MANAGING THE RISKS OF OUTSOURCING:A SURVEY OF CURRENT PRACTICES AND THEIR EFFECTIVENESS
Potential Negative Outcomes of Outsourcing
Outsourcing generally,and offshore outsourcing in particular, continues to be a key part of many companies’supply and cost management strategy.The strategy has proven to be effective but brings with it significant risks that must be recognized and managed.In outsourcing, a company is relying on someone else to run certain business functions.If not properly managed,companies may negatively affect their operations and customers.The product or service can be outsourced, but the risk cannot.Some of the potential negative outcomes can include:
-On-time delivery performance and end customer satisfaction levels may decline because of delays at third parties.This risk can be severely aggravated as product/service is outsourced.Delays can be caused by many factors that are outside the control of the outsourcing company.Examples include port/customs delays,labor disputes,weather,and political unrest.More extreme examples include terrorism related delays and interruptions and uncertainty resulting from the outbreak of contagious diseases such as SARS.As lead-time and variability increase, so does the need for higher stock levels and other costly buffers,while overall supply chain confidence deteriorates.
Product or service quality may also suffer in outsourcing,affecting customer satisfaction.Companies must carefully select, qualify, contract with,and manage their outsourcing partners to ensure that quality does not deteriorate. This often requires adequate transition periods and/or parallel production as well as effective cross-training between companiesThese aspects are often neglected because of cost saving efforts.