Introduction
Procurement can be defined as the process of acquisition goods, works and services to satisfy the identified needs of an important function within an entity. Procurement can be defined as the process through which entities purchase their requirements to fulfill school requirements. The traditional definition of procurement is acquisition by any means of supplies, services, or works. This definition was more associated with purchasing than procurement. We can say that procurement, different purchasing, is a process not an event. It has to be conducted in a systematic manner; and involves a number of stakeholders.
What are the objectives of procurement?
The traditional five (5Rs) rights of procurement, Bailey and Farmer (1985) namely:
- Acquiring the Right product
- From the Right supplier
- In the Right quality
- At the Right time
- At the Right price
Outsourcing
The transfer an activity or specific process or work stream from one organization to another one which is usually referred to as a third party. We can refer to the third party as supplier, contractor or even a subcontractor depending on the level of the relationship between the parties. Organizations should outsource non-core activities. Outsourcing increased in recent times and according to an article, in the Financial Times, ‘Subcontracting as many non-core activities as possible is a central element of the new economy’. It has been associated closely with determinants of “make-or-buy decision” in organizations. Firms would prefer to “buy” as opposed to “make” as long as the cost of outsourcing is lower than in-house production. There are various reasons for outsourcing of non-core activities by organizations in the modern economy.
The reasons why organizations outsource
- The need to focus more on core activities utilizing core competencies
- Lack of internal capacity to perform the activity
- Existence of external suppliers with better capacity to perform those activities that can be outsourced
- The need to free up company resources for other core activities
- The need to spread the risk of running organizational activities
- The need to reduce operating costs such personnel costs (salaries, wages, medical bills, insurance costs, etc.).
- Outsourcing can be used to economize on production cost
Disadvantages of outsourcing
When the relationship is not well managed, then the outsourcing organization is likely to suffer disadvantages. The following are the likely disadvantages of outsourcing:
- Over-dependency on suppliers
- Coordinating different suppliers where most non-core activities have been outsourced
- Quality of service may decline when the supplier experience management issues
- Unrealistic expectation of outsourcing providers due to overpromising
- Communication with suppliers may be hampered by personalities and different levels of technology
- Lack of supplier flexibility
- Extra training costs of those outsourced service providers to ensure they deliver what you want
Potential risks of outsourcing
Whilst there outsourcing has got benefits for the organizations that undertake it, there are potential risks associated with it. They include the following:
- Poor contract or poor selection of partner
- Loss of competitive knowledge and skills
- Power shift to supplier
- Supplier problems (poor performance or bad relations, opportunistic behavior, not giving access to best talent or technology
- Loss of control or core competence in handling the outsourced activities or processes
- The possibility of creating a competitor in the outsourced provider
- The possibility of conflict of interest
