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Wonderful Widget: Procurement Outsourcing Strategies
Introduction
A company has to decide on the approach to use when producing goods for the market. Functional management in an organization ensures that a business has the best option for goods and services production. The following paper indulges on various approaches that Wonderful Widget Company can use in the manufacturing stage and recommends the appropriate strategy for the firm.
Scenario Description
In this case, one is to assume that he or she is the supply manager of Wonderful Widget Company. The company manufactures one product, which is a widget. Wonderful Widget Company has two options for the production of its product: first, the company can procure widgets parts from different suppliers. The second option is that the organization can use its current facilities, equipment, materials, and layout to produce the product for the market.
Organizational Problem
The supply manager noticed that the operational cost increased every month, hence, increasing the cost of production. For the firm to reduce the operation cost, the supplier manager needs to streamline the production process. The supplier manager has to achieve this before the end of the quarter since; the corporate management will review the financial statement of the company in the quarterly report. For the supplier manager to be successful, he/she needs to be proactive by forecasting problems and developing solutions before they occur. The Supply Manager is also responsible for developing solutions and decision-making on issues regarding procurement in the company. Historical data and information from the clients showed the following results: there was no value attached to the commodity, clock speed was very slow, and the product had no competitive advantage.
Outsourcing
To solve operation costs the supply manager could decide to outsource the product from one or multiple suppliers. This will enable the functional management to vet the suppliers to determine who has the best skills and expertise (Power, Desouza & Bonifazi, 2006). If the supply manager decides to procure the product from one supplier, then, he/she must be sure that the supplier has the skills and the technical ability to supply the required quality (Bower, 2003).
Outsourcing has the following advantages: first, a company can select the supplier with the best skills hence, improving the quality of the product. The company will also benefit from the expertise of the supplier, which will enable it to grow (Bower, 2003). Furthermore, Outsourcing will allow the business to focus on the major organizations processes since it does not have to worry about production. The third advantage is risk-sharing. Outsourcing strategy transfers the risk of product production to other parties involved in production processes (Power, Desouza & Bonifazi, 2006). However, outsourcing has the following limitations. First, the firm faces the risk of exposing its confidential information to a third party such as product design. The second disadvantage is that outsourcing may have some hidden costs. For instance, the cost involved when signing an agreement between the company and suppliers (Ryals & Rogers, 2006).
Internal Production
Wonderful Widget Company can choose to continue producing the product internally. However, due to the high cost of production, the supply manager should examine the production process and determine the areas that can be eliminated to reduce the cost of production. Internal production has various advantages, which include: first, a company can learn and develop through this strategy (Bower, 2003). The functional management gets to learn the best methods to use in the production process. In addition, unlike outsourcing, internal production protects the companys information. The third advantage is that internal production is that it has a small communication structure. Despite the numerous advantages, internal production has various limitations (Power, Desouza & Bonifazi, 2006). First, in-house production raises the cost of operation since; the management has to hire experts. The second limitation of in-house production is that a company has to deal with new challenges such as infrastructure, storage, or resource planning (Bower, 2003).
In-house and Outsourcing mix
This is where supply management procures particular parts of the product and manufactures some in the company. The mixed strategy allows the company to learn from its production and the supplier experience (Ryals & Rogers, 2006). Production mix strategy also reduces the cost of production for the firm. However, the approach may fail due to miscommunication between the supplier and the company.
The supply manager should use an in-house and outsourcing mix since; it will improve the organizations knowledge of the product (Bower, 2003). Based on the above analysis it is clear that that the management will benefit more from this approach than the other approaches. For successful implementation of this strategy, the supply manager has to first establish what the company ought to outsource and what it needs to produce internally (Click & Duening, 2005). The second step should be identifying the appropriate supplier and developing a contractual agreement that specifies the role and expectation of each party in the contract (Ryals & Rogers, 2006).
The most challenging part when dealing with this scenario is when determining the internal issues that may be affecting in-house production. It is hard to determine the reasons that cause the cost of production to increase. Strategic alliances affect the procurement process in several ways, which include: first if one of the parties in the merger has the skills and capacity to handle manufacturing then the other party will change its outsourcing strategy. Finally, strategic alliances affect outsourcing since; after the merger, the business managers have to use a different approach to achieve their goals (Ryals & Rogers, 2006).
Conclusion
In conclusion, the Wonderful Widget company supply manager needs to implement a procurement strategy before the quarterly review of the firm. Most businesses experience several problems during the manufacturing stage due to the technical requirement of a product being produced.
References
Bower, D. (2003). Management of Procurement. London: Thomas Telford.
Power, M., Desouza, K. & Bonifazi, C. (2006). The Outsourcing Handbook. London: Kogan Page.
Ryals, L. & Rogers, B. (2006). Holding up the mirror: The impact of strategic procurement practices on account management. Business Horizons, 49(1), 41- 50.
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