Question
Why would a company outsource parts of its supply chain? Explain the value of this practice and why so many companies use it today. What are some operational challenges that outsourcing can present?
Sample Answer
A company may outsource parts of its supply chain to reduce its operational costs by reducing the amount of money it pays employs as wages to handle supply chain operations. A company may also outsource parts of its supply chain to reduce regular costs associated with supply chain management. For instance, the company may outsource its supply chain operations to eliminate the need to meet the conditions of programs such as social security, Medicare, and unemployment insurance, which are non-existent for overseas operations. A company may also outsource certain parts of its supply chain to benefit from tax breaks in certain countries. For instance, outsourcing to countries such as Singapore and Taiwan would enable a company benefit from the low corporate tax rates in these countries.
Outsourcing parts of supply chain helps in reducing the operational costs of a company. It enables supply chain management to be handled by companies that specialize in this activity. Therefore, most companies are willing to outsource supply chain if it is not a core activity. This is one of the major reasons as to why e-commerce companies are reluctant to outsource supply chain management since it is a core activity to them.
Integration difficulties are some of the major challenges of outsourcing supply chain management. The transition process requires both parties to invest significant time and money. Lack of communication may lead to mishaps and delays. In addition, outsourcing supply chain management may have a negative impact on quality especially if the company hired to engage in supply chain management does not have experience.
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