One of the more common tasks within Procurement is that of outsourcing.
“Outsourcing is when the procuring company obtains goods or services from outside the company by a supplier. Conversely, if the item is insourced it’s done within the procuring organization.”
Initially, outsourcing will usually invoice some up-front work deciding where work is undertaken. This is typically part of a procurement sourcing project where the requirement is ascertained and then an appropriate form of supply (often supported by a formal contract) is found.
There are obvious reasons why some services (especially manufacture of parts and materials) is bought in but it’s helpful to review the rationale.
So why do we outsource, here’s our list of 5 common reasons.
1/ Capability
The most obvious one is capability. You might work for an organization that specializes in the assembly of a final product. It hasn’t got strategic interest in manufacturing the individual piece parts and buys these in from suppliers that specialize in the process.
In this instance, the buying organizations specialty might be in the design and aftermarket care of the product but you may not be specialists in making nuts and bolts for example so they buy these items in.
2) Capacity
Capacity is also often a driver for the need to outsource. Company A needs to manufacture 1,000 widgets per week but they have a maximum output of 750.
Because of this capacity short-fall, there is need to outsource the manufacture of 250 per week.
In many cases, the demand may fluctuate so the business buys in the extra capacity it needs as and when it needs it.
3) Risk
Risk is another reason for outsourcing. A key process or function that is critical to the success of production might need mitigation in terms of a second available service. In some cases, outsourcing might be a short-term solution while the procurement business looks to put in place a more long-term mitigation.
4) Outsourcing solves a problem – i.e. financial benefit
One of the more common reasons for outsourcing products or services is that the outsourcing company is financially cheaper than the insourcing alternative. This can often cause much discussion in particular of issues such as cost base and costing principles and can divide many a company who are looking at outsourcing while being ’emotionally’ attached to the service (maybe viewing it as a core feature of their service). Clearly, costs can vary over time so this driver can be frequently be reviewed to ensure that it still meets business strategy.
5) Personal Gain
Perhaps controversial but another common reason for outsourcing is that it facilitates someone’s career advancement. Under the auspices of solving a problem, an individual may drive to resolve the issue (or a number of issues) via outsourcing. This can often become a political issue within the business where the issue being solved is not the primary reason for the outsourcing activity.
So there are our 5 reasons for outsourcing, have your thoughts? Leave some feedback in our comments section below.