Outsourcing Procurement – Benefits vs Problems

Outsourcing procurement is often undertaken by very large companies to save money.  Procurement requires a great deal of focus on cost saving, profit maximization and compliance. Often good procurement strategies can be the difference between a profitable company and a failed business.

Some companies such as Amazon, Tesco and Walmart have made their purchasing strategies a competitive advantage.  Procurement can be very complex and cost consuming in many large companies so some of them are outsourcing procurement rather than build their own world-class procurement capabilities.

A procurement outsourcer can leverage their economies of scale and have the experience and trained staff that cut costs and enhance efficiencies.

Smaller companies that have experienced growth spurts and have few internal purchasing resources are also outsourcing procurement to take advantage of external structures and expertise.

Others that do not have the market leverage to obtain good discounts or the expertise to find good suppliers or purchasing staff are also turning to outsourcing procurement.

Some of the benefits that can be gained are:

• Cost reduction from head count, training, office space and computerization.
• Market leverage allowing for better discounts.
• Transaction cost per purchase are lowered by economies of scale.
• Marketing knowledge of which suppliers are best for each product to be purchased.
• Highly skilled staff that specialize in purchasing.
• Improved communication between purchasing experts and the company staff.
• Better management information and purchasing analysis is available for people who understand the purchasing environment.
• Globalization means that the same products are often required in different countries.
• Negotiation by an expert in the field is often more effective and profitable.

There are also several key problems that may arise from outsourcing:

• Continuity of service

There is a hand over time that needs to be managed so that products continue to be delivered during this time. You should have a detailed transition plan in operation the commencement of any handover.

• A reduction in control

Obviously by outsourcing you lose control over the day to day purchasing activities so you should ensure that you retain a reliable company and have a measurable and enforceable service level agreement (SLA).

• Outsourcing management

You need to manage the outsourcing procurement on a continual basis and ensure compliance to your contracts and SLA’s.

• Integration

Not only you will need to integrate your technology so that your accounts and warehousing systems are updated, but your staff needs to understand what is happening on a day to day basis.  Encourage your staff to understand what is happening and treat the outsourced area as part of the business.

By outsourcing procurement companies are able to concentrate on their core capabilities, confident that their purchasing is being effectively and profitably managed.

Many large companies have ensured that they have "first movers advantage" by concentrating on their core business as opposed to purchasing. 

 

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