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Outsourcing Decisions PDF

The document discusses factors to consider when making outsourcing decisions. It identifies the key steps as identifying core competencies, determining future business needs, assessing required competencies, and comparing insourcing vs outsourcing options. Outsourcing can provide benefits like reduced costs and innovation, but also risks like supplier dependence and loss of strategic control. Cost considerations include direct, indirect, inventory and capital costs for both insourcing and outsourcing options.

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117 views

Outsourcing Decisions PDF

The document discusses factors to consider when making outsourcing decisions. It identifies the key steps as identifying core competencies, determining future business needs, assessing required competencies, and comparing insourcing vs outsourcing options. Outsourcing can provide benefits like reduced costs and innovation, but also risks like supplier dependence and loss of strategic control. Cost considerations include direct, indirect, inventory and capital costs for both insourcing and outsourcing options.

Uploaded by

ragha_4544v
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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OUTSOURCING DECISIONS

Nomenclature

■ Purchasing?
– The process of acquisition of goods or services to accomplish the goals of the
enterprise

■ Outsourcing?
– Contracting out of a business function to an external provider

■ Sourcing?
– Identification and selection of suppliers that best meets the buyer’s needs.
Why a Make or buy decision?

■ Increasing trends of outsourcing

■ Benefits are beyond reduce costs

■ Provides opportunity to achieve innovation

■ Lower staffing levels

■ More flexibility
Make or Buy Decisions
■ First Step?
– Identify core strengths – what is it that we do well?

■ Second Step?
– Look into current and expected future business environment
■ What business do we really want to be in to maximize the use of our core
competencies?

■ Third Step?
– Expected competency requirements for future operations

■ Fourth Step?
– Compare and identify competencies required to be developed

– Senior Managers must conceive of their companies as a portfolio of


core competencies rather than just as a portfolio of businesses and
products
Supplier Dominance

■ If activities having ‘transaction-specific investments’ are outsourced

■ The firm gets locked into a supplier

■ This increases supplier dependency

■ Lock-in can be exploited by the supplier

■ Demand renegotiate the terms of the contract


Strategic Vulnerabilities

When you outsource something, you tend to make it more generic. You
tend to pass a lot of the technology, particularly on the manufacturing
or service delivery side, to your suppliers. That creates strategic
vulnerabilities and also tends to commoditize your product. You’re
sourcing from people who also supply your competitors.

- Michael E. Porter
Strategic Vulnerabilities

■ Outsourcing something makes it more generic

■ Lose control over it

■ Pass a lot of technology and know-how to the supplier

■ That commoditize your products

■ You are sourcing from someone who also supply your competitors
Dangers of Vertical Integration

■ The critical connection between output and rewards are broken

■ Cost and responsiveness suffers

■ Loss of flexibility

■ Loss of responsiveness
Horizontal Integration

■ Virtual corporation that is involved in outsourcing nearly everything except few core
activities

■ Critical dependencies are common to other businesses and are not unique part of
the firm’s product

■ Identify minimum resources and value-adding activities that support core


competencies

■ Outsource all others


New Product Development and Outsourcing

■ Make or buy decision arise at the beginning of product life cycle

■ Extensive supplier market research on new technologies and innovations

■ Firm’s technological core competencies must be identified and defined

■ Often supplier will develop technologies and innovations beyond firm’s core
competencies

■ Outsourcing of developments?
Lean Manufacturing

■ Lean firms increasingly buy more and make less

■ Outsource otherwise
– An item is critical to the success of the product

– An item that requires specialized design and manufacturing skill or equipment and
the number of capable suppliers are less

– An item that fits well within the firm’s core competencies or within those the firm
must develop to fulfill future plans
Analyzing Strategic Outsource
Decisions
SUBSYSTEMS LEVEL
No Outsource

Is it strategic?
Yes Further analysis required

COMPONENT LEVEL

Can the subsystem No Make in-house


be broken down
into families of No Outsource
Are families
components and of components
parts?? Yes and parts
strategic? Make
Yes
in-house
Make or buy decisions at Tactical Level

■ Unsatisfactory supplier performance

■ Cost considerations

■ Changing sales demands

■ Restricted manufacturing capacity

■ Modification of existing products


Make or buy decisions at Tactical Level

■ The firm already have necessary production resources

■ Driven by considerations such as


– Efficiency
– Control of quality and reliability
– Cost
– Capacity building

■ Investment on additional resources minimal

■ Little top management participation


Factors Influencing Make or Buy
Decisions

■ Favor Making
– Less expensive to make parts
– Desire to integrate plant operations
– Productive use of excess capacity
– Need to exert direct control over production and/or quality
– Design secrecy required
– Desire to maintain stable workforce (in periods of declining sales)
Favor Buying

■ Limited production facilities


■ Cost considerations
■ Small volume requirements
■ Suppliers’ research and specialized know-how
■ Desire to maintain a stable workforce (in periods of rising demand)
■ Indirect managerial control considerations
■ Procurement and inventory considerations
Cost Considerations

■ Checklists for Make


– Delivered purchased material cost
– Direct labor cost
– Any follow-on costs stemming from quality and related problems
– Incremental inventory carrying costs
– Incremental factory overhead costs
– Incremental managerial costs
– Incremental purchasing costs
– Incremental costs of capital
Cost Considerations

■ Checklists for Buy


– Purchase price of the part

– Transportation costs

– Receiving and inspection costs

– Incremental purchasing costs

– Any follow-on costs related to quality or service


Cost Consideration

■ The time factor


– Probable future changes in relative costs of labor, material, transportation etc.

– Ability to reduce cycle time is a key strategy for gaining competitive advantage

■ The Capacity Factor


– Incremental overhead costs vary from time to time based on utilization

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