Global Insight

The paradigm shift towards the outsourcing of procurement and supply chain management

Outsourcing the allocation of a specific business process is becoming increasingly popular

This is a method of achieving performance improvements throughout the goods and services industries. Linesight’s Head of Procurement and Supply Chain Management, Neil L Doyle, explores the reasoning behind this growing trend.

The development and success of a business lies in its ability to derive optimum efficiencies from its procurement and supply chain operations. Business success is driven by the pursuit of higher performance and service level improvements. The rigorous management and performance of these goals is key to that success.

Current Thinking on Outsourcing (OR An Inherent Reluctance to Outsource)

A small number of businesses still assume that outsourcing is not as efficient or effective as an in-house team, and seem to retain an inherent reluctance to outsource key business processes. The perception that it is not as cost effective lingers, whilst others continue to believe that it does not deliver the desired results nor does it maximize revenue. With a perceived loss of control and oversight from management, a seeming lack of external support and service providers, and the critical importance of procurement and supply chain management as a business activity, some business leaders struggle to relinquish the responsibility to a third party. However, as a huge number of businesses continue to outsource their IT, accountancy, human resource and legal advice services with great success, the question remains as to why procurement and supply chain management would be viewed any differently?

 

The Decision to Outsource

The decision to outsource should depend on a business’s ability and internal capacity to perform a function. Typically a business would outsource when the need for a function is beyond its main business and exceeds its expertise. Rather than invest additional resources in staff and infrastructure, a strategic approach to outsource to a specialist service provider is considered a viable short-term strategy and cost-beneficial solution.

Certain skillsets present a significant challenge, now more so than ever, and are often more easily obtainable from an external service provider. Outsourcing offers an avenue to businesses to obtain these expertise, and the flexibility to scale up or down as required.

Such skillsets are offered as core competencies of outsourcing partners and include:

  • Process advice and improvement
  • On-time delivery and performance
  • Negotiation strategies
  • Spend analysis and external benchmarking
  • Supplier relationship management and performance assessment
  • Spend analysis advice
  • Legal and contractual advice
  • Innovation and value adding ideas
  • Diversity within the supply chain base

Changing Objectives of Outsourcing

The objectives of outsourcing procurement and supply chain management services have changed considerably in recent times. It is no longer just about cost savings; it is a strategic tool used to develop and manage business relationships in the modern globalized economy. It is no longer treated as a business tactic to remain commercially competitive, but rather as one of the key business tools that has the power to transform a business and improve its performance exponentially. The focus on independent management of strategic partnerships and collaborative working through an outsourcing partner is fundamental to that success.

 

The Benefits of Outsourcing

Outsourcing can help provide independence for businesses away from the procurement and supply chain management processes. It also helps the organization to avail of the knowledge and experience that an in-house team may not necessarily have, or to scale up at times when additional resources are required.

The standardization and simplification of the process can help reduce timeframes and administration costs thus leading to clear commercial benefits, which include:

  • Increased efficiency
  • Consistency of service
  • Independence from current commitments
  • External market intelligence and benchmarking
  • Risk mitigation and reduced exposure
  • Due diligence

 

How to Successfully Outsource

The success of outsourcing lies in finding the right partnership for your organization. A common set of goals, along with teamwork and co-operation can help to foster a strong outsourcing relationship. Careful planning, strong leadership and effective communication will ensure a long-term relationship that both parties will consider mutually beneficial.

The foundation of the right partnership is built on the following actions:

  • Select a reliable outsourcing partner
  • Trust and commitment
  • Define clear objectives
  • Set realistic expectations
  • Outline an implementation roadmap
  • Manage and share risk
  • Include key performance indicators
  • Monitor and evaluate progress

The inclusion of a service level agreement with key performance indicators will ensure correct monitoring of the function, and determine if the anticipated benefits were achieved. As with all business transactions, the use of incentives and penalties will promote better results.

 

Conclusion

There is a growing trend in outsourcing procurement and supply chain management operations, which is driven by a number of factors but underlined by the need to unlock the potential and maximize the benefits from the supply chain. The introduction of an outsourced model will facilitate this by identifying opportunities, adding value and improving supplier relationships. Employing specialists who can perform this service more efficiently and effectively, and allow for flexibility and scalability, are the foundations of successful outsourcing.

While a relentless push to operate more efficiently remains the driving force behind outsourcing, many businesses are thinking beyond the commercial savings. Outsourcing is moving away from constituting just a cost-saving measure, towards being a key element of corporate strategy. Operating a successful outsourcing arrangement is achieved through supplier relationship management and strategic sourcing solutions, which in turn will help to improve performance, address risks and ensure a greater return on investment. 

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