Outsourcing and its role in the supply chain


Traditionally, outsourcing is an abbreviation for ‘outside resource using’ (Arnold 2000). Currently, in the simplest of forms, outsourcing takes place when an organisation transfers the ownership of a service or function that used to be done in-house to a supplier. The degree of transfer of control is the defining characteristic of outsourcing. It concerns ‘the transfer of routine and repetitive tasks to an outside source’; ‘having an outside vendor provide a service that you usually perform in-house’; and ‘paying other firms to perform all or parts of the work’

Historically, outsourcing was used when an organisation could not perform to world-class standards in all aspects of its work due to many factors, including: incompetence of staff and/or management; lack of capacity within the organisation; financial pressures and/or technological pressures. In its most basic of forms it started from the outsourcing of a single service such as canteen management, buildings management, or computing. In addition, outsourcing was applied in overhead functions or activities with no potential for competitive advantage and business processes where an end user could create a competitive advantage through partnerships with vendors specialising in a particular area (Dole 1998). Now, outsourcing is used to build on core competencies and organisations recognise that serving the customer is critical: ‘Anything that distracts us from this focus will be considered for outsourcing’ (Greaver 1999).

Outsourcing is not simple or easy to create, develop and support, and it can have both positive and negative effects on key areas of the supply chain (Mason et al. 2002). There are many implementation problems and the failure rate is often quoted to be as high as 70 per cent (Zineldin and Bredenlow 2003). In addition, it can adversely affect employees and many transitions have been unsuccessful.

Even with these problems recent studies have indicated that 85 per cent of all companies outsource at least one function or service (Logan 2000).

So, why outsource? According to Dole (1998):

To compete in today’s information age companies must re-evaluate the way they do business in the light of rapid, unrelenting change in the marketplace.

The need to improve productivity, quality and flexibility has led companies to examine their organisational structures and to realise that creating the greatest value does not require them to own, manage, and directly control all of their assets and resources. Rather, strategic alliances and partnerships with those who provide expertise in a particular area may be the most effective way to gain results.

It permits organisations to enhance effectiveness by focusing on their core competencies while using specialist suppliers for non-core activities, and as a result they should have better overall performance.

Furthermore, it can be applied to most functions and services within an organisation. Today, what an individual company outsources depends on the core competencies, core activities and critical functions within the organisation.

Core competencies are one of the keys to customer satisfaction and superior performance. They combine three features: (1) They differentiate between the company and its competitors; (2) Resources and know-how for the product must be unique over time, (there must be something to prevent it against an influx of imitators); and (3) The core competencies should never be outsourced (Arnold 2000).

To hand over core functions to a third-party supplier is to hand over the things that make a company what it is and what differentiates it from others, in essence what makes the company profits.

Non-core competencies take up time, energy and workspace, and help management to lose sight of what is most important in the organisation (Greaver 1999). Non-core activities can be farmed out to specialists if they conduct them better, more cheaply or both.

Nowadays there are two main types of outsourcing: total outsourcing and selective outsourcing. Total outsourcing happens when companies outsource all the activities within the selected function or service of the company.

Selective outsourcing on the other hand can be done in four separate and distinct ways. The first is outsourcing on the individual level. It involves moving specific positions out of the organisation, for example the management of a poorly performing function or service. The second type is outsourcing on the functional level. The next type of selective outsourcing is the process level. The final level is outsourcing on the component level, which involves outsourcing the manufacture of component parts or sub-assemblies.

Other types of outsourcing that are used, though not as widely as total outsourcing and selective outsourcing, include co-sourcing, whereby the client company keeps responsibility for the management and strategic aspects of the outsourced activity while the outsourced supplier provides a consultancy service and often experienced personnel to help to keep the business streamlined.

By Aoifeo ’ Riordan and Edward Sweeney