Benefits & Challenges of Procurement Outsourcing
Procurement outsourcing is undertaken by large enterprises most of the times, in order to save money. It requires a great focus on profit maximization, cost-saving, and compliance. Often good strategies of procurement can be the difference between a failed business and a profitable company.
Some companies like Tesco, Amazon, and Walmart have made their purchasing strategies a competitive advantage. A procurement process can be quite complex and cost consuming in various large organizations, so some of them outsource procurement rather than create their own world-class capabilities of procurement. A procurement outsourcing company can leverage its economies of scale and have an experienced and trained staff that enhance efficiencies and cut costs.
Smaller firms that have experienced growth spurts and have a few internal purchasing resources are also getting procurement to take competitive advantage of various external expertise and structures.
Others that don’t have the market leverage in order to obtain good discounts or the expertise to search good suppliers or purchasing staff are also turning to outsource their procurement process. Some of the advantages that can be gained are as follows:
- Cost reduction from training, headcount, computerization, and office space.
- Market leverage allows for better product discounts.
- Transaction cost on every purchase is lowered by economies of scale.
- Marketing knowledge of which suppliers are the best for each good to be purchased.
- Highly skilled and experienced staff that specializes in the purchasing.
- Improved and flawless communication between the company staff and purchasing experts.
- Better purchasing analysis and management information are available for people who understand the environment of purchasing.
- Globalization means that the same products are required often in different other countries.
- Often negotiation by a professional in the field is more profitable and effective.
Although there are also a plethora of key challenges that may arise from outsourcing:
Continuity of service
There is a hand over time that requires to be managed so that the distribution of products continues during that particular time. You should have a detailed transition plan in operation at the start of any handover.
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Loss of control
Obviously, by outsourcing your procurement, you lose control over day-to-day activities so that you must make sure that you maintain a reliable company and have an enforceable and measurable service level agreement (SLA).
You need to manage the outsourcing procurement on an ongoing basis and make sure compliance with your contracts and service level agreement (SLA). Although most of the companies don’t face any issue with a good procurement company in China.
Not only will you require to integrate technology so that your warehousing and accounts systems are updated accordingly, but your employees have to comprehend what is happening on a day to day basis. You should encourage your employees in order to understand what is happening and treat the outsourcing sector as part of the business.
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By outsourcing, various procurement companies are able to focus on their core capabilities and confident that their procurement process is being managed profitably and effectively. Most of the large companies have made sure that they have the “first-mover advantage” by focusing on their core business as opposed to purchasing.