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2. Table of Contents
1.0-Introduction ....................................................................................................... 3
2.0-Outsourcing For a Competitive Advantage ................................................... 3
Figure 1 – Decision Making for Outsourcing ........................................................ 3
2.1 Advantages and Risks of the Outsourcing Process .......................................... 4
3.0- Strategic Implications of Outsourcing Logistics ........................................... 4
3.1 Benefits of Outsourcing Logistics.................................................................... 5
3.2 Risks of Outsourcing Logistics ........................................................................ 5
4.0 Conclusion .......................................................................................................... 5
5.0 References and Bibliography ........................................................................... 6
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3. 1. Introduction
After the Industrial Revolution which started in UK, companies around the world embarked new
business strategies to increase their market share and profits by focusing on their competitive
advantages (Handfield, 2006). The main of these companies were to achieve profit stability, lowering
the cost of production and increasing the company’s market share. Diversification of businesses
through expansion to achieve economies of scale was the trend in the 1960’s; however, for some of
these organizations, establishing the correct management structure was arduous. Therefore companies
tended to lack the agility that was required to conduct the business. Companies who drifted away from
their core businesses developed new strategies to bring flexibility and creativity. The idea of focusing
on core competencies and outsourcing the other activities within the organisation got progressively
favourable over time. Outsourcing has become a critical enabler for strategic sourcing and a global
marketing strategy that provides companies with the agility to adjust to rapidly changing market
conditions (Trunick, 2008)
Therefore, this report will examine the general impacts of outsourcing in organizations and the
strategic implications of outsourcing logistics by assessing the advantages and risks of the process.
2. Outsourcing for a Competitive Advantage
Outsourcing decisions are complex and include a number of trade-offs and long-term consequences
(Wasner, 1999). From the beginning of 1980’s to 1991 the percentage of the value added by foreign
affiliates of parent company’s tripled to %6 of the world GDP (Gross Domestic Product) (The World
Investment Report, 1996). The outsourcing decision made by the board of directors is undertaken by
going through numerous means, such as the identification of competencies within the organisation and
the comparison of their output values with the external opportunities (Barrar, Gervais, 2006). As can
be seen in Figure 1, decision making process of outsourcing can be evaluated better by identifying the
core competencies and measuring its efficiency in the organisation. If the supply chain is not
effectively and efficiently managed, the organisation is likely to face problems like customer
dissatisfaction, increasing costs, lower stock turnover rates, low internal efficiency, reputational
damage etc... The corporate strategy of the organisation which is usually determined by the external
business environment, opportunities which can create flexibility or can provide labour arbitrage and
customer demands in this sense, affect how the supply chain is managed. Companies are faced with
numerous strategic choices when handling supply chains and the strategic decision is what determines
the implications of outsourcing for organisations. In this case, the success of IBM can be a good
example on how outsourcing is managed. Outsourcing being a key factor in their business strategy,
IBM has increased their net income by %9 in 2011 (Ottawa Business Journal, 2011). However, no
matter which supply chain strategy is adopted, the objective is always the same: gaining competitive
advantage in the industry. A mixture of supplier’s competencies and the core competency the
organisation shelters within is argued to be a way of gaining competitive advantage overall. On the
other hand, outsourcing also has specific risks which can have unforeseen negative effects to business
practises.
Figure 1 - Decision-making of outsourcing
Source: Navarrete, 1996
Low
OUTSOURCING
INTERNAL
EFFICIENCY
INSOURCING
High
Core COMPETENCES Non-core
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4. 2.1. Advantages and Risks of the Outsourcing Process
Noticeably it is not possible to establish companies that can take advantage of economies of scale for
all inputs. Many inputs are outsourced even in the largest firms around the world. For instance, Pfizer,
which is one of the largest pharmaceutical companies in the world, has been outsourcing their R&D
(Research and Development) and manufacturing activities in Asia, (Arnum, 2008). To optimize the
degree of outsourcing and internal integration, some core competencies need to be developed to
support the business model and achieve cost reduction rather than just deciding which core
competency to outsource (Anderson, 2004). Based on a large survey of companies (Deavers, 1997),
the top five reasons for outsourcing can be listed as:
- to improve company focus;
- to gain access to world-class capabilities;
- to accelerate benefits from re-engineering;
- to share risks; and
- to free resources for other purposes.
Outsourcing some of the primary activities and the support activities within an organisations value
chain is likely to provide cost savings. A poll of senior business executives reveals that most Irish
firms are achieving cost savings of between %25 and %39 percent by outsourcing their IT to external
providers (Smith, 2010). Although cost savings can be achieved from outsourcing, it is also likely to
slow down the supply chain. For example if the suppliers are located too far away, the shipping
process would slow down the responsiveness speed of the supply chain. If the supplies are not
delivered on time, the loss the organisation is going to face can be even more than the estimated cost
saving. Therefore a good JIT planning might be required in some cases to increase the efficiency of
the supply chain. Yet, contracting nearby suppliers is still the rational way of protecting the
organisation from long-distance transportation delays.
In addition, the suppliers may be able to provide innovation more quickly than the organisation itself
resulting in quicker response times, greater flexibility and better quality of service (Navarrete, 1996).
Moreover, outsourcing not only reduces the risk taken in some cases, but also it results in the
organisation to acquire specific expertise from the suppliers. Therefore enabling the company to
operate within multiple parameters and compete in the global market. Briefly, the general advantages
and disadvantages of outsourcing can be listed as below:
Advantages Disadvantages
Cost Saving Loss of control
Speed Possible cost increases
Flexibility Lack of production quality
Quality
Risk reduction
Competitive Advantages
In this sense the supply chain manager’s essential job is to: Avoid pitfalls, evaluating opportunities
and aligning the supply chain strategy with the business strategy while executing supply chain
strategies like outsourcing.
3. Strategic Implications of Outsourcing Logistics
The close relationship between logistics and customer service, and its effects on a firm’s
competitiveness dictate that companies handle their logistics function prudently so as to achieve its
full potential as a source of competitive advantage (Razzaque and Sheng, 1998a). Outsourcing the
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5. logistics function in this sense, can be considered as an important approach to excellence customer
satisfaction. A growing awareness that competitive advantage comes from the delivery process as
much as from the product has been instrumental in upgrading logistics from its traditional backroom
function to a strategic boardroom function (Razzaque and Sheng, 1998b). Moreover, in the concept of
the value chain (Johnson et al, 2005); logistics is a value-adding activity in the creation of competitive
advantage (Stock, 1997). However, if an organisation is planning to outsource, they should take into
consideration the strategic and operational implications, so that outsourcing the logistic function can
add value to the organisation rather than causing a problem.
3.1 Benefits of Outsourcing Logistics
Outsourcing can contribute to profits by enabling users to gain competitive advantage, adding
measurable value to products, enhancing customer service, assisting in opening new markets, and
providing dedicated resources (Foster and Muller, 1990). Rather than spending time on logistics,
companies tend to focus on strategic planning and management concerns. The utilization of contract
logistics enables the firms to do so and focus on their core business competency. In addition, the use of
third-party logistics enables the organisation to cut transportation/distribution and internal
administrative cost as well as reducing the staff. Moreover, outsourcing the logistics function also
enables firms to respond quickly to marketing, manufacturing, and distribution changes (Byrne,
1993a)
3.2 Risks of Outsourcing Logistics
Similar to the outsourcing process in other activities within the organisations value chain, outsourcing
logistics shelters the same risk: loss of control. As Byrne indicates, the loss of control to third-party
providers appears to be the most commonly cited reservation that inhibits firms from outsourcing their
logistic operations (Byrne, 1993b). Besides the loss of control, the inability to select and manage the
suppliers appropriately as well as the supplier’s probable lack of alignment with the organisations
business strategy is likely to cause problems such as undesired costs due to the change of suppliers.
After determining all the benefits of outsourcing and contrasting them with their corporate objectives;
strategy and strengths; market conditions and environmental concerns, the organisation is left with the
decision of make-or-buy.
Horne indicates that there is a growing need to be more responsive to customer service and market
(Horne, 1989). This need can be achieved by using logistics as an to deliver better customer service as
customer service is getting progressively important as the competition degree in the world is roaring
high.
4. CONCLUSION
The outsourcing decision is a part of most organisations business strategy and is becoming
increasingly important as the world market is getting more and more globalised. The rising
competition in the business world has been turning the outsourcing activity into an inevitable business
practice.
Therefore, in this report the growing trend of outsourcing have been assessed to have a better
understanding of how and why the outsourcing decisions are taken. Minor operational details, general
advantages and risks of outsourcing have been used to better explain the strategic role of outsourcing
in organisations. Apart from the general implications of the outsourcing process in organisations, the
significance of outsourcing logistics is particularly emphasized, on account of its strategic importance.
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6. 5. REFERENCES AND BIBLIOGRAPHY
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Barrar, P. Gervais, R. (2006). “Global Outsourcing Strategies”. Hampshire, England: Gower Publishing Ltd.
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Foster, T.A. and Muller, E.J. (1990), “Third parties: your passport to profits”, Distribution, October,
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