Reasons for buying or outsourcing
Organisations buy or outsource materials, components and/or services from suppliers for many reasons:
1. Cost advantage
For many firms, cost is an important reason for outsourcing, especially for supplies and services that are non-vital to the firm’s operations and competitive advantage. This is usually true for standardised or generic supplies and services for which suppliers may have the advantage of economy of scale because they supply the same item to multiple users. In most outsourcing cases, the quantity needed is so small that it does not justify the investment in capital equipment and/or other resources to make the item or provide the service. Alternately, they could outsource to foreign suppliers, which may offer a cost advantage because of lower labour and/or materials costs.
2. Insufficient capacity
A firm may be running at or near capacity, making it unable to produce the components or provide the services in-house. This can happen when demand grows faster than anticipated or when expansion strategies fail to meet demand. The firm buys parts or services to free up capacity in the short term to focus on vital operations. Under some circumstances, firms may even subcontracting vital components and/or operations under very strict terms and conditions in order to meet demand. When managed properly, subcontracting is an effective means to expand short-term capacity. A good example in Malaysia is multinational manufacturing companies such as Intel, Motorola or Agilent subcontracting some of its stable or smaller volume products to local contract manufacturers.
3. Lack of expertise
The firm may not have the necessary technology and expertise to manufacture the item or provide the service. Maintaining long-term technological knowhow and economical viability for non-core activities may be affecting the firm’s ability to focus on core competencies. Suppliers may hold the patent to the process or product in question, thus precluding the make option, or the firm may not be able to meet environmental and safety standards to manufacture the item.
Procured components or services may be superior in quality because suppliers have better technology, know-how, know-who, process, skilled labour and the advantage of economy of scale. Suppliers may be investing more in research and development. Suppliers’ superior quality may help firms stay on top of product and process technology, especially in high-technology industries with rapid innovation.