The Procurement Glossary » Outsourcing

Outsourcing

Sourcing & RFx

Definition

Contracting an external supplier to perform a function or produce goods that could otherwise be done in-house.

Explanation

Outsourcing lets a business tap specialist scale and expertise and convert fixed costs to variable ones, at the price of reduced direct control and new supplier-management effort. It is governed by contracts, SLAs and performance management.

Example

The firm outsources its warehousing to a third-party logistics provider, paying per pallet instead of running its own site.

Related terms

• Make-or-Buy Decision — The analysis of whether to produce a good or service in-house or purchase it from an external supplier.
• Third-Party Logistics (3PL) — Outsourcing logistics activities — warehousing, transport, fulfilment — to a specialist provider.
• Service Level Agreement (SLA) — A contractual commitment defining the level of service a supplier must deliver, with measurable targets and consequences for missing them.
• Supplier Management — The discipline of selecting, onboarding, evaluating and developing suppliers to maximise value and minimise risk over time.

Frequently Asked Questions

What is Outsourcing?

Contracting an external supplier to perform a function or produce goods that could otherwise be done in-house. Outsourcing lets a business tap specialist scale and expertise and convert fixed costs to variable ones, at the price of reduced direct control and new supplier-management effort. It is governed by contracts, SLAs and performance management.

Can you give an example of Outsourcing?

The firm outsources its warehousing to a third-party logistics provider, paying per pallet instead of running its own site.

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