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Elucidating the effect of outsourcing Elucidating the effect of outsourcing on the supplier relationshipon the supplier relationship
Kevin Shihping HuangKevin Shihping Huang
Yu-Tang LoYu-Tang Lo
Lopin KuoLopin Kuo
outlineoutline
• 1. Introduction1. Introduction
• 22. Literature review. Literature review– 22.1 Outsourcing.1 Outsourcing– 22.2 System dynamics.2 System dynamics
• 33. Establishment of casual loop diagram. Establishment of casual loop diagram
• 44. Outsourcing effect on supplier relation. Outsourcing effect on supplier relation
• 55. Conclusion. Conclusion
1. Introduction1. Introduction
• The classic case of IBMThe classic case of IBM – At the beginning: improved IBM’s product to marAt the beginning: improved IBM’s product to mar
ket speedket speed– Final : Final : so called “Intel Inside” phenomenon so called “Intel Inside” phenomenon
eventually replaced IBM eventually replaced IBM
• Outsourcing is more than managing its related Outsourcing is more than managing its related benefits and risks. benefits and risks.
• The nature of outsourcing arrangements could The nature of outsourcing arrangements could significantly impact the outcome.significantly impact the outcome.
1. Introduction1. Introduction (con.) (con.)
• MMaps out the necessary outsourcing factors aps out the necessary outsourcing factors affecting supplier relationaffecting supplier relation..
• TThe interrelationships of these outsourcing he interrelationships of these outsourcing factors are also examined closely through factors are also examined closely through system dynamics diagram of outsourcing.system dynamics diagram of outsourcing.
22..11 Outsourcing Outsourcing Literature reviewLiterature review
• OutsourcingOutsourcing– BBenefits/risks analysisenefits/risks analysis– IIndustry characteristics analysisndustry characteristics analysis
22..11 Outsourcing Outsourcing Literature reviewLiterature review
• BBenefits/risks analysisenefits/risks analysis– Benefits:Benefits:
• reducing transaction costsreducing transaction costs
• increasing product to market speedincreasing product to market speed
• improving production and financial flexibilityimproving production and financial flexibility
• strengthening specialization.strengthening specialization.
– Risks:Risks:• loss control of loss control of OEM’OEM’s contract manufacturers (CMs)s contract manufacturers (CMs)
• loss learning opportunityloss learning opportunity
• potential loss of critical skills.potential loss of critical skills.
22..11 Outsourcing Outsourcing Literature reviewLiterature review
• IIndustry characteristics analysisndustry characteristics analysis– Fine (2000) points out that the nature of industry Fine (2000) points out that the nature of industry
structure affects outsourcing outcome.structure affects outsourcing outcome.– IIndustry characteristicsndustry characteristics include: include:
• vertical/integral vertical/integral industry industry structurestructure
• industry speedindustry speed
• product specificationproduct specification
• technological performancetechnological performance
• the dependent relationship between the OEMs and CMsthe dependent relationship between the OEMs and CMs
• the novelty of the productthe novelty of the product
2.2 System Dynamics2.2 System Dynamics
• System dynamics (SD) System dynamics (SD) – A methodologyA methodology
– studying and managing complex feedback systemsstudying and managing complex feedback systems
– SD aids SD aids the decision making process through the the decision making process through the understanding of systemic forcesunderstanding of systemic forces
• SD focuses on:SD focuses on:– interactive relationinteractive relation
• The simplest way to adopt System Dynamics approacThe simplest way to adopt System Dynamics approach is use a h is use a causal loop diagram causal loop diagram (CLD) (CLD) to analyze a to analyze a complex managerial problemcomplex managerial problem..
2.2 System Dynamics2.2 System Dynamics
• Causal Loop Diagram (CLD) example:
Net Withdrawals
Bank Cash Reserves
Perceived Solvency of
Bank
+
-
-
2.2 System Dynamics2.2 System Dynamics
• Causal Loop Diagram (CLD) example:
Environmental Quality
Pressure to Clean up
Environment
Cleanup Effort
+
+
-
33. Establishment of . Establishment of CLDCLDOEM's Rate of ReturnSize and growth
of OEM
OEM's propensity toinnovate & to reduce cost
Modular product
Outsourcing
Knowledgelearned by CM
Capability of CM
innovation and qualityof component
innovation and qualityof final product
Attractiveness tocustomer
+
+
+
+
++
+
+
+
Loop1
+
33. Establishment of . Establishment of CLDCLDOEM's Rate of ReturnSize and growth
of OEM
OEM's propensity toinnovate & to reduce cost
Modular product
Outsourcing
Knowledgelearned by CM
Capability of CM
innovation and qualityof component
innovation and qualityof final product
Attractiveness tocustomer
+
+
+
+
++
+
+
+
Loop1
Universalcompatibility
New OEM entrants
+
+
+
+
33. Establishment of . Establishment of CLDCLDOEM's Rate of ReturnSize and growth
of OEM
OEM's propensity toinnovate & to reduce cost
Modular product
Outsourcing
Knowledgelearned by CM
Capability of CM
OEM's Capabilityrelative to CM's
innovation and qualityof component
innovation and qualityof final product
Attractiveness tocustomer
+
+
+
+
+
--
+
+
+
+
Loop1
Loop2Universal
compatibility
New OEM entrants
+
+
+
+
33. Establishment of . Establishment of CLDCLDOEM's Rate of ReturnSize and growth
of OEM
OEM's propensity toinnovate & to reduce cost
Modular product
Outsourcing
Knowledgelearned by CM
Capability of CM
OEM's Capabilityrelative to CM's
innovation and qualityof component
innovation and qualityof final product
Attractiveness tocustomer
CapacityDependence
KnowledgeDependence
+
+
+
+
+
--
- +
+
+
+
+
Loop1
Loop2Universal
compatibility
New OEM entrants
+
+
+
+
33. Establishment of . Establishment of CLDCLD
OEM's Rate of ReturnSize and growthof OEM
OEM's propensity toinnovate & to reduce cost
Modular product
Outsourcing
Knowledgelearned by CM
Capability of CM
OEM's Capabilityrelative to CM's
innovation and qualityof component
innovation and qualityof final product
Attractiveness tocustomer
CapacityDependence
KnowledgeDependence
+
+
+
+
+
--
- +
+
+
+
+
Integral systemdevelopment of CM
-
Loop1
Loop2
Loop3 CM's Rate ofReturn
CM's capability andknowledge relative to
OEMUniversal
compatibility
New OEM entrants
+
+
+
+
+
+
+
33. Establishment of . Establishment of CLDCLDOEM's Rate of ReturnSize and growth
of OEM
OEM's propensity toinnovate & to reduce cost
Modular product
Outsourcing
Knowledgelearned by CM
Capability of CM
OEM's Capabilityrelative to CM's
innovation and qualityof component
innovation and qualityof final product
Attractiveness tocustomer
CapacityDependence
KnowledgeDependence
+
+
+
+
+
--
- +
+
+
+
+
Integral systemdevelopment of CM
Threat againstOEM
Integral systemdevelopment of OEM
-+
+
Complexity of ProductLoop1
Loop2
Loop3Loop4
CM's Rate ofReturn
CM's capability andknowledge relative to
OEMUniversal
compatibility
New OEM entrants
+
+
-
+
CM's dependabilityon OEM
-
--
+
+
+
+
OEM's Rate of ReturnSize and growthof OEM
OEM's propensity toinnovate & to reduce cost
Modular product
Outsourcing
Knowledgelearned by CM
Capability of CM
OEM's Capabilityrelative to CM's
innovation and qualityof component
innovation and qualityof final product
Attractiveness tocustomer
CapacityDependence
KnowledgeDependence
+
+
+
+
+
--
- +
+
+
+
+
Integral systemdevelopment of CM
Threat againstOEM
Integral systemdevelopment of OEM
-+
+
Complexity of ProductLoop1
Loop2
Loop3Loop4
CM's Rate ofReturn
CM's capability andknowledge relative to
OEMUniversal
compatibility
New OEM entrants
+
+
-
+
CM's dependabilityon OEM
-
--
+
+
+
+
Whole Causal Loop DiagramWhole Causal Loop Diagram
44. Outsourcing effect on supplier relation. Outsourcing effect on supplier relation
• The first loop is a positive loop in which The first loop is a positive loop in which benefits of outsourcing is visible.benefits of outsourcing is visible.– Modularization through outsourcingModularization through outsourcing
• reduces costsreduces costs • improves product to market speedimproves product to market speed • provides OEMs with greater profitabilityprovides OEMs with greater profitability • allows CMs to concentrate on the improvements of allows CMs to concentrate on the improvements of
the subsystemthe subsystem • eventually translates into greater end product eventually translates into greater end product
performance and better customer approvalperformance and better customer approval
44. Outsourcing effect on supplier relation. Outsourcing effect on supplier relation
• The second loop demonstrates The second loop demonstrates outsourcing effects.outsourcing effects.– CM’s capability and knowledge improve CM’s capability and knowledge improve
dramaticallydramatically and and might eventually surpass might eventually surpass that of OEMs’that of OEMs’
– To maintain control of the industry, it is To maintain control of the industry, it is essential for OEMs to maintain a good level of essential for OEMs to maintain a good level of knowledge on critical components.knowledge on critical components.
44. Outsourcing effect on supplier relation. Outsourcing effect on supplier relation
• The third loop reveals the result of CMs’ The third loop reveals the result of CMs’ effort to make product improvement.effort to make product improvement.– As CMs capabilities improve, CMs might try to As CMs capabilities improve, CMs might try to
integrate into subsystems and such strategy integrate into subsystems and such strategy could eventually erode OEMs’ profit.could eventually erode OEMs’ profit.
44. Outsourcing effect on supplier relation. Outsourcing effect on supplier relation
• The forth loop describes OEMs’ counter The forth loop describes OEMs’ counter strategy.strategy. – CMs become less dependent on OEMs in CMs become less dependent on OEMs in
terms of capacity and knowledge. OEMs feel terms of capacity and knowledge. OEMs feel threaten by CMs. Consequently, OEMs would threaten by CMs. Consequently, OEMs would try to move towards the integration of the try to move towards the integration of the entire architecture in order to protect its entire architecture in order to protect its market position.market position.
55. . ConclusionConclusion
• more than outsourcing benefits and risksmore than outsourcing benefits and risks
• Some fSome factors also influence supplier actors also influence supplier relationship tremendously.relationship tremendously.– knowledge dependencyknowledge dependency– capacity dependencycapacity dependency– product noveltyproduct novelty– product architectureproduct architecture
55. . ConclusionConclusion
• All these factors were scattered and All these factors were scattered and fragmented without any visible method fragmented without any visible method that places the interrelationship of that places the interrelationship of outsourcing into a single context. outsourcing into a single context.
• To supplement such a gap, this article To supplement such a gap, this article applies SD analysis to describe the applies SD analysis to describe the interactions among these outsourcing interactions among these outsourcing factors.factors.
55. . ConclusionConclusion
• From cooperation to competitionFrom cooperation to competition• Not necessary all the outsourcing relationship Not necessary all the outsourcing relationship
end up in a competitive outcome. end up in a competitive outcome. • Of course, there are forces such as product Of course, there are forces such as product
complexity and knowledge dependency that complexity and knowledge dependency that prevent such scenario from happening. prevent such scenario from happening.
• It It is critical for outsourcing participants to be is critical for outsourcing participants to be conscious about knowledge over dependency conscious about knowledge over dependency and product complexity.and product complexity.
Thanks for your attention!Thanks for your attention!
