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Chapter 5: Outsourcing and Global Supply Chain Management: Contract Manufacturing
Overview
It is feasible to state that the growth in several branches of the outsourcing field has been precipitated by the onslaught of globalization. As operating environments become more complex, companies are compelled to seek outside expertise that complements their own arsenals of human, physical and digital capital.
By definition, outsourcing implies the use of third parties to carry out functions that are not native to the "core competencies" of an organization. In today's market, outsourcing has come to incorporate the subcontracting of services and/or manufacturing activities and extends to payroll, information technology, logistics, light assembly and full-blown manufacturing, among other areas.
Theoretically, a company outsources non-core competencies so that limited resources can be focused on activities indigenous to its business model. In reality, outsourcing creates the potential to reduce costs at an operating level (less in direct payroll, for example), as well as improve the balance sheet by reducing the value of assets that are shown there (less in raw materials inventory through outsourced manufacturing, as another example). In each case, supply chain managers must analyze the true value of outsourcing within the confines of strategic and tactical initiatives, determining both the operational and financial consequences of any such undertaking.
Regardless of the motivation behind outsourcing and the varying opinions on its long-term future with supply chain management (SCM), its effect on global processes and communications in undeniable. Entire outsourcing industries have been born under the guise of strategic focus and functional expertise, with thousands of jobs and billions in revenue generated in the process.
When focusing on the specific strategic and operational impact of outsourcing on SCM, the two most important industries to consider are contract manufacturing and third-party logistics. It is in these two businesses where the greatest potential for optimization of supply chain efforts can be found, with an in-depth understanding of how both industries play on operations a prerequisite to supply chain superiority. Taken in hand with globalization, the outsourcing component of global SCM and its bottom line significance to profitability and asset utilization is a field rich in potential for future productivity gains.
