Outsourcing Case Study: Saving Money at the Magazine through Process and Supplier Selection
Every business must contend with the decision of how many of its necessary processes and the products and materials utilized in these processes will be internally sourced and accomplished, and which processes and procurements will be outsourced to other companies (Monczka et al. 2008; Trent 2007). This magazine operation is no different, and with the sudden reduction in initial capital for the venture combined with the ongoing uncertainty of the current economy, this decision becomes all the more pressing -- cost savings and efficiency are hugely and directly impacted by the choice between outsourcing and vertically integrating, and with newly limited initial operating capital such savings and efficiency improvements are essential to the success of the venture. Determining which processes will create the most substantial cost savings without sacrificing the quality or the unity of the magazine itself was simple in some instances, and more complex in others, but ultimately five business processes necessary to the creation and sale of the magazine were selected for outsourcing.
For each selected business process, details of the supplier selection and contracting process will be provided in the following summary. Performance measurement, contract types and certain other details of the arrangements to be made for each process, and methods for evaluating competing suppliers will be focused upon for each of the individual processes selected. Additionally, a timeline estimating the period from selection to implementation will be presented.
The information contained in this report is presented as though five separate suppliers/vendors will be utilized, with each other business that is selected as the recipient of an outsourced process from this magazine limited to only one of the functions or processes selected for outsourcing. This does not necessarily mean that five separate vendors or suppliers will be contracted with, though, and in fact there might be additional savings and time efficiencies achieved if one supplier take son more than one of the processes that have been selected for outsourcing. When evaluating and receiving bids from suppliers, however, the basic approach will be to treat each process as a separate need, and to accept each bid for comparison to other bids for a single service. While a combined offer from one supplier for more than one process might be accepted, then, it will need to beat the combined best offers from other suppliers for those same services/processes.
One of the easiest decisions to make in terms of outsourcing certain of the magazine's business processes is the decision to utilize an outside supplier for distribution services. There are many companies that specialize in distribution, and in fact distribution is one of the most commonly outsourced business processes in many different industries (Trent 2007). The level of service that will be necessary from the contracted distribution supplier will include the timely and regular picking-up of the magazine from the printing center through to the final retail delivery of the magazine to stores; subscriptions will be mailed directly from the printing warehouse.
In the initial phase, a fixed contract will be the most advantageous for both the magazine venture and the contracted distributor. Actual rates of consumption/sales of the magazine, though projected with some degree of reliability, cannot be accurately estimated until the magazine has been made available on shelves for several months. The potential for fluctuations in the number of units to be distributed means agreeing on a fixed rate for the first phase of the magazine production limits risk and increases certainty for both companies; a unit-based contract could be adopted once trends and sales levels are more established (Monczka et al. 2008). Price will be the primary consideration when accepting bids for distribution services, though reliability is also important and performance records for similar clients will be required during the magazine's acceptance of bids for this particular process.
Though not quite as easy as the decision to outsource the distribution of the magazine, the decision to outsource the printing of the magazine was not especially difficult. Just as there are many businesses that specialize in distribution, there are many companies that are capable of printing the magazine at a much lower initial cost than a new magazine could achieve on its own. The warehouse space, equipment, and expertise necessary are all costly, and outsourcing makes a lot of sense when confronted with such massive start-up costs (Monczka et al. 2008). Printing quality must be maintained, and other performance targets include a rate of misprints lower than five percent of the total of each run.
A unit contract would be best suited to the needs of the magazine when it comes to outsourcing its printing needs, as such changes in the printing cost will then be directly affected by and in keeping with sales and thus revenues from the printing. It is also expected that the printing supplier would be able to change the number of units produced more frequently without affecting its own efficiency or profitability, unlike the distribution supplier which would no doubt require more advance notice to make changes to vehicle allotment and other logistic needs. The increased flexibility of the supplier, then, should not come at a premium and can provide increased flexibility and thus cost efficiency for the magazine itself (Trent 2007). In selecting the printer, price will again be the primary criteria assuming a basic level of quality and reliability can be met, and the ability to effectively integrate with the selected distribution company -- i.e. To ensure the proper timing of printing and temporary storage until the distributor can pick up the product -- will also be necessary.
The decision to outsource the magazine's accounting needs was a difficult one, and was made not simply on the basis of cost-effectiveness but also due to the increased protection this affords the business. Through the bi-weekly maintenance of accounting records and the external preparation of required tax and income forms, an outsourced accountant will provide an objective eye for the company and will also reduce the liability of the company if mistakes are made in accounting practices (Monczka et al. 2008). An accounting specialist can also identify further areas for increasing efficiency and cost-effectiveness (Trent 2007).
A fixed contract would yet again be the most effective means of securing outsourced accounting services, both for the magazine and for the accountant/accounting firm. The accounting firm would be in a much better position to determine a reasonable estimation of the time necessary to perform the necessary services, and thus to establish a proper fixed price for the provision of these services; a reimbursable or unit contract for these services would not only encourage "padding" the bill by the accountant, but could also lead into cost overruns for the outsourcing that would diminish or eliminate the advantages sought in the outsourcing to begin with (Trent 2007). A fixed contract that can be annually renegotiated allows the magazine venture to accurately plan its expenses while ensuring the accounting tasks and processes necessary to the business remain consistently provided. While price will definitely be a consideration in choosing n accountant or accounting firm, ethical track records and overall value will be the primary criteria for evaluating bidders.
Once any portion of the content for the magazine begins to be outsourced, there is a danger of the consistency and/or quality of the magazine to begin slipping out of the control of the owners/managers. This is a danger that is faced in every industry and outsourcing scenario, but is arguably even more insidious for a publishing venture, as the content is the product (Monczka et al. 2008). Advertising is one of the last areas left that can be outsourced without touching the real content of the magazine, and greater revenues can likely be generated by an experienced and specialized firm.
A per -- unit contract would be the most appropriate way to ensure the mutual benefit of both the advertising sales firm, with the company selected to handle the advertising that appears in the magazine receiving a fixed percentage of every type of sale (full-page, multi-page, and smaller advertisements might be negotiated at different percentages; increases in the overall advertising sold may receive a bonus of some sort, etc.). This type of contract incentivizes the sale of advertising at the highest possible prices, which is good for the long-term benefit of the magazine (Trent 2007). Evaluation criteria will be consist primarily of overall value and the demonstrated effectiveness of the advertising sales firm working in similar areas and/or with similar clients: price is not a major issue, as a more effective sales firm could very easily generate more revenue for the magazine even if it was taking a larger percentage of each sale. Balancing this percentage with proven and ongoing effectiveness will be necessary in order for the magazine to receive the maximum benefit form this outsourcing, however.
Like advertising sales, the marketing of the magazine itself -- the…