Outsourcing as a supply chain strategy

In the current market place there are quiet a good number of companies that are specialized in some activities. However this theory fails in present conditions where subcontractors are seen as partners sharing risks, rewards and revenues Paul D Cousins,

Outsourcing as a supply chain strategy

The 10 hidden costs of outsourcing By Terence T. But the combination of changing business dynamics and the original outsourcing assumptions has revealed costs that may prompt companies to re-evaluate their outsourcing decisions. Decades ago, when many companies began outsourcing production overseas, they had several reasons for adopting that strategy.

One of their most important objectives was to establish a presence in China, Brazil, India, and other high-growth countries with the potential to generate huge demand for goods and services. Another major driver of outsourcing was the availability of low-wage Chinese workers who could produce goods so cheaply that their output essentially flooded the global marketplace.

Companies that outsourced production internationally were looking at incremental revenues, significant cost reductions, and huge profits. In retrospect, though, many of those outsourcing decisions were based on a flimsy foundation, driven by a cursory spreadsheet analysis that focused on labor and other visible profit-and-loss elements of costs.

Some organizations, moreover, blindly followed the outsourcing paths taken by other companies. Several executives even mandated that "X levels of outsourcing be achieved by Y date" without any analysis at all.

Along the way, companies became confused about the difference between price and total landed cost, and they failed to consider all of the cost factors associated with outsourcing. Those overlooked factors—what I call the "hidden costs of outsourcing" described later in this article —typically add up to somewhere between 14 percent and 60 percent of purchase price.

In some isolated situations I have seen, the hidden costs represented in excess of two or even three times the purchase price.


For now, at least, incremental revenues from international sales are covering those costs, and profitability is not immediately at risk. In my estimation, however, more than half of the outsourcing arrangements today need significant improvement if they are to maintain profitability and achieve long-term feasibility.

Outsourcing as a supply chain strategy

Because 80 percent of total costs are in the supply chain, and the contractor arrangements in force today include millions of dollars in hidden opportunities to reduce cost, improve quality and delivery performance, increase velocity and throughput, and enhance the customer experience through closer relationships.

Now is an especially appropriate time for companies to take a fresh look at their current policies and be sure they understand the true costs of outsourcing.

Oil prices have tripled sincemaking cargo-ship fuel much more expensive. Wages in China are now five times what they were in and are rising at an annualized rate of about 20 percent.

Outsourcing as a supply chain strategy

The natural-gas boom in the United States has dramatically lowered operating and facility costs. In Asia, meanwhile, natural gas rates are four times those in the United States. Higher material-value content in products, combined with impressive productivity gains through continuous-improvement initiatives, has made chasing labor savings the wrong game.

Much of the illusive labor savings in low-cost countries is trumped by the hidden waste and overhead costs required to make the overall supply chain function well. Organizations that are willing to re-evaluate their present outsourcing processes and practices, factoring in the above points and other considerations, will see a different picture of success emerge.(Originally published in the April issue of AFSMI's The Professional Journal.).

By Timothy W.

Subscribe to our mailing list

Purkis Many enterprises find that keeping focused on their business strategy can be very difficult, especially when supply chain issues progressively tend to "overwhelm" their operations and administration. Dear Colleagues, On behalf of the program planning committee, please be invited to submit an abstract for the PDA Europe Conference on Outsourcing and Supply Chain..

This newly designed conference will cover the whole supply chain from raw materials to last-mile distribution. Supply Chain Sourcing from Rutgers the State University of New Jersey. Have you ever wondered how companies manage relationships with their thousands of suppliers?

Sourcing is an important part of managing a successful supply chain. The Supply Chain Management Specialization is made up of four basic courses in logistics, operations, planning, and sourcing, followed by a capstone course in Supply Chain Management Strategy. The Supply Chain Logistics course will cover transportation, .

SCM and Outsourcing, Postponement Decisions Supply Chain Supply Chain (SC) is a network of various organisations involved both through upstream and downstream linkages in different kinds of activities and processes.5/5(2).

Outsourcing can be defined as “the strategic use of outside resources to perform activities traditionally handled by internal staff and resources”. Sometimes known also as “facilities management”, outsourcing is a strategy by which an organization contracts out major functions to specialized and efficient service providers, who become.

The 10 hidden costs of outsourcing – Strategy – CSCMP's Supply Chain Quarterly