It’s a common decision made in every part of every company every day. With the continuing presence of competitive demands forcing business to enhance efficiency, Business Process Outsourcing is expanding its reach beyond tactical functions. While the hard and soft dollar benefits of transactional process outsourcing are well documented, and often a no-brainer when considering outsourcing, businesses are already addressing the value proposition of outsourcing procurement, and in many cases handing over portions of their supply chain management to outsource resources.
While firms have been open to, if not eager to, handing over complicated tactical spends such as MRO and Telecommunications, the relatively low dollars in these spends (when compared to direct materials) typically represent modest bottom line gains. At the same time, top dollar, direct material/upstream spends remain the holy grail in procurement and executive regimes. When considering what’s at stake from the sales side, it makes sense that businesses have approached direct spends with great care. Nonetheless, the raw numbers make a compelling case for new methods in direct material procurement. When one considers that businesses have long been willing to engage consultants for recommendations on direct material purchases, the option of outsourcing the entire business process is not at all far-fetched.
The dividing line between paying for advice and actually outsourcing the function is the solitary issue of control. While control takes many shapes; e.g. cost, quality, service-level, R&D, it is ultimately the issue of management having to answer for its decision making. One can clearly see the discomfort in having to answer for the decision making of an outsourced resource. The fear of having to answer for the micro-decisions that spring from a macro-decision can be daunting. But, as costs continue to rise and price pressure intensifies and non-core spends are maximized, the arrow will eventually find its way to direct materials.
It is important then, that top management consider that the same efficiencies that apply to tactical spends, apply to strategic sourcing as well. Outsource resources will uncover economies of scale, they will leverage technology, they will enhance rather than sacrifice expertise, and most importantly they will not function in the preconceptions found in the “single business vacuum”. While a direct material outsource relationship will require a more intimate connection than indirect material sourcing, the benefits will merit the investment.
The crucial element to such a partnership is a many touch, “no surprises” format. 100% commitment and adherence by outsource firms to move strategically, only with prior consent; will ensure the advancement of direct material procurement from a make to a buy proposition. While businesses have been reticent to turn over the direct material procurement business process, the benefits of well executed outsourcing are incontrovertible, and the move to include direct materials is merely a logical extension.
While firms have been open to, if not eager to, handing over complicated tactical spends such as MRO and Telecommunications, the relatively low dollars in these spends (when compared to direct materials) typically represent modest bottom line gains. At the same time, top dollar, direct material/upstream spends remain the holy grail in procurement and executive regimes. When considering what’s at stake from the sales side, it makes sense that businesses have approached direct spends with great care. Nonetheless, the raw numbers make a compelling case for new methods in direct material procurement. When one considers that businesses have long been willing to engage consultants for recommendations on direct material purchases, the option of outsourcing the entire business process is not at all far-fetched.
The dividing line between paying for advice and actually outsourcing the function is the solitary issue of control. While control takes many shapes; e.g. cost, quality, service-level, R&D, it is ultimately the issue of management having to answer for its decision making. One can clearly see the discomfort in having to answer for the decision making of an outsourced resource. The fear of having to answer for the micro-decisions that spring from a macro-decision can be daunting. But, as costs continue to rise and price pressure intensifies and non-core spends are maximized, the arrow will eventually find its way to direct materials.
It is important then, that top management consider that the same efficiencies that apply to tactical spends, apply to strategic sourcing as well. Outsource resources will uncover economies of scale, they will leverage technology, they will enhance rather than sacrifice expertise, and most importantly they will not function in the preconceptions found in the “single business vacuum”. While a direct material outsource relationship will require a more intimate connection than indirect material sourcing, the benefits will merit the investment.
The crucial element to such a partnership is a many touch, “no surprises” format. 100% commitment and adherence by outsource firms to move strategically, only with prior consent; will ensure the advancement of direct material procurement from a make to a buy proposition. While businesses have been reticent to turn over the direct material procurement business process, the benefits of well executed outsourcing are incontrovertible, and the move to include direct materials is merely a logical extension.
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