Companies are increasingly challenged to sustain a competitive advantage in a dynamic business environment (Christopher 2005, p.117). Accordingly, more and more companies are now focusing on the core competencies and outsourcing the non- core activities to a third party (Chandra & Grabis 2007, p.29).
The dynamic nature of today’s business environment affects the existing supply chain configuration. Supply Chain Configuration in a plain English is the interconnection relationship between all players in a supply chain (Dawei 2011, p.30). Within this context, one of the main decisions in the supply chain configuration/ reconfiguration is the outsourcing decision (Chandra & Grabis 2007, p.29).
The purpose of this article is to set the scene by examining the need for supply chain configuration followed by a definition for the strategic outsourcing concept.
A configurable supply chain is defined as
“A system that efficiently adapts to its environment, offered in the form of the supply and demand issues for the product(s) to be manufactured” (Chandra & Grabis 2007, p.21).
The relationship between the parent international company and its subsidiaries is a good example of the adaptation process. Previously, a ‘hand-off’ relationship with a minimum power from the parent company was widely known in Europe. A ‘wholly subsidiary structure’ and parent’s domination became more obvious in the USA. Later, a global oversees strategies in Japanese companies were more adapted (Chandra & Grabis 2007, p.28; Dawei 2011, p.30).
One of the decisions that a company faces during the supply chain configuration/ reconfiguration is the ‘Outsourcing Strategy’. Outsourcing or ‘Make or Buy’ decision is used to describe the act of securing a business function, a product or a service from third parties because they can provide it better than performing it internally (Chandra & Grabis 2007, p.29; Fawcett et al. 2007, p.282; Donald Waters 2010, p.165; Bowersox et al. 2010, p.10; Dawei 2011, p.34; Slack et al. 2013, p.157). Within Michael Porter’s Value Chain, the business aspect is outsourced to a partner who can provide a better ‘cost advantage’ or ‘value advantage’ (Christopher 2016, p.198). When the aspect that is being externally outsourced is significant to the company, it is called ‘strategic outsourcing’ (Dawei 2011, p.34). Outsourcing is different than offshoring where the company decides to move part of its operations to another country (Rolstadas et al. 2012, p.98). The Outsourcing/ Offshoring relationship is shown below.
Outsourcing is not a new discipline. Historically, companies have been engaged in different types of outsourcing as summarized below (Fawcett et al. 2007, p.283; Vagadia 2012, p.30):
- First phase: outsourcing for the supporting activities to a third party in order to reduce the associated costs.
- Second phase: outsourcing the supporting and more of a centre to the business process with a motivation to cost saving and other benefits such as getting better quality. Examples: IT helpdesk, call centers and data entry.
- Third phase: integrating the outsourcing decision at a strategic level and include the Information Technology Outsourcing (ITO) in order to achieve two benefits; focusing on core competencies and reducing costs associated with managing IT service internally.
- Fourth phase: outsourcing key processes under what is called ‘Business Process Outsourcing (BPO)’ such as logistics, human resources management, payroll processing, purchasing, marketing, sales, accounting, administration and IT.
- Fifth phase: transformational outsourcing where the third party act as an extended element for the company and act as a business partner. This approach is still not fully implemented at a large scale like the previous phases.
Bowersox, D.J., Closs, D.J. & Cooper, M.B., 2010. Supply chain logistics management 3rd ed., New York: McGraw-Hill Higher Education.
Chandra, C. & Grabis, J., 2007. Supply chain configuration: concepts, solutions and applications 1st ed., New York: Springer.
Christopher, M., 2016. Logistics & supply chain management 5th ed., Harlow: Pearson Education.
Christopher, M., 2005. Logistics and supply chain management: creating value-adding networks 3rd ed., Harlow: Financial Times/Prentice Hall.
Dawei, L., 2011. Fundamentals of Supply Chain Management [e-book], Dr. Dawei Lu and bookboon.com. Available at: http: //bookboon.com/en/fundamentals-of-supply-chain-management-ebook.
Donald Waters, 2010. Global Logistics: New Directions in Supply Chain Management 6th ed., London: Kogan Page.
Fawcett, S.E., Ellram, L.M. & Ogden, J.A., 2007. Supply chain management: from vision to implementation 1st ed., Upper Saddle Rive: Pearson Prentice Hall.
Rolstadas, A., Henriksen, B. & O’Sullivan, D., 2012. Manufacturing outsourcing: a knowledge perspective [e-book] 1st ed., London: Springer.
Slack, N., Jones, A. & Johnston, R., 2013. Operations Management 7th ed., Harlow, England: Pearson.
Vagadia, B., 2012. Strategic Outsourcing: the alchemy to business transformation in a globally converged world 1st ed., London: Springer.