OutsourcingOutsourcing

Outsourcing refers to a Outsourcing refers to a holistic approach in holistic approach in

determining how and determining how and where to procure goods where to procure goods

and servicesand services

Reasons for OutsourcingReasons for Outsourcing• Strategic Reasons

– Improve business focus– Gain access to world-class capabilities– Accelerate re-engineering benefits– Shared risks– Free resources for other purposes

Reasons of Outsourcing Reasons of Outsourcing (cont.)(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

Traditional vs. new supplier Traditional vs. new supplier partnershipspartnerships

• 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

Framework of analysis - Framework of analysis - outsourcingoutsourcing

• 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

Outsourcing FrameworkOutsourcing Framework

NOVELTY(outsource/in-house)

TechnologyQualityService

ULTILITY(outsourcing)

CooperationService

PROPRIETARY(in-house)

TechnologyQuality

COMMODITY(outsourcing)

Price

Low High

High

Low

Strategic value of product/service

Criticality of the product/service

Insourcing – Vertical Insourcing – Vertical IntegrationIntegration

• 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

OutsourcingOutsourcing• 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

Example: Supplier Evaluation SchemeExample: Supplier Evaluation Scheme

A supplier is assessed on three criteria: A supplier is assessed on three criteria: quality, on-time delivery, and service. The quality, on-time delivery, and service. The maximum rating for quality is 100 points maximum rating for quality is 100 points

and 50 points each are assigned to on-time and 50 points each are assigned to on-time delivery and service. This, there are 200 delivery and service. This, there are 200

total possible points for rating of the total possible points for rating of the supplier.supplier.

If the total drops below say, 160, the If the total drops below say, 160, the supplier must allow the customer to supplier must allow the customer to

perform an on-site evaluation audit. For perform an on-site evaluation audit. For overseas suppliers, an audit may be overseas suppliers, an audit may be contracted out to a consultant at the contracted out to a consultant at the

suppliers expense.suppliers expense.

Four Key Attributes for Four Key Attributes for Evaluating A SupplierEvaluating A Supplier

• Technical ability• Manufacturing facilities• Financial strength• Managerial competence

The Power matrix of The Power matrix of Supplier-Buyer RelationshipSupplier-Buyer Relationship

Buyer Dominance

Supplier Dominance

(moral hazard)

Independence

(adverse selection)

Inter-dependence

(defensive position)

Low HighRelative utility and scarcity of supplier resources for buyers

Relative utility and scarcity of buyer’s resources for suppliers

High

Low

Source: Andrew Cox, 2000