Academic journal article Journal of Supply Chain Management

Outsourcing Supply Management

Academic journal article Journal of Supply Chain Management

Outsourcing Supply Management

Article excerpt

SUMMARY

There is increasing interest in outsourcing part or all of the supply function, but little empirical knowledge of the drivers of this phenomenon. Based on a survey of 126 chief purchasing officers, internal purchasing outperforms third parties when strategic buys are involved. For nonstrategic purchases, performance is about equal for internal and third party purchasers, except where tight systems connections or strategic input are critical. Accompanying case studies support these conclusions and illustrate the approaches used by leading firms to position internal purchasing for maximum efficiency and effectiveness.

INTRODUCTION

This article focuses on outsourcing of purchasing activities, such as monitoring inventory, order placement, and source selection. For purposes of this study, outsourcing is defined as "the transfer of responsibility to a third-party of activities, which used to be performed internally (Ellram and Maltz 1997)." In the realm of supply management, the third-party is generally a supplier. The fundamental issues explored are:

1. What purchasing-related activities should be outsourced because they can be performed more efficiently and effectively outside the organization?

2. What purchasing-related activities should not be outsourced, because they can be performed better internally?

3. Does outsourcing represent an opportunity or a hazard for supply management? Are there any factors that point one way or the other?

The article begins with some background on outsourcing trends and issues. It then presents the research methodology that was used to explore the answers to the questions above. Next, the results of the research are presented and analyzed. The article concludes with managerial implications and directions for further research.

LITERATURE REVIEW

The outsourcing issue has been recognized and studied for many years under such names as make-or-buy (Harris in Erlenkotter and Dobler 1990; Dilworth 1986; Buffa 1971, Hendrick and Moore 1985; Dobler and Burt 1996; Zenz 1987; Stevens in Farmer 1985), vertical integration (Coase 1937; Joskow 1988; Stuckey and White 1993; Maltz 1992), transaction cost minimization (Williamson 1985; Noordewier, John, and Nevin 1990; Heide and John 1990; Stuckey and White 1993; Rangan, Kasturi, Corey, and Cespedes 1993; Palay 1984; Maltz 1994; Maltz 1993), and core competencies (Venkatesen 1992; Prahalad and Hamel 1990; Quinn and Hilmer 1994; Stalk, Evans, and Shulman 1992). Although economic concerns are still very important, organizations are increasingly taking a broader view of the outsourcing question. Some organizations have modified their cost evaluations to include internal and external transaction costs as well as purchase price versus internal cost. Research studies have consistently shown that organizations react to a supplier with unique advantages by either producing internally, buying out the supplier, or using other methods to balance the supplier's power (Coase 1937; Joskow 1988; Stuckey and White 1993; Maltz 1992 Williamson 1985; Noordewier, John, and Nevin 1990; Stuckey and White 1993; Rangan, Kasturi, Corey, and Cespedes 1993; Palay 1984; Maltz 1994; Maltz 1993). But if competitive suppliers are available, successful organizations are investing financial and human resources in a few key areas and outsourcing most other activities.

In a recent study, Fearon and Leenders found that "outsourcing is the one corporate activity in which supply management's role/responsibility/involvement is somewhat above moderate and is expected to increase significantly (Fearon and Leenders 1995)." So it appears that supply managers are clearly aware of outsourcing trends and issues. In addition, some or all of supply management's own activities may be candidates for outsourcing (Purchasing 1995; Karoway 1995). Corporate initiatives such as reengineering (Hammer 1990) and emphasizing "core competencies" (Prahalad and Hamel 1990) are causing in-depth examinations of all of the firm's functions, including supply management. …

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