What is outsourcing in procurement management?

 Outsourcing in procurement management refers to the practice of contracting with an external supplier or vendor to provide goods or services that are typically performed by in-house employees. This can include activities such as manufacturing, logistics, and information technology support. The goal of outsourcing is to reduce costs, improve efficiency, and access specialized expertise. In procurement management, outsourcing is often used to manage the acquisition of goods and services from outside suppliers.


 PROCUREMENT AND OUTSOURCING

Purchases are usually made to meet the needs of the construction work or other internal works for which the purchases are made. It also enables access to external markets, supplier development and relationship management and other functions.


It is buyers and suppliers who are usually engaged in a purchase transaction, which usually begins with the buyer receiving the order and making the payment. When designing a purchasing process, it is important to consider the merchandise that the process will be used to purchase. The two main categories of purchased goods are direct materials and indirect materials. Direct materials are components such as those used to create finished goods. Indirect materials are items used to support a firm's operations. Indirect materials are components used to create finished goods. Indirect materials are items used to support a firm's operations. All purchasing processes within a company are related to the purchase of direct and indirect materials.


The direct material procurement process should focus on improving coordination and visibility with the supplier. The indirect material procurement process should focus on minimizing transaction costs for each order. In both cases the buying process should consolidate orders to take advantage of economies of scale and quantity discounts.


In addition to the classification of direct and indirect materials, all purchased products can also be classified based on value/cost and how important they are:


Why is sourcing decision important?

Making or Sourcing Decisions

1. Use multi functional teams:

  The strategy, which is developed, should be in collaboration with various functions like engineering, procurement, construction, engineering etc. which will help in identifying the right drivers in total cost.

2. Ensure that there is appropriate co-ordination across regions and business units

Ensuring that there is adequate coordination across all sectors and business units will allow a firm to maximize economies of scale.

3. Evaluating the total cost of ownership

Cost reduction should not be the sole objective of an effective sourcing strategy. Total cost of ownership is also affected by other factors, which must be recognized and used for supplier selection. By focusing on total cost of ownership, it also allows the buyer to identify opportunities to better collaborate on design, planning and fulfillment.

4. Building long-term relationships with key suppliers

Basically, when buyers and suppliers work together, more savings opportunities will arise that if both parties were working independently. A long-term relationship will encourage the supplier to put more effort into issues that are important from the buyer's point of view.


Why do companies outsource logistics?

Logistics Outsourcing

Today, business organizations around the world are struggling to compete not only for growth but also for survival alone. The factors responsible for this are the liberalized economies of countries across the world. Also, customers have become more demanding and are looking for value added services from potential suppliers as they want value for money they are spending. In such a situation, business organizations across the world have started reviewing their business processes and have realized that cost cutting and differentiation in value delivery is the solution to the current problem. Outsourcing previously done in-house to an external provider There is a transfer of work.

Outsourced providers are often referred to as contractors or "third parties". When "outsourced" work is contracted out, the outsourcing business or agency still provides the inspection.

Once the decision to outsource has been made, identifying a short list of partners can be a daunting task. Although many options exist, it is necessary to sort them out. The following may facilitate sorting them out

1. Identify areas of opportunity

Gaining the ability to enter new markets without building an expensive distribution infrastructure is a big reason to outsource. Establish a team to look at the current and future needs of a business, and assess its ability to meet those needs. This team should include key members of the logistics organization and other areas such as marketing and customer service. These other departments can provide insight into growth projections and deficiencies in existing processes.

2. Assessing the Strengths and Weaknesses

Having an understanding of what the company is good at and what it is not - will help in finding a suitable partner. Potential partners also have different strengths and weaknesses. For example, some logistics partners are better at warehousing than transportation. Others may be great at managing the import process but are less efficient at such functional

3. Decide what to outsource

Once a team has identified partnership opportunities, it needs to determine which tasks to assign to the partner. Functions such as warehousing and transportation affect how customers view a company's ability to perform. The success of an outsourcing project depends on the company's comfort level with the partner's ability to execute on the company's behalf.

4. Identify a Short List of Providers

Several strategies can help in selecting the right partner. Creating and distributing a request for information that asks potential partners about their capabilities can be done. A list of providers with experience in the industry can be developed. This process will rapidly reduce the number of potential partners. The network infrastructure of the rest of the companies also needs to be examined. It may also be helpful to initiate a logistics network optimization effort to identify optimal locations for distribution. A company's geographic needs may require a nationwide network or a greater focus on specific regions. It is necessary to compare the requirements with the capabilities of potential providers and assess their technical capabilities.

5. Consider the Human Element

Successful outsourcing projects have one element in common: nurturing relationships between key people on both sides. Ensuring fit not only between corporate cultures but chemistry between individuals. This is especially important during implementation and ongoing operation.


Outsourcing - A value proposition

Logistics service providers help the business corporation to achieve two goals, i.e., to reduce the operating cost and increase the revenue. Since the service provider organizes the necessary logistics assets, the investment in the ownership of logistics assets on the part of the customer is reduced, this in turn allows the firm to invest in more productive activities and earn higher returns on the remaining assets, Due to which the returns increase. on the investment of the shareholders. Tie-ups with service providers will free up the company's manpower for more productive work, focus on their area of core competence, and increase the company's returns. The firm gains knowledge through exposure to and familiarity with best available practices and technologies used by service providers. These value propositions justify logistics outsourcing.