As global competition intensifies, organizations must look for ways to evolve and adapt to the ever-changing landscape of supply chain and procurement. This translates to an increasing demand for sustainable cost reduction, improved productivity and the ability to quickly and efficiently scale production.
A growing trend among organizations is the use of procurement outsourcing as a key tactic in strengthening business operations. Research conducted in 2015 revealed 84% of companies outsource some manufacturing activity, with the majority of respondents (79%) planning to continue with their current outsourcing operations or increase them over the next few years.
What is Procurement Outsourcing?
Typically, procurement outsourcing involves hiring a third party to manage a company’s procurement processes. It is a strategic investment that requires organizations to take a calculated approach and make a decision on whether to completely or partially transfer their business processes, infrastructure and resources associated with purchasing materials to the expert third party.
There are two types of procurement activities:
- Direct procurement: This deals with procuring products directly related to your business function. For example, memory chips, screens, connectors and batteries are the crucial direct procurement items in the mobile phone manufacturing industry. It is possible to hire a provider to identify and procure these items for your company.
- Indirect procurement: This refers to obtaining goods and services from specialist third-party providers to support all other functions of business not directly related to its function, such as finance and accounting, IT, marketing and HR. These functions are more commonly outsourced than direct procurement activities.
Why Procurement Outsourcing?
With today’s mounting competitive pressure and rising expectations from shareholders, the need to improve pricing is a common driver for any outsourcing effort. Indeed, outsourcing activities can accelerate the entire buying transaction and substantially reduce costs. By leveraging service providers’ expertise and networks, you can gain access to the best tools and practices, and improve procurement effectiveness without the need for staff training and investment in new technologies. This in turn helps reduce headcount and lower overall operational costs.
Relying on partners to manage manufacturing and distribution also frees up more time for businesses to fully focus on core competencies in-house. This allows firms to apply limited resources to mission-critical business functions. In fact, by concentrating on what they do best as opposed to purchasing, many organizations are able to accelerate the time-to-market for new products and gain first-mover advantage.
Since maverick buying is a common problem, procurement outsourcing helps improve spend visibility. Working with professional third-party providers gives you access to leading technology toolkits that ensure transparency across your supply chain. As a result, you can gain greater control and collaboration with key vendors, better inventory management and reduce risk of disruption.