There’s More to Outsourcing than Meets the Eye

Understanding the value chain – and how it relates to outsourcing will help understand the bigger business model to which outsourcing belongs.
Filipinos are debating whether outsourcing is exploitation or not. I say this is the wrong kind of debate to have. Rather, I suggest the Philippines get its acto together and learn how to manage the value chain and compete. You don’t gain market share by whining – you gain market share by changing your paradigm.
Otherwise, the Filipinos will be left to philosophizing about outsourcing, while its neighbors reap the benefits of the value chain – again.

Globalization is here to stay – and global competition is no longer about brands – but between supply chains.

The economy with the best managed supply chains will emerge on top of the pack. Compete or be blown out of the map.

When it comes to these kind of stuff – I’d rather take you to “the source” instead of having me paraphrase it and have stuff get lost in translation.

So here goes.

Where it all began – The Value Chain

These sites provide a very good explanation of the value chain and how it relates to outsourcing

The value chain, also known as value chain analysis, is a concept from business management that was first described and popularized byMichael Porter in his 1985 best-seller, Competitive Advantage: Creating and Sustaining Superior Performance

Concept
A value chain is a chain of activities for a firm operating in a specific industry. The business unit is the appropriate level for construction of a value chain, not the divisional level or corporate level. Products pass through all activities of the chain in order, and at each activity the product gains some value. The chain of activities gives the products more added value than the sum of added values of all activities. It is important not to mix the concept of the value chain with the costs occurring throughout the activities. A diamond cutter can be used as an example of the difference. The cutting activity may have a low cost, but the activity adds much of the value to the end product, since a rough diamond is significantly less valuable than a cut diamond. Typically, the described value chain and the documentation of processes, assessment and auditing of adherence to the process routines are at the core of the quality certification of the business, e.g. ISO 9001.
Activities
The value chain categorizes the generic value-adding activities of an organization. The “primary activities” include: inbound logistics, operations (production), outbound logistics, marketing and sales (demand), and services (maintenance). The “support activities” include: administrative infrastructure management, human resource management, technology (R&D), and procurement. The costs and value drivers are identified for each value activity.

The Value Chain and Outsourcing (from http://www.learnmarketing.net/valuechain.htm)

Value chain analysis

Michael Porter in 1985 introduced in his book ‘ The Competitive Advantage’ the concept of the Value Chain. He suggested that activities within the organisation add value to the service and products that the organisation produces, and all these activities should be run at optimum level if the organisation is to gain any real competitive advantage. If they are run efficiently the value obtained should exceed the costs of running them i.e. customers should return to the organisation and transact freely and willingly. Michael Porter suggested that the organisation is split into ‘primary activities’ and ‘support activities’.


Primary activities

Inbound logistics : Refers to goods being obtained from the organisations suppliers ready to be used for producing the end product.

Operations : The raw materials and goods obtained are manufactured into the final product. Value is added to the product at this stage as it moves through the production line.

Outbound logistics : Once the products have been manufactured they are ready to be distributed to distribution centres, wholesalers, retailers or customers.

Marketing and Sales: Marketing must make sure that the product is targeted towards the correct customer group. The marketing mix is used to establish an effective strategy, any competitive advantage is clearly communicated to the target group by the use of the promotional mix.

Services: After the product/service has been sold what support services does the organisation have to offer. This may come in the form of after sales training, guarantees and warranties.

With the above activities, any or a combination of them, maybe essential for the firm to develop the competitive advantage which Porter talks about in his book.

Support Activities

The support activities assist the primary activities in helping the organisation achieve its competitive advantage. They include:

Procurement: This department must source raw materials for the organisation and obtain the best price for doing so. For the price they must obtain the best possible quality

Technology development: The use of technology to obtain a competitive advantage within the organisation. This is very important in today’s technological driven environment. Technology can be used in production to reduce cost thus add value, or in research and development to develop new products, or via the use of the internet so customers have access to online facilities.

Human resource management: The organisation will have to recruit, train and develop the correct people for the organisation if they are to succeed in their objectives. Staff will have to be motivated and paid the ‘market rate’ if they are to stay with the organisation and add value to it over their duration of employment. Within the service sector eg airlines it is the ‘staff’ who may offer the competitive advantage that is needed within the field.

Firm infrastructure: Every organisations needs to ensure that their finances, legal structure and management structure works efficiently and helps drive the organisation forward.

As you can see the value chain encompasses the whole organisation and looks at how primary and support activities can work together effectively and efficiently to help gain the organisation a superior competitive advantage.

Where does outsourcing fit in? If any of these primary and support activities are not a core strength of the company – it should outsource the process. What this implies is that as globalization becomes the norm – companies that have a strong understanding of outsourcing will reap the benefits.

The earlier Filipinos understand that – the better. More outsourcing means – if Filipinos step up to the plate they can gain more market share in outsourcing instead of being limited to the after-sales customer services because outsourcing is more than just CSR.

Broaden your mind Philippines. It’s not just CSR – there are opportunities in all of the activities in the value chain model. It boils down to outperforming the competition – and reap the rewards.

Winners have no time to bitch, they are too busy building wealth – corporate, personal, and national.

Recommended Videos
Michael Porter

The Value Chain

Transportation Department Outsourcing

3rd Party Logistics – Building the Global Supply Chain

Playlist on th Value Chain

http://www.youtube.com/watch?v=7wL6x1BSlw8&feature=PlayList&p=5D192C05982E1D51&playnext_from=PL&playnext=1&index=33

****

p.s. Am getting my certification as a Professional Logistics Specialist and member of the American Society of Transportation and Logistics very very soon – just 1 more class – next week 🙂

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One comment

  1. True that Filipino are on philosophizing things that had given them good revenues the outsourcing jobs had offered. They have overlooked the wise and practical ways inspite that we’re in a sinking economy wherein almost majority of the highly educated professionals are jobless, financially down the drain and hardly meet their basic needs. It’s relieving enough to realize that we have the largest pool of talented population fit for the job they’re offering. I guess it is time for us to face the trends, drop our impractical mindset and prepare for some nicer economic outcome for the rest of the Filipinos.

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