Outsourcing

1. Outsourcing Outsourcing refers to a holistic approach in determining how and where to procure goods and services

2. Reasons for Outsourcing • Strategic Reasons • Improve business focus • Gain access to world-class capabilities • Accelerate re-engineering benefits • Shared risks • Free resources for other purposes

3. Reasons of Outsourcing (cont.) • Tactical Reasons • Reduce or control operating cost • Make capital funds available • Create cash infusion • Compensate for lack on internal resources • Improve management of difficult or out-of-control functions

4. Traditional Approach Primary emphasis on price Short-term contracts Evaluation on bids Many suppliers Improvement at discrete time interval Problems are suppliers responsibility to corrects Information is proprietary Supplier Partnerships Multiple criteria Longer term contracts Intensive and extensive evaluation Fewer selected suppliers Continuous improvement is sought Problems are solved jointly Information is shared Traditional vs. new supplier partnerships

5. Framework of analysis - outsourcing • Which products/services should be outsourced? • Core competencies vs. non-core • What criteria should be used for supplier selection? • What criteria should be used for supplier evaluation? • How might these factors change across the life of the main product/service

6. Outsourcing Framework High NOVELTY (outsource/in-house) Technology Quality Service PROPRIETARY (in-house) Technology Quality Strategic value of product/service COMMODITY (outsourcing) Price ULTILITY (outsourcing) Cooperation Service Low Low High Criticality of the product/service

7. Advantages Higher degree of control over inputs Increases visibility over the process Economies of scale/scope uses integration Disadvantages Requires high volumes High investments Dedicated equipment has limits Problems with supply chain Insourcing – Vertical Integration

8. Advantages Greater flexibility supplier Lower investment risk Improved cash flow Reduction in labor costs Focus on core competency Disadvantages Possibility of choosing wrong supplier Loss of control over process Long lead-times/capacity “Hollowing out” the corporation Outsourcing

9. Example: Supplier Evaluation Scheme A supplier is assessed on three criteria: quality, on-time delivery, and service. The maximum rating for quality is 100 points and 50 points each are assigned to on-time delivery and service. This, there are 200 total possible points for rating of the supplier. If the total drops below say, 160, the supplier must allow the customer to perform an on-site evaluation audit. For overseas suppliers, an audit may be contracted out to a consultant at the suppliers expense.

10. Four Key Attributes for Evaluating A Supplier • Technical ability • Manufacturing facilities • Financial strength • Managerial competence

11. The Power matrix of Supplier-Buyer Relationship Buyer Dominance Inter-dependence (defensive position) High Relative utility and scarcity of buyer’s resources for suppliers Independence (adverse selection) Supplier Dominance (moral hazard) Low Low High Relative utility and scarcity of supplier resources for buyers Source: Andrew Cox, 2000