Essential Strategies for Successful Outsourcing

Written by Tang Li Xuan, DPSM

by Tang Li Xuan, DPSM

Essential Strategies for Successful Outsourcing

Written by Tang Li Xuan, DPSM

by Tang Li Xuan, DPSM

by Tang Li Xuan, DPSM

Outsourcing is the complete transfer of a business process to an independent external organisation. The reasons for outsourcing could be due to uncertain market situation at where the company is located, company’s efforts to restructure the process flow of departments, so as to achieve economies of scale as well as efforts to reduce costs from skilled labour to raw materials. Outsourcing can be deemed effective and thus successful when it helps companies to achieve better quality, quantity, delivery, cost, service, lower risk and greater opportunity for the company’s competitive position and greater customer satisfaction.

Categorisation as a Procurement Strategy

Categorisation is a form of category management used in procurement/purchasing. It is a strategy where the Procurement Managers in organisation cluster and centralise similar goods and services. By doing so, it eases administrative procedures and lower prices of goods and services through bulk purchases. Therefore, by applying categorisation strategy, it would be easier for organisation to outsource part of their procurement processes successfully. It would also effectively assist organisations in checking for the performance of their hired outsourced department.

As categorisation is a strategic approach, as a guide, there is an 8 stage cycle on how category management can be conducted in organisations.

Supplier Integrative Negotiation

Negotiation is the process whereby both parties (organisations and suppliers) attempt to reach an agreement. It is a technique to get the goods or services at a lower price, with changes in terms and conditions that one deemed fit; instead of accepting what have originally been offered by the suppliers. It is an art of haggling about anything in the goods or services.

Integrative negotiation, also known as win-win bargaining, is a negotiation strategy whereby two or more parties (organisations and suppliers) collaborate to find a “win-win” solution during an agreement. It is important for successful outsourcing because it produces satisfactory outcomes which fulfil the interests of both the organisations and suppliers.

Integrative negotiation is crucial as it produces more satisfactory outcomes for both parties involved than what positional bargaining offers. Positioning bargaining is based on fixed, opposing viewpoints; and tend to result in compromise from one of the parties.

The table below shows the factors to consider during positioning bargaining and integrative bargaining (negotiation). It also reflects the differences between the two types of bargaining; to prove why an integrative approach to negotiation is the preferred strategy to ensure successful outsourcing.

Positional Bargaining Integrative Bargaining (Negotiation)
Disputants are adversaries
Goal is victory
Demand concessions
Dig into position
Mislead, use tricks
Insist on your position
Apply pressure
Look for win for you alone
Disputants are joint problem-solvers
Goal is wise decision
Work together to determine who gets what
Focus on interests, not positions
Be open about interests, use fair principles
Insist on objective criteria; consider multiple answers
Use reason; yield to principle, not pressure
Look for win-win opportunities

Table adapted from https://www.beyondintractability.org/essay/interest-based_bargaining

Integrative negotiation is an effective strategy to ensure successful outsourcing. This is because both the organisations and suppliers have to agree on who gets what; such that ultimately, the best value of interests are met by both parties.

The main basis of this strategy is to create a cooperative working relationship between organisations and suppliers; thereby ensuring a positive Supplier Relationship Management (SRM).

Measuring Suppliers Performance

To ensure successful outsourcing, a set of supplier performance measurement is necessary. It helps to determine whether during the outsourcing process, the suppliers are performing up to expectations. This can be measured in terms of these 3 tools – KPI Measurement, Performance Monitoring and Performance Analysis.

1. Key Performance Indicator (KPI) Measurement

Key Performance Indicator (KPI) is a tool used to measure the success of the organisation; or the progress of crucial activity the organisation undertakes. It varies in different organisations and/or suppliers.

For a call centre department, the KPIs should focus on managing the outsourced goods or services; for successful outsourcing activities, such as:

  • Customer satisfaction
  • Inbound call centre service levels
  • First call resolution rate (FCR)
  • Conversion metrics
  • Call quality
  • Average handling time

2. Performance Monitoring

Performance monitoring is used to measure suppliers’ performance. It is measured by the rate of responses of procedures and resources which the suppliers can react to the organisations. Such performance measurement are performed and recorded on a regular basis, to ensure consistency and thus ensures successful outsourcing. The diagram below shows how a logical management structure (during performance monitoring) can be categorised under eight dimensions.

The Supply Chain Manager in the organisation should be well-organized and have logical planning capabilities for performance monitoring to occur. When the manager analyse and check for improvements, he will therefore be able to measure the outcomes of performance when conducting the outsourcing strategy. To ensure an effective outsourcing strategy, this performance monitoring should be performed every quarterly and recorded on a regular basis.

3. Performance Analysis

Performance Analysis is a measure of success or failure using various parameters like delivery, quality, rejects and responsiveness.

A supplier with efficient, on-time delivery can definitely lead to successful outsourcing. This is because when there is accurate delivery (through cross docking operations) of goods or services (despite increasing inventory levels), organisations will feel that the suppliers are reliable. With greater confidence on the suppliers, organisations would most likely push for that particular brand to their customers; therefore requiring more of those goods or services. Therefore, with more purchases, it will benefit both organisations and suppliers. This will increase the frequency of transactions between organisations and suppliers, thereby leading to a successful outsourcing strategy.

With a high quality of goods or services, the possibility of having to handle defective goods is minimal. This is because high quality goods or services help to maintain the minimum material, labour and overhead costs. This, in turn, helps ensure effective outsourcing, as there is minimal transportation of goods or services back-and-fro to the supplier for repairing of defective goods.

There would be a success in outsourcing when the goods or services provided by the suppliers have minimal rejects due to defective goods, and the supplier have high responsiveness over various communication tools, i.e. e-mail, phone call, social media platform like WhatsApp, WeChat etc. This is because with few rejects of goods or services from the organisations (trickled down due to feedback from consumers), there would be fewer chances of recall of that particular goods or services. The quality of that goods or services is being trusted; with minimal chances of returning the goods or services back to the suppliers. This thus leads to minimal material, labour and overhead costs for each unit of goods or services. Therefore, the outsourcing strategies implemented by organisations are successful.

Therefore, when there is strong Supplier Relationship Management with the suppliers, effective outsourcing will be even more evident. It often leads to lower rate, increased speed-to-market times and improve service quality.

Conclusion

When these strategies are conscientiously implemented on the organisations and/or suppliers, it may in turn ensure that the most effective procurement processes can be conducted. The strategies discussed also help develop measurement systems that look beyond the unit costs of the goods and services.

To ensure successful outsourcing to occur on the organisations, there is a need for continual improvement in the processes when dealing with suppliers. Supplier Relationship Management is one of the most important components of information flow of the supply chain management. When organisations work well with suppliers to develop mutual capability and integrated strengths, it helps to improve supply chain effectiveness.

Outsourcing allows organisations to have the resources and time to perform the other activities which they have a greater competitive advantage. Outsourcing is flexible; it is up to individual organisations on the degree of business they would like it to be outsourced. The outsourcing strategies can also be modified according to the market trend, in particular in the current times where frequent conflicts such as the tariffs and trade wars will affect how organisations and outsourcing companies work together in the global world.


References

Academy, A. O. (2017). “What Are Supplier Performance Measures?”. Retrieved from ADR International: http://www.adr-international.com/insights/what-are-supplier-performance-measures, accessed 21/12/2018.

Council, N. R. (2000). “Surviving Supply Chain Integration: Strategies for Small Manufacturers”. Retrieved from The National Academies of Sciences Engineering Medicine, NAP: https://www.nap.edu/read/6369/chapter/8#56, accessed 20/12/2018.

Hao, D. (2018). “How Category Management Can Decrease Your PO Processing Time”. Retrieved from Procurify: https://blog.procurify.com/2018/07/16/what-is-category-management-and-how-does-it-tie-into-procurement, accessed 21/12/2018.

Insider, O. (2015). “4 Key Factors For Outsourcing Success”. Retrieved from INFINIT-O Endless Opportunities: http://www.blog.infinit-o.com/4-key-factors-outsourcing-success, accessed 17/12/2018.

Kotlarz, C. (2016). “6 KPI’s to Effectively Manage Your Outsource Call Center”. Retrieved from LinkedIn: https://www.linkedin.com/pulse/6-kpis-effectively-manage-your-outsource-call-center-corey-kotlarz, accessed 22/12/2018.

Lau Chee Leng, DPSM. (2018). “Eight Essential Steps for an Effective Global Sourcing Strategy”. Retrieved from SIPMM: https://sipmm.edu.sg/eight-essential-steps-effective-global-sourcing-strategy, accessed 17/12/2018.

See Yin Qian, DPSM. (2018). “Key Stages to Develop a Global Sourcing Strategy”. Retrieved from SIPMM: https://sipmm.edu.sg/key-stages-develop-global-sourcing-strategy, accessed 17/12/2018.

Spangler, B. (2003). “Integrative or Interest-Based Bargaining”. Retrieved from Beyond Intractability: https://www.beyondintractability.org/essay/interest-based_bargaining, accessed 22/12/2018.

Webb, J. (2015). “What Is Category Management”. Retrieved from Forbes: https://www.forbes.com/sites/jwebb/2015/12/23/what-is-category-management/#6df659385dbf, accessed 21/12/2018.

About the Author: Tang Li Xuan has substantive experiences in the education sector, specifically in the Food industry. She is currently involved in inventory planning and supplier outsourcing. She is a member of Singapore Institute of Purchasing and Materials Management (SIPMM). Li Xuan holds a Bachelor degree from the Nanyang Technological University (NTU) and she completed the Diploma in Procurement and Supply Management (DPSM) course on December 2018 at SIPMM.

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