1.
Introduction
The term outsourcing is a combination of ‘Out’ and ‘Sourcing’. Sourcing refers to the act of
moving work, responsibilities and decision making rights to a person else. Therefore,
outsourcing is the act of transferring the works to an outside person or organization.
Outsourcing consists of three major components known as Client, Vendor and Project. The
business organization providing their manufacturing requirements to outside is called as the
client, the business organization that carry out the manufacturing works and make decisions
is called as vendor, and the the target of the production is defined as project (Power, Desouza,
& Bonifazi , 2006).
Outsourcing is the natural way for humans to accomplish complicated duties. The logical
basis for the system is that we focus our personal efforts on the duties that we're skilled at and
are seeking others with complementary talents to complete a project (Forum for International
Trade Training Inc. (FITT), 2016). When a firm outsource its production, it can concentrate
on those activities on which they are able to influence their core competencies (Hendry,
1995; Quinn & Hilmer, 1994).
2. Making decision on Outsourcing
Making decisions about outsourcing is a complex task, with hard deliberations and
occasionally internal conflicts. The plans have in some situations might be involved
governments and public sectors at local or country level. Because these decisions have been
the results of ‘buy’ or ‘make’ decisions on employment, and other factors. (Rolstadås,
Henriksen, & O’Sullivan, 2012)
Narayanan (2009) say that there are four strategic reason to outsources in that order,
enhanced cash flow, enhanced control of payment, measurable staffing and to advance
overall business performance. The competition in the world has been increased due to the
technology improvement and it is very difficult for the companies to be competitive when the
competitors have comparatively lower prices. Outsourcing decision is not only to bring the
cost down but also to gain and sustain competitive advantages in the primary intention of the
business. Customers demand higher quality products for lower prices. Even, customers have
more choices for their wants than in the past. Therefore, organizations are leading to
outsourced manufacturing processes.
3. The Outsourcing life cycle
Outsourcing must be taken as a strategic tool for the organization to employ to amplify its
competitiveness and performance in the market. For effective outsourcing, the initiative must
be evaluated in the context of the strategic posture of the organization.
There are seven major steps in the Outsourcing life cycle (Figure 3.1).
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Figure 3.1. The outsourcing life cycle. Adapted from The Outsourcing Handbook (1st ed.)
(p.32), by Power, M. J., Desouza, K. C., & Bonifazi, C. (2008), United Kingdom: Kogan
Page Limited. Copyright 2008 by Mark John Power, Kevin Clyde Desouza and Carlo
Bonifazi.
4. Advantages of Outsourcing
4.1 Cost Reduction
Organizations can accomplish significant cost reductions by using outsourcing strategies.
Outsourcing enables the outsourcing party/client to benefit from vendor cost advantages such
as economies of scale, experience and location. Vendors may undertake investment and
development expenses while giving out these risks among many clients and in this manner
reducing vendor costs for all clients.
In addition, by gradually the clients can reduce risks by altering its fixed costs into
variable costs. During the unfavorable conditions vendors will have to handle the problem of
excess capacity. However, vendors should be able to manage in a better way with demand
variations through economies of range and have more possibility for substitute sources for
excess capacity.
4.2 Performance Improvement
Vendors can often reach much higher levels of performance in certain processes than can be
achieved in-house by the client. This benefit is based not only on reduced costs. Specialist
vendors can frequently supply higher levels of service quality than those of internal functions
by clients.
4.3 Flexibility
Outsourcing can offer an organization with superior flexibility, particularly in the sourcing of
swiftly developing new technologies or fashion goods. Specialist vendors can give better
responsiveness by new technologies than large integrated organizations.
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4.4 Specialization
Outsourcing allows an organization to focus on areas of the business that bring favorable
advantage and outsource processes enabling it to influence the specialist skills of service
providers.
4.5 Access to innovation
Many organizations are hesitant to outsource because they fear they may lose the potential for
innovation in future. However, in many supply markets there exists considerable
opportunities to influence the capabilities of vendors into the services of the clients.
(Power, Desouza, & Bonifazi , 2006)
5. Limitations of Outsourcing
5.1 Quality
Organizations that outsource manufacturing could drop control over the quality of the
products they are selling. Vendors might try to reduce their operating costs and improve their
profit margins without prior approval. But the vendors won’t have to field customer
complaints. It would be the duty of the company whose brand name is on the end product.
5.2 Delivery
Planning manufacturing to meet the demands is a complex and complicated process. Lack of
suitable raw materials can stop the manufacturing process. When production stops, delivery
stops. Therefore, it will affect the consumer market.
5.3 Logistics
Based on the products and the manufactured location, the logistics of receiving them from the
outsourced vendor to customers can have a significant challenges.
6. Conclusions
Outsourcing has become unavoidable and almost many of the multinational companies are
outsourcing to make use of scare resources (Pai and Basu, 2007).
In future, outsourcing will be brighter concept among industries. There are many things
that will happen in the near future. In addition to that, there will be leaders and laggards in
any type of industry, based on the effectiveness of their outsourcing programs (Power et al.,
2006)
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References:
Forum for International Trade Training Inc. (FITT). (2016). FITT International Business
Guide: Outsourcing Product Manufacturing and Services – Pros and Cons. Retrieved
November 27, 2018, from www.fittfortrade.com
Hendry, J. (1995), “Culture, Community and Networks: The Hidden Cost of Outsourcing”,
European Management Journal, Vol. 13 No. 2, pp. 193-200.
Jiang, B & Qureshi, A (2006) ‘Research on outsourcing results: current literature and Future
opportunities’.Management Decision Vol. 44 No. 1, pp. 44-55
Kraft, D. (2016, July 14). Disadvantages of Outsourcing Manufacturing Jobs. Retrieved
December 05, 2018, from https://woman.thenest.com/disadvantages-outsourcing-
manufacturing-jobs-18414.html
Narayanan, R. (2009) “In Search of Outsourcing Excellence” Supply Chain Management
Review, 36-42.
Power, M. J., Desouza, K. C., & Bonifazi, C. (2008). The outsourcing handbook: How to
implement a successful outsourcing process. London: Kogan Page.
Pai, AK & Basu, S 2007, ‘Offshore technology outsourcing: overview of management and
legal issues’, Business Process Management Journal, vol. 13.1 (2007), pp. 21-46.
Quinn, J. B. and Hilmer, F. G. (1994), “Strategic Outsourcing”, Sloan Management Review,
Vol. 35 No. 4, pp. 43-55.
Rolstadås, A., Henriksen, B., & OSullivan, D. (2012). Manufacturing outsourcing: A
knowledge perspective. London: Springer.
