Cost Cutting in Supply Chain Management

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Supply chain management is a cross cultural approach to managing. This in line with managing the flow of raw materials into the organization and also the movement of finished products from the company to the final consumer. Many organizations strive to spotlight on competencies and become flexible. Through this the ownership of distribution channels and raw material sources is greatly reduced.

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In each and every organization, there is normally the pressure of reducing cots so that profits are maximized. As human resource managers develop a cost cutting strategy, it is important that there be some reconciliation with the commitment in the organization. Before looking at the extent that consequences of cost effectiveness and commitment reconcile one has to have the broader picture of the effects of reducing costs within an organization (Hilton, 2008).Cost cutting can be carried out through various means which are as follows;


One of them is through minimizing the number of employees within the organization. There are some cases where human resource managers are compelled to carry out retrenchment of some employees in order to minimize costs. This means that the few employees that remain in the organization have to carry out multitasking. Cost effectiveness in an organization can also be implemented by reducing employee’s bonuses and allowances. This includes scraping off of medical allowances from employees’ salaries.


The other way that cost cutting in an organization is carried out by human resource managers is through introducing of technology. This includes having computers and internet in an organization. Instead of having messengers in an organization, use of emails is incorporated. This is very cost effective. Human resource managers also increase employees’ working hours so that there is more productivity in an organization. The best example of the technology used by many organizations in cutting cost in supply chain management is the Enterprise Resource planning (ERP) systems which are now gaining deep roots and are now used by organizations in there management practices. ERP is moderately new concept in the innovation and technology sector. E which stands for the word enterprise implies that software applications are applied in the day to day operations of a business, R which stands for resource implies that management of resources i.e. monetary and non-monetary resources are utilized while P which stands for planning implies that firm must forecast for the future (Blacharski, 2008).

ERP therefore is a system that entails the applications of software that offers the organization management skills to manage their activities for example, managing human resources in a company. This technology is based on databases which are easily reached on real time foundations. ERP systems perfectly provide the management with the opportunity to produce steadfast, consistent, and timely information necessary for attainment of organizational goals (Gattorna, 2003).

ERP has several components that aid in management practices and most notable features include; modular integration which facilitates the ERP system to perform operational roles as a whole or one unit. Such integration will yield more gains, it also deemed to be client focused as well as easy to maintain. Another feature is that of universal and relational database which enhances the integration of data in to one unit. Such features in ERP permits many activities like querying structures which enhances efficiency.

ERP systems utilize the use of computers in the running of day to day activities in the organization. For such activities like networking to be carried out or installed the use of computers is necessary to be incorporated in the systems. ERP also utilizes the feature of server/client technology which is actually linked to networking procedures and aid customers to ask for data, queries and analysis from the main server within an organization. Thus this technology interfaces with the web in its attempt to satisfy the management goals (Hilton, 2008).

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The ERP can be used in the organization for many ways; for example ERP systems can be utilized by the management in monitoring and evaluating the performance of employees. This imply that the management does not have necessarily to physically supervise the workers since through ERP which facilitates integration and networking managers can pass their desired guidelines to the employees through such technology. ERP systems can also be designed to facilitate employee’s payroll activities in an organization; for example the manual preparation of the payrolls in the organizations will be done away with and replaced by ERP system which is faster and more accurate when compared to manual applications.

The ERP systems can also be used in financial departments of organizations which can replace manual activities carried out in the department; for example the use of traditional accounting will be replaced by ERP systems because it will incorporate the concepts of computerized accounting in the department. ERP systems is useful in planning and therefore can replace techniques such as Time Series analysis which involves the use of manual application in forecasting and modeling of firm’s future trends; ERP system can be designed in such a way that it can forecast with less ease thus saving time and other related costs that could have been incurred by a firm (Blacharski, 2008).

However, ERP system like any other technology demands competent workers and therefore those who will be operating must therefore be well equipped with the skills, knowledge and qualifications that will enable them to operate the system effectively and efficiently; this implies that firms must recruit competent and qualified personnel as well as constantly carry out training and development processes to equip the workers on how to operate such ERP systems (Hilton, 2008).

Outsourcing Internal Auditing

There are various steps that can be taken by human resource managers in the motive of implementing cost cutting. This includes contracting out some of the business in the organization that is not very core in nature this practice is normally referred to as outsourcing internal auditing with time, this outsourcing has actually become strategic imperative in any business sector, it can be partially done or it can be full outsourcing.

Partial outsourcing

This is whereby organizations source internal audit services from external sources less than hundred percent. Most organizations source fifty percent of these services from external auditors. Many organizations incorporate partial outsourcing of internal auditing. This is also known in other terms as co-sourcing. This actually means having to balance between full outsourcing and retaining an in house team. This is whereby in most cases the in house team has good control of internal audits. The management decides to make good use of external advisors such that the internal auditors get additional support. In this venture there is integration of a partnership that is formal between the external auditors and the internal audit team.

In this case each party actually contributes experiences, skills and complementary knowledge. This is normally done in many organizations as a means of cost cutting. It also helps many organizations to upgrade their capabilities within the organization. It also plays a big role in increasing responsiveness and efficiency within the organization. This helps many organizations to create operational effectiveness and efficiency especially in the areas that the firm is exposed to great risks (Deavers, 1970).

This is also beneficial to organizations as they are helped to comply with approved policies, industry best practices, procedures and regulatory requirements. This involves the use of risk assessment process that is fundamental in internal auditing. This allows organizations to carry out self assessments. Some organizations normally carry out subcontracting and in this case the internal auditing is only carried out for a limited period of time. (Hayes, 1999)

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Full Outsourcing

This is where a hundred percent of internal auditing is sourced from external experts. There are organizations that full outsourcing of internal auditing. This helps the firms to focus on strategies to improve their competitive advantage. In many cases organizations normally retain a resource in house. This can be the chief internal auditor. He is normally responsible for assessment of the organizational and internal process needs. Such a person is responsible for communicating with management and the audit committee. He is also liable for allocating the internal audit resources in the department. When there is total outsourcing of internal auditing, it actually generates more questions on how to manage it within an organization (Hilton, 2008).

When full outsourcing is carried out in an organization, it is important that the oversight responsibility should not be given to an external expert. It is always safe for this responsibility to be given to a senior management level employee in the organization. Management team in an organization has to evaluate and determine the source of internal audit resources and the structures available. (Hayes, 1999)

Considerations for Evaluating Outsourcing Alternatives

Organization size

Outsourcing is not just for large organizations only but even the small ones too. Many small organizations never have the ability to hire full time internal audit staff or even hire them on permanent basis. They therefore need to explore outsourcing. Reasons why many organizations evaluate outsourcing include specialty skills and temporary staff shortages.


This is one of the considerations that need to be analyzed before outsourcing is carried out. There are instances when internal audit resources are unavailable or even scarce due to various factors. Outsourcing internal auditors can be carried out on a permanent or on a temporary basis depending on resources available. Outsourcing is actually necessary where organizations can be in a position to get competent internal audit staff and professional internal audit services in good time (Deavers, 1970).

Advantages of Outsourcing Internal Auditing

Saves Costs

Outsourcing of internal auditing became very popular in many organizations. This is because it offered significant advantages to accounting firms and corporations. Many organizations have really benefited from the outsourcing strategies in line with internal auditing. One of the benefits is that these strategies save money. Research shows that it is far much cheaper for this organization to carry out outsourcing than if it were to do train experts to carry out outsourcing. This is because the operational costs are highly minimized in this case especially when the staffs in an organization are not highly qualified in this field.

Many Companies have benefited in reducing internal audit costs. This is by firms obtaining access to broad expertise that it would be expensive to maintain within the organization. Costs are reduced by overlapping audit effort and positions within the organization. This is implemented by replacing fixed cost with employees that are variable cost effective. This also gives firms the ability to balance workloads (Deavers, 1970)

Resource relocation

The other importance of outsourcing internal auditing is that it allows the relocation of resources in the organization. Time as a resource is relocated to other important sectors in the organization by the managers. For instance the managers in many organizations able to use time saved in outsourcing to carry out strategic planning in the organization. This time is used to critically analyze the operations in the organization.

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Saves time

The other importance outsourcing is that it really saves the organization a lot of time. For instance, if the human resource management was to carry out personnel training so that they can carry out internal auditing it would take quite a long period of time. When outsourcing is carried out in an organization it helps in saving time and therefore other departments in the organization are given enough attention.

Minimizes corruption

Outsourcing internal auditing has got very many advantages to organizations. This is because it helps to minimize corruption within the organization. In most of the organizations where outsourcing is not carried out, corruption is normally very rampant. This is because employees within the organization can actually lias to carry out inappropriate auditing of the books of accounting. This actually creates avenues for corruption practices to thrive within the organization. External experts that are normally used in carrying out internal auditing mostly do not have direct relations to employees within the organization (Hayes, 1999)

Staff is reduced

Outsourcing really helps in the reduction of staff in many organizations. Research shows that if such organizations would manage an internal professional staff to handle internal auditing then it could be very expensive. Many organizations through outsourcing have managed to reduce the professional staff by half. This means that less money is used in the payment of staffs. This is very relevant for small organizations that cannot afford to pay professionals on a permanent basis and therefore carry out partial outsourcing.

Increase in business effectiveness

Outsourcing has got very big impacts to the entire business. There is increased effectiveness in even the delivery of the services. This is because external experts have adequate experience to analyze the business operations. They also give invaluable advice to management in organizations on how to run the business. This actually leads to effectiveness in the business operations. As internal staffs in organizations interact with external professional they gain skills which in turn lead to increased business effectiveness.


The desired human resource management consequences of commitment and cost cutting are reconcilable. This is when proper measures are considered when implementing cost cutting within the organization. Communication is a very important factor that has to be considered when carrying out cost cutting. Proper communication has to be carried out to the various stakeholders within the organization like customers, vendors and employees. Change even if it is in line with cost cutting has to be carried out carefully. Human resource managers need to know that success in an organization is not just in monetary terms only (Gattorna, 2003).


Blacharski D (2008). What is ERP-Enterprise Resource Planning?. Web.

Deavers, L. (1970): Outsourcing a corporate competitiveness strategy; not a search for Low Wages; Journal of Labor Research 18; 503–19.

Gattorna, J. (2003): Gower handbook of supply chain management; Gower handbook of Logistics and distribution management; Aldershot; Gower.

Hayes, H. (1999): Agencies move to outsource network management; Washington Technology 14; no. 13: 32–6.

Hilton, R. (2008). Managerial Accounting Creating Value in a Dynamic Business Environment 7th Edition McGraw Hill, New York.

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