Sunday, 3 March 2013

Outsourcing as a procurement option

Profs. Shruti Jain and Shweta Dixit write...

The authors can be contacted at:,

Procurement plays an important role in helping companies achieve the desired savings and profitability. Strategic sourcing has gone to new levels for building process excellence and aligning capabilities with requirements of corporate buy, as procurement has a key role in the corporate quest for value growth. Outsourcing has rapidly become a part of the everyday social lexicon. Harvard Business Review has identified outsourcing as one of the most important management ideas of the past 75 years.

Outsourcing saves precious resources and allows focus while building on core competencies.  Further, it leads to more profits, increased shareholder value, greater efficiency and better services. Therefore, more and more companies are moving their non-core business processes to outsource providers.

International outsourcing represents an opportunity to obtain materials at a lower cost than is possible in the home country .The trend towards such sourcing has been on the increase. To reduce costs European and Japanese companies are relying less on internal sourcing of materials. American firms too are taking advantage of such trends and outsourcing mainly from Mexico and Southeast Asia. For example, a major shift in the procurement from Mexico of high priced and high labor content materials that are inexpensive to transport.

Strategies which results in lower procurement costs without significantly compromising quality or increasing transportation charges are expected to become more widespread.

General Agreement on Tariffs and Trade (GATT) and the establishment of the World Trade Organization (WTO) have helped to globalize the sourcing option. Countries may now be identified as production platforms where a specialized activity in a company’s value chain can occur and provide a competitive advantage. These countries might possess special endowment factors such as low labor cost, availability of resources, good infrastructure, skilled workers, and local demand for manufactured products. To exploit these advantages, a firm may source from a number of locations to minimize overall cost and gain access to technology and quality output.

Global sourcing is also advocated as a means of achieving economies of scale, improving quality, and preparing export markets by obtaining knowledge from purchasing activities oversea. Sourcing may now be regarded as a network in which firms try to manage the flow of materials.

Outsourcing is a phenomenon that has been one of the most sustained yet controversial trends over the past few years and consequently researchers have found it attractive. In particular, offshore outsourcing has become one of the mainstays of several different research disciplines, including international business, strategic management, supply-chain management and information.

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