OUTSOURCING

Outsourcing

 a management strategy where by major

noncore functions are transferred to specialist,

efficient, external providers.

 Executives are focused on stock value and huge

pressure is placed on organisation to increase

profits by reducing costs through outsourcing.

 MOTIVATIONS FOR OUTSOURCING & RISKS

1. Economic of scale.

 -reduce manufacturing costs through the aggregation of orders from

different buyers.

2. Risk pooling

 allows the firm to transfer demand uncertainty risks to the

manufacturer(s) .

 The manufacturer aggregate demand from many buying companies and

thus reduce uncertainty.

 thus can reduce inventory levels while maintaining or even increasing

 MOTIVATIONS FOR OUTSOURCING &
RISKS
 3. Reduce capital investment.

 4. Focus on core competency

 5. Increased flexibility. Flexibility has three main issues;

The ability:

A) to better react to changes in customer demand.

b) to use the suppliers technical knowledge accelerate product

development cycle time.

c)to gain access to new technologies and innovation.

 Other benefits of outsourcing

 Freeing management time

 Reduced staff costs
 Cost certainty
 Reduced staff management problems
 Improved consistency of service
 MAIN RISKS ASSOCIATED WITHOUT SOURCING

1. Loss of competitive knowledge.

 Outsourcing critical components to suppliers may open up opportunities

for competitors.

• Outsourcing of the main manufacturing components from

suppliers may prevent the development of new insight.

• Prevent innovations and solutions that typical requires cross-functional

teamwork.

2. Conflicting objectives supplier and buyer usually have different and

conflicting objectives.
 Conflicting objectives supplier and buyer usually have different and
conflicting objectives.

 For instance increased flexibility is a key objective of the buyer

when outsourcing the manufacturing of various components.

 Inability to better match supply and demand by adjusting

production rates as needed. Product design issues are affected by the
conflicting objectives.

 Buyer would like to solve the design problem as fast as possible whereas
suppliers focus on cost reduction that typically implies slow responsiveness
to design change.
 risks may include
 Problems of flexibility
 Overdependence on suppliers
 High staff turnover
 Poor project management skills
 Lack of commitment to the client or industry.
 Shallow expertise
 Insufficient documentation
 Lack of control over larger suppliers
 poor staff training
 Complacency
 Overtime divergent interest of the customer
 Product cultural mismatches between customer
and provider organizations.
 In outsourcing manufacturing, the following
decisions need to be made:
A) Strategic make or buy decisions on:

 what products to make

 what investment to make machines and labor to make the

products.

 ability to develop new product and processes as the knowledge

and skills gained by manufacturing in house.

 selection of suppliers as they may need to be involved in

design and production process.
 In outsourcing manufacturing, the following
decisions need to be made:
 B) Tactical make or buy decisions which deal with the
issue of a temporary imbalance of manufacturing capacity-
fall or rise in demand

 C) Component make or buy decisions – made at the design

stage and relate to whether a certain component should be
made or bought
 REASONS FOR OUTSOURCING

1. Dependency on capacity

 In this case the firm has the knowledge and the skills required to
produce the components but for various reasons, decoded to outsource
due to lack of manufacturing capacity

 e.g. materials, space transport facilities etc.

2. Dependency on knowledge

 the company does not have resources skills and knowledge required to
produce the components and outsources in order to have access to
these capabilities.
 FACTORS TO CONSIDER IN MAKE OR BUY
DECISION
1. Nature of the product; bulky perishable

2. Awareness of new technology

3. Market conditions; changes in world market, economic and market

conditions

4. Firms’ financial structure

5. Mgt of make or buy portfolio

6. Length of scheme –short term or long term relationship with suppliers.

7. Personnel to be involved
 MAKE OR BUY DECISIONS

 is the act of making a strategic choice between producing an item

internally (in-house) or buying it externally (from an outside supplier).

 Make-or-buy decisions usually arise when a firm that has developed a

product or part or significantly modified a product or part is having
trouble with current suppliers.

 Has diminishing capacity or changing demand.

 Compare the cost of producing a component or providing a

service internally with the cost of purchasing a component or a service
from an external supplier.
 Three levels of make or buy

Three levels of make or buy have been identified which

are linked to overall organization strategy.

1. Strategic make of buy: -

 Undertaken by top management.

 Seeks to determine the shape and capability of the

organisation’s manufacturing operations by influencing:
 Three levels of make or buy

1a) What products to make

b) What investment to make in machines and labor

c) Ability to develop new products and processes

d) Profitability, risk and flexibility-Provide the framework for short- term

tactical and component decision.
 Three levels of make or buy

2. Tactical make or buy:

 taken by middle level managers and deals with the issue of

temporary imbalance of manufacturing capacity.

 It considers the acquisition of additional machines, tools and

other resources in order to manufacture internally what would
otherwise been bought.

3. Made ideally at the design stage and relate to whether a

particular component of the product should be made in house or
 Reasons for make or buy decision

Possible reasons are:

1. Deterioration in supplier’s quality performance

2. Delivery failure or poor service by exiting source

3. Large price increase

4. Volume changes: much large or smaller quantity requirements for item concerned.

5. Pressure to reduce costs

6. Desire to concentrate internal resources on areas of special competence

7. Need for design secrecy

8. Import substitution
 Reasons for make or buy decision

9. To gain access to world class capabilities

10. Reduction in staff management problems

11. Reduced capital requirements

12. To improve organizational focus

13. To increase flexibility

 Factors in favor of making
 Chance to use up idle capacity and resources

 Potential lead time reduction

 Possibility of scrap utilisation

 Greater purchasing power with larger orders of a particular material

 Exchange rate risks

 Cost of work is known in advance

 Ability to manage resources

 Commercial and contractual advantages

 Maintaining secrecy

 Worries over stability and continuing viability of suppliers are eliminate

 Factors in favor of buying

 Quantities required too small for economic production

 Avoidance of costs of specialist machinery or labor

 Reduction in inventory

 Spread of financial risk between supplier and purchaser

 Ability to control quality when purchased from outside

 Availability of vendors specialist expertise, machinery etc.

 PARTNERSHIP SOURCINGPartnership sourcing has been defined as
‘a commitment by both customer and suppliersregardless of size
to a long-term relationship on clear mutually agreed objectives to strive
forworld-class capability and competitiveness.Reasons for seeking
partnerships can include improvements in:-Design, Quality, Delivery and
completion times, Production costs, operating costs, Stock levels, Cash
flow, Skill and resource availability etc
 Advantages of partnership sourcing
 Partnership sourcing would lead to:
 1. Emphasis on co-operation between purchaser and supplier
 2. Consideration of total acquisition costs. Lowest price is never the sole buyer
consideration.
 3. Long-term business relationships with the involvement of the supplier at the
earliest possible
 stage
 4. Emphasis on quality assurance based on total quality management
 5. Emphasis on single sourcing although is not of necessity it will however
reduce the supplierbase6. Emphasis on mutual trust between purchaser and
supplier
 Problems of partnership sourcing
 a) Termination of relationships has to be undertaken over a period of time through an
agreed
 separation plan
 b) Inequitable Business shares i.e. possible domination by the customer or over-
dependence on
 the supplier.
 c) Lack of confidentiality – where prospective partners are also suppliers to competitors
 d) Requires regular review of competitiveness through regular meetings
 e) Attitudes – traditional adversarial buyers and sales people will require retraining to
adjust to
 the new philosophy