2013

GIMPA BOPM LEVEL 400

[MATERIALS MANAGEMENT DEBATE: TO OUTSOURCE OR NOT TO OUTSOURCE]

According to Nicholas Beaumont and Amrik Sohal (2004), outsourcing is defined as having work that was formerly done inside the organization performed by an external organization.

MATERIALS MANAGEMENT DEBATE: To Outsource or Not to Outsource OUTSOURCING DEFINED According to Nicholas Beaumont and Amrik Sohal (2004), outsourcing is defined as having work that was formerly done inside the organization performed by an external organization. Lysons and Gillingham, 2003, states that outsourcing is a management strategy by which An organisation outsources major non-core functions; To specialized and efficient service providers; To help the organisations perform best where it is best capable.

One area that is gaining an increasing amount of attention is materials management. An alternative being considered by many is outsourcing their material management functions (Belcourt, 2006) WHY OUTSOURCING? There is a growing need to be more responsive to customer service and market demand (Horne, 1989). Increase in cost-efficient foreign competition Management demand for a financial contribution from all sectors of the company Increasing customer demands and Increasing environmental awareness Razzaque and Chang (1998)

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BENEFITS OF OUTSOURCING There are many reasons why a company may choose to outsource a particular function of their business. Outsourcing is beneficial in the following ways;

1. FOCUS ON CORE ACTIVITIES CASE STUDY: BOEING According to Lysons and Gillingham (2003), Outsourcing allows an organisation to concentrate on areas of business that derive competitive advantage and outsource non-core activities to specialist with better skills and expertise. Example: Boeing outsource its Inventory or Purchase function Summarized advantages

Superior service levels Focus on continuously improving the process Increased flexibility of to service or product demands Economies of scale, access to technology and specialized expertise, Focus on higher value-added functions.

2. COST SAVING Example: Outsource the Inventory management function. This is the lowering of the overall cost of the service to the business.

Summarized advantages Significant reduction in materials costs Turn fixed costs into variable costs Greater ability to control delivery dates (eg: via penalty clauses) Lower ongoing investment required in internal infrastructure Control of budget Elimination or reduction of slow-moving and obsolete stock

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3. CONTINUITY & RISK MANAGEMENT

Summarized advantages Overcome resource shortages by outsourcing Outsourcing can help accommodate peak and off demands. Process Improvement

A particularly strong reason to outsource involves a shortage of a critical resource. Periods of high market turbulence will add uncertainty and inconsistency to the material management operations. By spreading your risk, you reduce your total risk. Outsourcing will provided a level of continuity to the company.

4. QUALITY ASSURANCE Proper storage of product storage

The third party service providers, also known as vendors, are specialist in handling the types of jobs outsourced to them, therefore assuring higher quality of output. 5. REGULAR IMPROVEMENTS The vendors constantly strive to improve their own services, in order to beat competition and grow themselves while attracting new clients. This, in turn, directly impacts the quality of products and services in a favorable manner. Gain market access and business opportunities through the suppliers network

Purchase of industry best practice( Byrne,1993) 6. EFFICIENT EMPLOYEE MANAGEMENT As material management function is outsourced, employees handling becomes simpler and less tedious. As such, the parent company needs not be stressed about handling administrative issues in warehouse, purchase personnel etc.
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Oppose them with this point:

CRITICAL FACTORS THAT MAKE OUTSOURCING WORK. Focus on the customer; Establishing operating standards and monitoring performance against those standards; Knowing the payback period, Benefits expected by the firm, means to achieve those benefits. Factors such as being aware that outsourcing may require a longer term of service than the firm is used to and building information systems that will allow the firm to make ongoing cost/value comparisons are also critical. Razzaque and Chang (1998) CONCLUSION Finally, the essential sources of competitive advantages are not the products themselves but the managerial capabilities to strengthen and to combine skills and technology into competences for adaptation to changing business environment.

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REFERENCE Belcourt, M., 2006: Outsourcing the benefits and the risks, Human Resource Management Review, 16: 269-279. Horne, R. (1989), Charting a course for integrated logistics, Transportation & Distribution, October, pp. 45-51. Lysons and Gillingham, 2003: Purchasing and Supply Chain Management, 6th Edition, Prentice Hall Publishing. Nicholas Beaumont and Amrik Sohal. (2004). Outsourcing in Australia. International Journal of Operations & Production Management, Vol. 24 No. 7 , pp. 688700. Razzaque Abdur Mohammed and Sheng Chen Chang (1998): Outsourcing of Logistics functions, International Journal of Physical Distribution & Logistics Management, Vol. 28 No. 2, 1998,pp. 89-107.

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