Hidden perils of Outsourcing, lean manufacturing and just in time inventory:

Hidden perils of Outsourcing, lean manufacturing and just in time inventory:

Disturbances in global supply chain can affect any company financially. We covered well known supply chain strategy “lean manufacturing” last week. Lean Manufacturing, outsourcing along with just in time inventory are some of the supply chain new strategies which are perceived as great methodologies which can help a company reduce its costs. They also allow company to focus on their core operations. For, example, for a production company, promotion of the product does not align with the machines and infrastructure they are using to produce that product. Promotional activities such as dynamic web-site or an app, which can help lure customers, can be now outsourced to an IT company who is good at developing such software. Thus the production company can now narrow down their focus to the core operations.

Here are some advantages of outsourcing.

1. Manage the outsourced activity efficiently: You can chose a supplier who is already a big player in that field.

2. Market Lure: You can assign costs based on different suppliers in the market.

3. Flexible resources: Resources which has no use in one field can now be utilized in more important core functions.

Risks involved in outsourcing:

General risks: Company’s dependency on supplier can be a problem affecting the degree and level of performance that supplier was providing the company. Company’s focus is only the core operations but this limits the knowledge and skills of the company in other fields which is necessary in the ever evolving competent market.

Hidden costs or risks:

When a company outsources its services to some off shore providers, a customer might have to pay more than what he/she would have paid if on shore resource were used.

Offshore outsourcing can have many more hidden costs: They can take costly and long process to choose a vendor.It may take four to twelve month or longer timeframes to finish the work handover to the offshore vendor;Costs related to severance packages due to layoffs of regional employees who cannot be reallocated globally.Finally, there can be costs associated with turnover, and extra costs related to adjusting to the cultural differences for instance language.

In Lean manufacturing and just in time inventory, purchasing goods and services is really important and hence manufacturers keep low stock levels. Their job is to control the stock levels of sourced goods. Problem arises when raw materials do not arrive on time, it disrupts the supply chain. Also, if a company relies on just one source for a critical part for their product, and that source fails to deliver, the supply chain is again disrupted. Risk diversification plays an important role here. Company can try to diversify the risk from suppliers thus eliminating the vulnerability arising from failure of one source.

Adapting supply chain innovation strategies such as outsourcing, just-in time inventory and lean manufacturing can prove successful in saving costs if all the risks are well managed. All the costs with these methods should be accounted for and then a final call should be made – Is Outsourcing a good option for us?

References:

1. http://ww2.cfo.com/supply-chain/2014/01/the-hidden-perils-of-supply-chain-innovation/

2.http://www.bdc.ca/EN/advice_centre/ask_professionnal/Pages/advantages_and_disadvantages_to_outsourcing_your_production.aspx