Outsourcing in Operations Management

Modern organizations, in order to reduce operational costs and become more competitive, have designed and implemented several key strategies. One is that of outsourcing.
Through Outsourcing is contracted and delegated one or more processes, not business critical, a specialist provider, to achieve greater efficiency in carrying out the mission. Outsourcing produces multiple benefits, the most important being the following: reduced costs, reorganizing the staff structure, increase the level of working capital, improve the quality of products and services and reducing the level of business risk. It also eliminates some conflicts with the workers (with the Outsourcing the number of workers will be less), while decreasing some wasteful activities such as payroll processing.
But, as the outsourcing have advantages; it also has some drawbacks that are necessary to take into account before making a decision on its implementation. The main disadvantages are: dependence on third parties and possible loss of control, increased risk to the confidentiality level of the organization, and possible conflict with the outsourcing provider.

Therefore, it is necessary to take into account some important considerations for successful outsourcing agreement. The s most important are the following: develop appropriate agreements, taking into account the location of the service to be provided, should determine the level of technology use in the Outsourcing, check before you hire Outsourcing provider capacity to provide efficient service; include in the contract of outsourcing the relevant training to employees of the company, check the quality of the service Outsourcing, and establish the potential of vendor to support and network integration.
When management of an organization decides to use outsourcing services, you should consider what can be arranged and must not be hired by this system. In general, these activities can be contracted by Outsourcing: information technology, collections and marketing, general maintenance services of installations, consulting and training, and recruitment and settlement of payroll.
It is not recommended to hire these outsourcing activities: management of strategic planning, financial management, consulting services to senior management, control of suppliers, and quality management and the environment. These are all functions inherent to the company that cannot be delegated.
Anyway, hay otras ventajas importantes que deben ser consideradas en la contratación del Outsourcing, tales como las siguientes: disponer de más tiempo para enfocar la empresa en sus objetivos estratégicos; interactuar con empresas de clase mundial; disminuir los niveles de riesgo al poder compartirlos con terceros; mayor atención a los trabajadores de la empresa y fomento del trabajo en equipo; y requerimiento de menor espacio físico en la empresa.
Anyway, there are other important advantages that should be considered in the agreement of outsourcing, such as: more time to focus the company on its strategic objectives; interact with world class companies, reduce risk levels to be able to share with third, greater attention to company employees and promoting teamwork, and less physical space requirement in the company.

8 thoughts on “Outsourcing in Operations Management

  1. You did a fantastic job of conducting an in-depth analysis of outsourcing. Do you currently work in a company that has outsourced a lot of its operations? I paid close attention to the section where you listed outsourcing activities that should not be hired. I definitely plan to apply some of your ideas to my company!

    1. The original poster asked, “If you were the chief operating officer at GM or Peugeot, how would you restructure your company and ‘build  for change?'”

      If I were on the board of directors for GM, I would split GM onto smaller companies. They have already reached what economists call “diseconomies of scale;” meaning that each additional dollar spent expanding the company will only reduce profits. GM’s budget cuts are long over due. I would go a step further and do away with all of its beuacracy. Each division of GM (like Chevy and Buick) should be sold off to the highest bidder. 

      Sent from my iPhone in Frankfurt Germany

      1. Sorry wrong post, I’m in a place with aweful Internet acess. What I meant to say was.
        The main advantage to outsourcing is called ” comparative advantage.” It means that some countries are more efficient at certain operations than others. Outsourcing means that more resources can be spend on the companies core tasks. For example, Apple iPhones are build in China, but most of the cost of producing an iPhone with are it’s research and development costs. Every dollar that Apple saves from outsourcing is a new dollar that can be spent on Research and Devolvement. Without outsourcing, most of the technology we enjoy today would not exist today, because the money that companies spent on scientific research would have been wasted on overpriced labor union wages. 

        Sent from my iPhone in Frankfurt Germany

  2. I think outsourcing is riskier than you’re making it out to be. Far from diminishing business risk, I would argue that it increases a firm’s exposure to hardship. The company, by focusing all its in-house activities on its core business, may lose sight of areas for growth, opportunities to create new internal synergies, and be in danger of becoming so unidimensional that its loses the ability to adapt.

    Also, having worked at a firm that practiced outsourcing, I can say that it can be negative for employee morale to see that the company is willing to eliminate internal jobs for the sake of minimizing costs. Of course it makes sense from a business perspective, but it gives the sense that one’s own job could go at any time. This decreases motivation and primes employees to jump ship when a more stable looking opportunity arises.

    1. Of course, any strategy that is taken into an organization has risks. At higher risk, there are more likely to obtain large profits and vice versa. Decision making involves the ability of risk to a manager. If the manager is willing to take high risk in his (her) decisions, you should know the consequences of what might happen if the decision fails. But in the business world take risks responsibly is one of the most important and difficult to assess. Precisely, the Operations Management will provide some useful tools for managers, based on the techniques of probability and uncertainty analysis, so that their decisions are rational, although taken in complex and high risk.
      On the other hand, managing change in organizations is complex too. The biggest problem is what is known as resistance to change. This stems from the particular interests of some people in the company, or the fear of others being displaced from the organization. However, changes in organizations are inherent elements of business development. Otherwise, companies would remain stagnant and marginal return, because innovation is an important factor for companies to grow and develop, or simply disappear.

  3. The number one reason companies obviously outsource is labor costs. The problem with this now is that currency shifts have changed the game of outsourcing. For example, we out source a lot job rolls such as manufacturing to China. Mexico’s peso value compared to the US is now equal that of China. What this means is that it will cost us the same to outsource the labor jobs to Mexico as it does to China. In fact, in-sourcing happens in the US. Our currency has depreciated dramatically against the Japanese Yen and Japanese companies such as Toyota have built factories here, hired US laborers, and ship the cars they make back to Japan. The whole outsourcing game has to do with currency and it will always stay that way.

  4. Last quarter we discussed some positive and negative impacts of outsourcing. Some positives impacts of outsourcing are: Increase efficiency, lower operating costs and save money. One negative(Internal)impact is that employees fear that they may be the next one to go and workloads dramatically increase for those that stay. According to what I learned in MAG300, it caused a decrease of 10-20% in the number of employees working in today’s large corporations.

  5. You mentioned various criteria to create an effective outsourcing practice; of your list, the point that stood out to me the most was the quality of services outsourced. I believe that a way to ensure that the outsourced team is producing quality work, it would be best for someone in-house to review the work before it is put into action. In the financial industry this can be done by having a standardized review process, such as a staff level reviewer for a staff level outsourced worker and etc. I think that another important aspect to the outsourcing agreement would be to take into account time zones and whether or not it would be beneficial to have the outsourced team be in a different time zone. For example, this may be helpful for a help hotline so that customers feel like they are taken care of 24 hours a day.

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