Outsourcing i.e. contracting out the manufacture of products, works and also services has been a dominant factor in procurement for a number of years. Many organisations have concentrated on reducing costs by moving production to low cost manufacturing countries. Overall the emphasis in the final decision is aimed at acquiring the products or services at the lowest overall costs. Does it work? Yes, up to a point.
The buyer’s decision is based on several factors which include;
- The availability of external skills and production capability;
- Labour and other overhead costs;
- The quality of the products, works or services;
- Lead times, shipping and associated costs;
- Risks of dealing with low cost manufacturing centres such as in China, the Far East and Africa;
- The ethical standards of distant suppliers, i.e. non-use of slave labour.
Is this tendency to outsource to distant lands about to reverse direction? Yes, in my opinion; the reverse has already begun with organisations bringing outsourced products, works and service closer to home.
Whereas buyers have concentrated on reducing costs by moving production to low cost manufacturing countries, labour costs at home are becoming a less important factor. In fact in some areas labour costs have fallen. It is the costs of transport and holding increased stock levels and the risk factor (including political risks) of dealing with distant suppliers that have now become the more active considerations.
Production methods and technology are changing how procurement is carried out. Robotics is leading the trend. Non-value added procurement functions are diminishing rapidly. Automation and the use of lean manufacturing are increasingly aimed at speeding production, reducing timescales and improving efficiency and with fewer product defects.
Improved communications and digital support for example, helps production to be customised to specific requirements and scheduled to meet customer needs better. This in turn reduces the costs of holding stocks. In effect improvement in procurement processes is continuous and this becomes the primary focus of cost reduction.
There can be no doubt the implications of introducing technology, robotics and e-procurement will in my opinion leave many procurement people foundering. The current low cost manufacturing markets will lose much of their existing work with the loss of large numbers of jobs.
Procurement must meet this challenge, starting now.