The Integral Part Of Organizational Management Commerce Essay

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Over the years, Outsourcing has become an integral part of most organisations strategic and operational management due to the need to remain competitive in the world market via an effective supply chain. The need to outsource in order to cut cost in the production process has brought about a situation where companies have products that are low on cost but high in quality. In any business, profit making and longevity are the ultimate goals and can be achieved using various approaches hence the concept of outsourcing. It is primarily aimed at looking at ways an organisation can select the most competent and cost effective supplier, who ultimately will affect cost of production, price of services or goods and profit. Outsourcing, which is closely linked with an effective supply chain, is paramount to the structure and management of an organisation.


Outsourcing, being a part of the production process in most organisations, is simply not only about procurement of raw materials, components, and services from competent suppliers but rather, it Is a strategic decision made to cut cost in the production process leading to an increase in resource allocation along with heightened managerial attention to the core competencies of an organisation. It should be noted that although outsourcing is a strategic decision, outsourcing plays a part in the development of that strategy. There is no universal definition for outsourcing especially when you take cognizance of the various sectors in business today. In their study of Information Technology (IT) outsourcing, Loh and Venkatraman (1992:9) defined sourcing as "the significant contribution by external vendors in the physical and/or human resources associated with the entire or specific components of the IT infrastructure in the user organisation". Outsourcing has also been defined as "products supplied to the multinational firm by independent suppliers from around the world" and "the extent of components and finished products supplied to the firm by independent suppliers" (Kotabe,1992:103).Furthermore, outsourcing has been defined as "the reliance on external sources for manufacturing components and other value adding activities"(Lei and Hitt,1995:836). It is clear to see that outsourcing takes on different approaches when applied to various sectors.

Outsourcing may have various definitions but the processes are uniform. The process of outsourcing goes through stages before a supplier is selected. Figure 1.1 shows the processes involved in outsourcing.







Source: Chopra, S and Meindl, P.2004. Supply Chain Management: Strategy, Planning and Operations


The concept of outsourcing is very prominent in organisations due to not only strategic reasons, but also, the nature of the world we live in today. We live in a globalised world which has brought about international economic integration characterised by free trade and capital movement thereby creating a global market. The term, DEATH OF DISTANCE, best describes outsourcing on a larger scale. The global society today is such that movement of information has become relatively easy due to technological advances and the internet. We have countries on one side of the planet paying companies on another for certain services. An example can be taken from IBM. They use Indian engineers to perform daily routine maintenance functions on software designed in the U.S (HILL 2010). Maintenance is a service, and in the case of IBM, that service is clearly being outsourced to another part of the world due to a level of expertise from the supplier and not forgetting the benefits of time zone. Therefore, the outsourcing concept gains the global scale. Outsourcing which can be considered a tool used by businesses to cut cost and allocate resources has an off shoring dimension associated with it. Offshore outsourcing is aimed at cost reduction and is the most compelling factor. Off shore outsourcing entails moving a company's internal business processes to an external company in another country. A great percentage of cost savings can be found in the wage differences between employees in developed countries and those in emerging economies such as Asia and Eastern Europe. In terms of wages, the following examples best describes the reason or reasons a company would opt for offshore outsourcing:

Architects, developing blueprints from sketches earn $250 per month in the Philippines as compared to $3000 a month in the United States.

Java programmers in India earn $5,000 a year compared to $60,000 in the United States.

Aerospace engineers in Russia earn $650 per month compared to $6,000 for their United states equivalents

U.S. trained and licensed radiologists in India read X-rays, MRIs and CT scan for less than half their U.S. counterparts (Corbett, M 2004).

Offshore outsourcing has increasingly become part of the production process in most organisations due to benefits from the wage structure and technical expertise from the suppliers. Asides from companies, governments have also taken up offshore outsourcing. For example, the United States health sector in 2008 employed 34,000 Filipinos in the business of transcribing American medical files .More generally, some estimates suggest that the outsourcing of many administrative procedures in health care, such as customer service and claims processing, could reduce health care cost in America by as much as $70 Billion dollars (HILL 2010). There is no doubt that outsourcing is here and here to stay. With an increase in outsourcing companies, what does this mean for the business sector?

The concept of outsourcing has and will lead to companies being able to narrow the investment cycle and allocate those resources to more important aspects in order sustain their core competencies. For example, Nike. Its core competencies can be seen in its design and marketing capabilities which give them that added advantage over competitors. As a result of focusing on their core competencies, Nike outsources the production of its shoes to some Asian countries like Vietnam, China. Therefore, the need to invest in manufacturing plants and storage facilities have been eliminated which in turn reduces the investment cycle.

An increased sense of competition or hyper competition is apparent between major competitors and also amongst suppliers. A heightened sense of competition among suppliers leads to an increase in the quality and standard of goods or services. The increase in the quality and standard is preceded by competition; a supplier knows that in order to remain relevant it needs to improve on the quality of its final goods or services. The increase in standard and heightened sense of competition creates an environment where goods or services are readily available for the outsourcer at affordable prices. So, what does this mean for businesses? In effect it means that companies have the 'luxury' of selecting the most cost effective, efficient and reliable supplier when considering the outsourcing option. Figure 1.2 gives an illustration of the effects outsourcing has on business restructuring













Source: Corbet,M. The Outsourcing Revolution.2004


The concept and process of outsourcing are no doubt a plus for any business especially when you take cognizance of some benefits like production cost reduction, investment cycle compression. But it's been argued that outsourcing can affect an organisations performance. Bettis, Bradely and Hamel (1992) propose that outsourcing may reduce organisational innovation, may shift knowledge to supplier organisations, and may reduce control over firms activities. In 2007, Lloyds TSB closed its customer call centre in India due to customer dissatisfaction. A petition signed by 400,000 customers prompted the closure of the call centre and the return of its call centres to the UK. At the initial stage, outsourcing seemed the right option cause of cost but it also meant reduced control over the bank's customer service. Longer lead times resulting from spatial dispersion cause several problems, such as larger inventories, communication and Coordination difficulties, lower demand fulfilment, and unexpected transportation and expediting costs (Levy, 1995).

In essence, the failure of the supplier, in effect, means failure of the company. In other words, the performance of a company is dependent on the performance of the supplier when outsourcing has been adopted into a company.

However, Quinn (1992) proposes that, by allowing outside specialist organisations to concentrate on certain task, firms may increase their performance by focusing narrowly on the things they do best. In 2008, HP (Hewlett Packard) bought outsourcing specialist, Electronic Data Systems for £7.13 billion. The reason behind the deal was to expand into government and manufacturing sectors and also to give it more outsourcing capability in corporate computer networks. Regardless of how you look at outsourcing, it is a very important tool used by most organisations in our every growing and economically integrated world. Most companies are jumping onto the outsourcing band wagon not only to cut cost but to expand their market. Market expansion has become imperative due to demands from around the world. The increasing demands from consumers mean companies have to look for cost effective ways and efficient supply chains in order to meet growing demands.


In conclusion, outsourcing being a technique used by organisations to increase performance figures and decrease production cost is certainly a way to meet demands as well as remaining competitive in the global market. Being one step ahead of your major competitor is very crucial in business not only to remain relevant but the need to ensure longevity and above all, profit making. The world we live is such that it is no longer company versus company but rather, supply chain versus supply chain. The growing practice of outsourcing by companies has and will lead to the implementation of a supply chain that needs to be managed effectively in order to ensure profitability and efficiency while meeting demands from consumers.