Outsourcing and SCMLuxe – Part 1 of 3

Outsourcing consists of two separate and discrete areas in any industry/operations:

1.       Outsourcing of operations of the firm – such as production/logistics etc

2.       Outsourcing of business operations of the firm – such as Finance and Accounting, HR Administration and Purchase (mainly indirect procurement)

Let’s look at each area separately since they are very distinct and need to be analysed independently.

Outsourcing operations:

Here the options considered are outsourcing operations like production, logistics or even the distribution of goods and services. Two of the models of outsourcing operations are:

China's increasing share of global procurment....

1. Outsourcing production to low cost locations: China is now the back office for most manufacturing companies due to low labour costs and economies of scale possible in the country. Some of the dangers of outsourcing operations is dealt in the posts  location and country of origin for SCMluxe and Make Strategy for SCMluxe. One must remember not to dismiss LCC production totally since it does bring the product closer to the customer and helps reduce lead times and possibly the quality of the product – something that might not be important for products like jewelry and perfumes but certainly of importance in a product like premium yogurt or bread. For instance a leading provider of organic luxury bread produces its dough in its country of origin in France but ships it over to its major market in China where its licensees/customer’s bake it in specialized ovens provided by the company. If not for this case of postponement strategy being put in place (see post on mass customization for postponement definition at Postponement strategy), this particular perishable product, bread, would never have been able to be sold in distant markets like China

...and one of the reasons why

2. Licensing or subcontracting parts of production or distribution: Licensing is the most widely used tools for faster growth in most industries and especially in the luxury goods sector. It frees up capital and growth can be achieved with very little investment. But it also leads to dilution of the brand equity if not managed well and problems of maintaining the relationship with the licensee (see posts “counterfeits” and “types of licensing and subcontracting”). Managing both the contract and the licensing agreements becomes of particular interest in SCMluxe.

In the next post we will see the outsourcing to LCC countries of business processes