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Sourcing Strategies

Essay by   •  January 10, 2012  •  Research Paper  •  1,885 Words (8 Pages)  •  1,545 Views

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1.0 FINDINGS

There is a common belief that businesses are better off if they turn over all of their non-core competency work to third parties (Murazabal.2007).

Strategic Sourcing are critical steps in buying goods and services. In this stage, individuals or groups analyse, assess, and select vendors and their goods and services based on certain specifications and requirements. This relationship is typically documented in a contract with terms and conditions regarding products, services, prices, and service levels. (UPS Supply Chain Solutions, 2005)

There are two most common sourcing strategies terms such as "Outsourcing and Off-shoring" however some organisations are attempting to reverse this trend and new concepts such as "Near-shoring, On-shoring and In-sourcing are also becoming more common (course- handbook).

2.0 Offshoring

Offshoring is a type of outsourcing that involves the relocation of a company's business process or processes to a foreign country. This term is very broad term that covers a variety of outsourcing processes and procedures (Operations Technology, 2010).

Firstly, it helps save money with lower staff costs. This is a big benefit and major attraction of this sourcing. For example network giants T-Mobile's call centre was in India.

More attention to core business functions. As you move non-core business processes offshore, the client company can focus more on tasks that directly have an impact to the growth of the company. Non-core tasks do not mean "not significant". Each procedure is crucial towards a smooth-running operation, and offshoring enables companies to finish these tasks, and at the same time, reduce overhead costs.

Companies can establish local presence and take advantage of the local knowledge as they bring the production process and delivery closer to their target markets. More companies are reassigning work offshore, whether as a cost-cutting extent or absence of enough manpower in-house. Offshoring is an effective business solution.

There is a risk that the offshore service provider may go bust automatically which causes difficulties, extra costs and waste of time searching for another outsourcing provider.

Secondly, managing offshore provider is constantly much more difficult than managing business processes within the organisation.

3.0 Near-shoring

Near-shoring is a practice applied to business outsourcing; it is a sourcing service activities to a foreign, lower-wage country that is relatively close in distance or time zone (or both). Near-shoring is understood to mean that the business has reduced the complexity and risk of offshoring (SQL Authority, 2011). Examples for the United States include domestic countries such as: Central America, South America, México, Canada and Latin America.

It was widely known that outsourcing meant sending some of an organization's processes to lower cost countries such as the Philippine's, India and China, etc. However, currently, more companies are stirring towards nears-shore outsourcing, as near-shore outsourcing offers greater security and constancy along with cost-effectiveness. These reasons have made near-shore outsourcing a good substitute to offshore outsourcing. Companies therefore decide on near-shore outsourcing because there are fewer risks and uncertainties when compared to outsourcing the work to an offshore partner.

Although it is difficult to argue against the massive availability of talent and low labour costs in India and other locations in the Far East, there are a number of reasons that make near-shoring a more attractive alternative for many large organizations (CIO Update, 2011).

Countries like Mexico Canada and have good IT substructures that also offer cheap services. These countries are also border line to the U.S and have capable and trained experts who can deliver high-quality IT services. According to Rutchik (2010), "Mexican outsourcing has already reached a critical mass with 2,000+ IT companies, 550,000 trained IT professionals ...". Such benefits have made these countries a supreme choice for near-shore outsourcing. The close immediacy to these countries has made outsourcers develop better working relationships, better communication and better project management. Near-shoring associates have also been able to provide better quality control and better services. These influences have made near-shore outsourcing a better and popular choice for organizations.

Near-shoring outsourcing provides allows companies to frequently visit their outsourcing partners. Since the countries are nearer, traveling becomes less of a task and inexpensive. A need for a business visa or going through tedious rules could be avoidable, as is the case in offshore outsourcing. Closeness also offers a better level of communication between the outsourcer and the vendor. Work happens faster and there is a greater understanding of the work to be done. Furthermore, both countries would be in similar time zone; which makes the work happen at the same time and there is better management throughout the project. For example, U.S.-based companies, including Microsoft, US Airways and Best Western International are all based in Mexico (Rutchik, 2010).

Cultural kinship between the outsourcer and he outsourcing partner is an additional advantage that near-shoring outsource proposes. As both countries would have a related cultural background, coordination and communication would be easier.

Another advantage is rising cost in offshore outsourcing. Companies' main reason for outsourcing was because of the cost factor. However since charges are increasing in countries like China and India, companies are looking for cheaper destinations. Some near-shore locations offer cheaper services than the services offered in offshore locations.

There is also better control for intellectual property. For example, favourable trade agreements with the U.S. and within Latin America called North American Free Trade Agreement (NAFTA) which has enabled U.S.-Mexico bilateral trade to increase to $300B+ today (Rutchik, 2010).

Near-shoring strategy will boost U.S manufacturing jobs. The transfer of manufacturing assembly to countries that provides inexpensive production methods and is nearer the end consumer; offers potential jobs from China to North America.

Another key impact is that it boosts productivity to the country, which also booms the economy.

4.0 On-shoring

On-shoring is a fairly new alternative to outsourcing business processes or services, but unlike offshoring

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