Fundamentals of Risk Management

outsourcing of operations
There are many benefits associated with outsourcing the manufacture of compo-
nents to specialist sub-contractors. However, organizations that decide to outsource 
the manufacture of components need to be aware of the risks and introduce appro-
priate controls. Outsourcing (or transferring) the manufacture of components does 
not completely transfer the risks associated with the activity. As with any transfer of 
risk, a suitable contract needs to be developed and implemented and this contract 

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supply chain management
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should provide clarity on where risk is allocated within the contract. The contract is 
likely to include penalty clauses for failure to perform, but contracts that also in-
clude provisions for rewarding exceptional performance provide a greater sense of 
co-operation. Table 32.1 identifies examples of the risks associated with outsourcing 
for a car manufacturer.
Outsourcing of non-core operations can also give rise to supply chain exposures. 
Table 32.2 sets out a list of considerations when setting up a contract for the supply 
of outsourced support. It is important that organizations consider the scope of
the outsource arrangements and the range of services to be supplied. Various other 
features of the outsourced agreement will need to be addressed.
TAbLE 
32.1
Risks associated with outsourcing
risks for car manufacturer outsourcing supply of components:
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Late or delayed delivery from supplier as a result of loss of control and increased 
dependency on third-party supply.
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Risk that the components may be outside technical specification or otherwise of 
poor/unacceptable quality. 
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Unethical or other inappropriate behaviour by the component supplier may 
damage reputation of the car manufacturer. 
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Cost reduction may not be maintained after the car manufacturer has lost the 
ability to manufacture the components.