Logistics 4

Outsourcing and Offshoring

Hove P

What is Outsourcing?
The transfer of the management and delivery

of a process previously performed by the

company itself to a third party.
It involves handing over process ownership to
a third party

Why Outsource?
Cost saving- where the partner may be able

to provide the service more cheaply than the

company can itself.
Increased flexibility- if the other partner is
more readily able to provide more or less of
the required service as required by the
outsourcing firm.
Focus on core competencies- to allow the
outsourcing firm to focus on the tasks it is
good at and has advantage in.

Why Outsource?
Gain access to the up-to date technologies- if

the outsourcing firm does not have updated

technologies to perform the task, it is wiser to
outsource
A firm may decide to outsource for a
combination of any of the above reasons.

Issues to consider when

Outsourcing
Select an outsourcing partner
find ways to effectively manage the partner.

This can be done by putting in place a service

level agreement (SLA)and performance
measures.
An SLA is a key part of a contractual
agreement between a customer and a
supplier to identify upfront performance (i.e
service ) levels expected.

Outsourcing Issues
continued...
Before considering a supplier as an

outsourcing partner, the supplier have to

qualify by meeting the SLA/performance
expectations (order qualifiers) and (order
winners- criteria for actual selection of
suppliers).
Also important is the constant monitoring of
suppliers and managing the buyer-supplier
relationships.

Order Qualifier Criteria

Reliability of delivery
Quality certifications
Conformance to agreed specifications
Delivery lead time
Financial capability
Performance track record
Price or cost reduction
Senior management attitude
Responsiveness to demand uncertainty
Record of corporate social responsibility
A VAT vendor
BBBEE rating for local suppliers

Outsourcing issues continued.....

Supplier development is also important

for
new and better products and solutions from
suppliers.
Price is also considered along with other
factors.
Collaborative partnerships can also improve
product development, quality and logistics
efficiency through information sharing.
Firms also need to consider the type of
activities to outsource.

Summary of reasons for

outsourcing
Reduce direct and indirect costs
Reduce capital costs
Reduce taxes
Reduce logistics costs
Overcome tariff barriers
Provide better customer service
Spread foreign exchange risks
Share risk
Build alternative supply sources
Pre-empt potential competitors
Learn from local suppliers, foreign customers and competitors.
Gain access to world class capabilities or attract talent globally

Reasons for Outsourcing

failure
Risk of Late deliveries: delivery on time in

the evaluation of potential outsourcees

(outsourcing partners) is usually considered as
an order winning factor and failure to provide
this service can cause serious problems in
relationships .
Due to the risk of late deliveries, some
outsourcers sometimes insist that the supplier
holds safety stock closeby to minimise the
problems of late delivery.

Reasons of Outsourcing
Failure
Quality Consistency : some outsourcees

deliver high quality products or services at the

start of the operations, but fail to maintain it
over time.
This leads to rejects and returns by the
outsourcers and attracts additional costs for
the outsourcees.
It also leads to poor customer service levels
for both partners.

Reasons for Outsourcing

Failure
General Reliability Problems-reliability on quality,

delivery, cost and service are the expectations that

have to be met by the outsourcee.
Failure to meet these reliability issues can cause
mistrust between the outsourcee and outsourcer.
General Responsiveness problems: could show
the outsourcees lack of flexibility to:
make changes to specifications
Not responding to queries made by the outsourcer
Not in constant contact to adapt to changing
circumstances beyond control of both parties.

Reasons for Outsourcing Failures

Cost Realisation: outsourcee not working

out costs properly when quoting to the

outsourcer at the evaluation/negotiation
stage.
This could lead to the outsourcee asking for a
subsequent increase in the quoted price.
Confidentiality: a serious concern relating to
intellectual property rights and confidential
information being passed over to competitors.

Reasons for Outsourcing Failures

Outsourcee being too polite in

negotiations: an outsourcee can agree to

everything the outsourcer asks for but then
fails to deliver. This could be due to the
countrys culture.
Thus, it is critical that outsourcers should
evaluate potential outsourcees before
selection and agreement.
More so, a strategy for good outsourceroutsourcee relationship development can help
overcome a number of factors causing failure
in outsourcing.

What is Offshoring
The transfer of specific processes to lower

cost locations in other countries.

The firm may still own and control the process
itself in the lower cost location.
Nearshoring- moving offshored activities to
countries closer to their home market.
Backshoring- move activities back to home
market

Reasons for offshoring

Lower costs in offshore regions
Less stringent regulatory controls in offshore

regions.
Deregulation of trade facilities offshoring
Lower communication and IT costs
Improve capabilities in many offshore regions
Clusters of specific activities (e.g. call centres)
emerging in certain regions.