Question

Why would a company outsource parts of its supply chain? Explain the value of this practice and why so many companies use it today. What are some operational challenges that outsourcing can present?

Answer 1

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The answer:

The companies decide to outsource depends on different factors such as cost savings in terms of labor cost and logistics cost, tariffs and taxes, energy costs, responsiveness, and supply chain complexity.

1. Cost-saving: Due to location and difference in economic conditions, the labor cost in developing countries is comparatively low. For instance, in India, the technical workforce for software programming is available at a lower cost than the US and other developed countries. Sometimes, companies choose outsourcing to reduce logistics costs and moving processes closer to the customers.

2. Tariffs and taxes: The incentives in operating different countries are sometimes related to tax benefits offered by the countries to operate in that country. Due to such advantages, outsourcing is a better option than exporting products.

3. Responsiveness: In order to be near to the customers and deliver the products as fast as possible, companies outsource the operations. For instance, Apple has a central warehouse for the delivery of products which are for retail stores. The products in other countries are delivered from China directly.

4. Supply chain complexity: Due to the transportation of goods from one country to another, and managing the supply chains make it difficult and inefficient. Hence, the companies outsource the processes to reduce the complexities in operations.

Some operational challenges:

1. Technology transfer: In outsourcing the supply chain operations, the company makes a kind of alliance with other companies. To produce the products as per the quality standards of the company, technology transfer is required. The complexities in the technology transfer present some challenges, for instance, the difference in technology infrastructure, the availability of skilled employees for the technology.

2. Process integration: As mentioned, the products or services are delivered by two organizations jointly, so the processes must be integrated. For instance, Apple requires to send the technology experts to the Foxconn facility in China to ensure that the processes are followed by the outsourcing partner.

Reference: Operations Management: Processes and supply chains (11th Edition) by Lee J. Krajewski, Larry Ritzman