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Why do companies (Small and Large) Outsource their work?

Updated on November 12, 2015

Outsourcing Procurement

For every procurement project, a formal and professional procurement process will save time, save money and reduce risk. Outsourcing procurement is often undertaken by very large companies to save money. Procurement requires a great deal of focus on cost saving, profit maximization and compliance. Often good procurement strategies can be the difference between a profitable company and a failed business. Some companies such as Amazon, Tesco, and Wal-Mart have made their purchasing strategies a competitive advantage. Procurement can be very complex and cost consuming in many large companies so some of them are outsourcing procurement rather than build their own excellent procurement capabilities. A procurement outsourcer can leverage their economies of scale and have the experience and trained staff that cut costs and enhance efficiencies (Hill, 2009).

The most effective procurement systems need to include suppliers who do not just want the cheapest and most inexpensive deals, but with a supplier that is reliable and has the best quality with a reasonable price range (Cruz, 2011) This is where outsourcing could come into play. The literature suggest that a strong, long-term relationship with a supplier is the best, because eventually the time makes the suppliers learn what your company wants and the needs of the company. The suppliers then learn what the company standards are and better deals will eventually be made. Even with outsourcing, this same basis can work for the company (Thomas, 2009). Even with outsourcing, the technicalities of procurement must be looked into. Procurement contracts are essential. Depending on the needs of the company these contracts can be tradition, longer-term; renewable; electronic or via the Internet, and even framework agreements (Desmond, 2007).

In order to be successful for effective purchasing and outsourcing, there is a factor of the need to find something sustainable over a long period of time. Furthermore, the key question ends up, if the long-term benefits of purchasing materials outweigh the initial costs (Robinson, 2006).

Key Concept: Procurement

Procurement is the acquisition of the supplies, services, and materials in which a company must have in order to operate the business successfully and efficiently. Ultimately, a procurement strategy makes sure everything is cost-effective when purchasing the required supplies. This means: timelines for procurement, funding, budgets, risks, and opportunities. (Cruz, 2011).

Procurement is parallel with outsourcing. Outsourcing is a form of procurement, because it may be the only way to get the supplies the company needs at the price that is within the company’s budget. In order to decide what is best for the company, the company must asses the details of the company. They must know what they need and don’t need. With these details, the project objectives along with what supplies are needed and resources are available become apparent. This happens because no company wants to outsource unless it means it is the best for the company. By hashing out all of this information, all of the business plan will help establish goals and objectives for the company (Hill, 2009).

Thriving Cities: Istanbul

Businesses Thrive, especially internationally from Outsourcing!
Businesses Thrive, especially internationally from Outsourcing! | Source

International Application of Outsourcing

With the growing popularity of outsourcing it has become a valuable tool to many organizations. Managers evaluate their organization to determine what it does best and what can best be done elsewhere. “Outsourcing means to contract out certain tasks or functions such as manufacturing, human resources, or credit processing, to other companies” (Daft, 2013, p. 125).Outsourcing is usually the option which is cheaper and more efficient for the production of products with an external partner. Daft (2013) points out that outsourcing is very popular across a wide range of entities from businesses, non-profits, and even military. Many businesses today are turning to outsourcing in order to increase profitability. Some of the most likely outsourced activities consist of marketing, payroll processing, textile assembly and the use of third party hiring agencies.

Call center work is becoming a commonly outsourced position as companies are able to reach out to developing nations and receive comparable service for a fraction of the price. However, it presents something of a catch-22 as organizations are able to save money through outsources, yet customers tend to have a negative response to such activities. Other outsourced activities might be those that include building toys or creating clothing or specifically a company that specializes in producing the glass for the screens of touch screen cell phones. This glass may be similar in specification for multiple manufacturers so the company may have a diverse client list. From the other perspective, the company producing the cell phone may incur higher fixed costs to establish this production system. Supply-side management would encourage the company to outsource at this point to reduce overall cost of production (Blocher, Stout, &Cokin, 2010).The reason for outsourcing is not always because of low labor rates in other countries, rather it can be because the company does not have the personnel to complete the tasks assigned. If a company has a reputation and ability to produce a unique product or service, it is unlikely that outsourcing would be an option. Outsourcing would least likely be done when determining the goals of an organization or making major management decisions such as an organizations values and mission.

Resources

Blocher, E. J., Stout, D. E., & Cokin, G. (2010).Cost management. New York: McGraw-Hill/Irwin.

Cruz, S. (2011). Applications of procurements. California Journal on Performance

Management 12(1) 24-34. Retrieved from http:// Procurementsperformance managementaspx?/trnsap.html.

Daft, R. (2013). Organization theory & design (11thed.). Mason, OH: South-Western Cengage Learning.

Desmond, M. (2007). Brainstorming. Florida Business Journal 10(3) 69-86. Retrieved from http://www.uni.edu.nedfg/opendoc.php?sno=470&doctype.

Hill, P. (2009). Procurement Outsourcing. Journal of Central Procurement 9(2) 34-39. Retrieved from http://www.centralprocurementprocess/jounalbiz.doc.

Robinson, B. (2006). Ten Keys to Effective Purchasing. Journal on Effective Purchasing 1(8). Retrieved from http://www.tenkeyseffective_opendoc?=345&doctype.

Thomas, R. (2006). Procurement Sustainability. Business Journal of Central Purchasing 18(1) 43-59. Retrieved from http://SustainabilityPro-3195.html

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