Question

Discuss why a company may choose to outsource a product or component. What are the risks?

Answer 1

Here are some of the reasons why a company chooses to outsource a product or component:

A) Outsourcing SCM has several advantages that work towards maximizing profitability at the end of the day.

1) Once the Company has outsourced supply and distribution to a third party, it becomes easier to spend more time on building the business and focusing on the future strategy. SCM can eat up precious time that would have been spent developing new ideas, marketing, and strengthening customer relationships: factors that are crucial for long-term success.

2) The Companies get access to facilities, knowledge, and capabilities that were initially inaccessible or unaffordable. Then, They get the chance to leverage on these resources to help you stay ahead of your competitors.

3) When they hire a professional organization, they will use their knowledge and expertise to help the company reduce their overall expenses. Usually, expenses associated with inventory, cold storage, sampling, overhead, and staffing can pile up and cause a financial strain.

4) However, when the Companies work the right supply chain partner, these costs can be reduced significantly. The partner will streamline logistics and establish the most cost-effective plan that can reduce the costs associated with performing specific functions. Some of the new changes may include better inventory management and transport optimization. In the end, the business will have more cash for investments.

5) The outsourced SCM will take the responsibility of supplying the amount of products demanded by customers. They will be responsible for raw material planning to meet production schedules. When these responsibilities are offloaded, the business will spend more time on growth and building brand equity.

6) Outsourcing allows a business to adapt quickly to the changes in demand. When you outsource, you can expand or downsize faster without having to worry about labor and labor laws. Increased flexibility is especially needed in today’s uncertain economies.

7) Outsourcing a company’s logistical needs reduces labor risks and the financial risk of an investment in equipment, property, and transportation in case the company downsizes.

8) Your company may be limited in resources and tools. However, outsourcing partners can bring extra capabilities, solutions, and expertise beyond the scope of the business. Your organization will then get a chance to utilize these excellent tools to increase productivity and efficiency. Logistics or cargo companies normally have industry connections that you can leverage on to save on cost and to improve your capabilities.

B) Although outsourcing SCM has a considerable number of benefits, there are just as many risks.

1) Quality may suffer - Your SCM partner should have extensive knowledge of your products or services. Otherwise, the quality of your offerings may diminish. This risk is increased when the third-party company tries to cut corners or use cheaper materials. Such practices can be detrimental to your company and may significantly reduce sales, alongside your brand equity, so avoid using SCM partners who don’t prioritize quality.

2) Setbacks - Outsourcing SCM can become a complicated process that opens up more chances for setbacks. Watch out for unrealistic timelines that could cause revenue loss and more issues down the supply chain.

3) Integration Challenges - Watch out for solutions that have a long on boarding process. The business operations become smooth once a business is integrated with the SCM partner, but the transition process can be a nightmare. It requires both parties to invest a considerable amount of time, and it also requires a good financial backing. If either party slacks, then it can cause delays and several mishaps. Several problems are likely to arise during the transition phase because this stage requires better communication besides time and money.

4) Unexpected Costs - Occasionally, taxes, shipping costs, and other hidden fees may get out of control. Some 3PLs have multiple hidden costs, such as labeling, pick and pack, boxing, and more. To avoid this, work with providers that are transparent with their costs so you can protect your profit margins.