Rate of innovation Long term Survival MVA Total Stockholder Return Customer Satisfaction ROS Levels of employement EVA Net Income Rate of growth Brand awareness Market share Sustainability ROCE Net Margin Earnings Growth ROE
What Businesses Do Take Inputs Process/Manufacture Output Costs – Fixed and Variable Revenue Profit
THE CASH-TO-CASH CYCLE Transformation Inventories Inventories Credits’ delay Debts’ delay Total cycle: Economic cycle + CD Economic cycle: I1 + T + I2 cash-to-cash cycle I1 T I2 CD DD
Value offer Services Price Customer relation Communication Promotion Store experience Product A Firm’s value offer Brand
THE SUPPLY CHAIN Focal firm Suppliers Distributors Customers
What happens inside a Supply Chain? Wharehouse Subsidiary End customer Plant and suppliers POS Suppliers Focal firm Reseller Information flow Materials flow Cash flow Paper flow
THE VALUE SYSTEM Focal firm Suppliers Distributors End Customers Complementors Logistic services POS management Design Research Communities Information providers Tech systems
THE VALUE CHAIN FIRM’S INFRASTRUCTURE HRM PRODUCT DEVELOPMENT AND TECHNOLOGY PROCUREMENT INBOUND LOGISTICS OPERATIONS OUTBOUND LOGISTICS MARKETING AND SALES SERVICES MARGIN MARGIN PRIMARY ACTIVITIES SUPPORT ACTIVITIES
“ Outsourcing” is a term coined to describe the practice chosen by many companies of contracting out to other companies some - usually manufacturing - activities of the value chain that used to be carried out in-house.
The big question is: Has outsourcing gone too far?
According to a recent study by McKinsey & Co., nearly 2/3 of the total value-added of the car industry in the United States (which amounted to 750 billion dollars in 2001) comes from suppliers of component and other materials, while the remainder comes from OEM assemblers.
Companies such as General Motors cut their workforce down to 388,000 from 761,000 in the 1990-1999 period, although the number of cars manufactured went from 7.45 million up to 8.78 million.
In the same period, Fiat Auto cut its workforce down to 82,450 from 133,431 although maintaining the same output.
There can be different reasons for outsourcing
First of all, the search for flexibility . Firms outsource production when demand is high and cancel it when orders are cancelled or demand falls. Thanks to the substitution effect between fixed and variable costs they obtain higher cost elasticity.
Lower costs , especially when the firm can benefit from suppliers’ economies of scale (a supplier can integrate demand from a large number of clients, as against the purchasing firm) and economies of specialisation (a supplier can specialise in single activities and reach world-class levels of excellence).
Less investments in fixed (machinery, equipment, production lines, transport systems) and working capital (input and output stocks), which are undertaken by suppliers.
Less investments in R&D as firms can take advantage of the numerous innovations available on the outside supply market.
A greater focus of the outsourcing firm on client needs and services and product development activities, i.e. on key activities for value creation;
Seen through the labels of the products we buy, the world looks much smaller than it actually is.
When we visit a footwear or clothing outlet in a Western country we find trousers coming from Malaysia, shirts from Turkey, jackets from the United States and jeans made in Guatemala and, perhaps, high quality shoes coming from the Marche region or Vigevano in Italy.
Outsourcing + Globalization = Global sourcing Global sourcing ≠ Offshoring
Nike has relocated production of its footwear and clothing to 51 countries where its third party production units employ more than 500,000 people (as against approximately 14,000 people directly employed by the multinational).
From its headquarters in Beaverton, Oregon, Nike manages a worldwide virtual company combining internal R&D functions with a low cost manufacturing strategy. For instance, its “Air Max” model is designed in sites in Oregon and Tennessee and developed jointly by American and Asian technicians in the USA, Taiwan and South Korea. Sneakers are then assembled in South Korea (man’s size) and Indonesia (boys’ size) from dozens of components supplied by firms in Japan, South Korea, Taiwan, Indonesia and the United States. Similarly, Nike outsources distribution to firms that specialise in logistics services.
Nike Supply chain: costs, margins and profit (www.nike.com)
Global sourcing and Corporate Social Responsibility
Recently, thanks also to pressure from consumers groups, governments, trade unions organisations and non-governmental organisations, there is a more mature awareness of the social accountability of Western companies involved in global sourcing processes. Most significant measures include the voluntary adoption of “Ethical Codes of conduct” by multinationals such as Levi’s, The Gap, Reebok and Nike.
The natural evolution of outsourcing is Business Process Outsourcing (BPO)
In BPO the contract manufacturer is responsible for managing a complete business process on behalf of the client.
As a result, for instance, contract manufacturing is more often connected to provision of logistics services and management of on-line orders.
Supply Chain Management is the coordination of information, manufacturing and logistics flows We are witnessing the growth and consolidation of a logistics services market made up of firms that can replace their clients in all or part of their logistics activities (Third party logistics providers) or play the role of web designers or negotiators of relationships with specialised operators (Fourth party logistics providers
Outsourcing requires every company to find a delicate balance between two opposite objectives:
Exploiting opportunities (competitive advantages) offered by existing markets for resources;
Limiting strategic vulnerability in the event of a break-up of relationships with suppliers or overall “market failure”.
It is not just a matter of deciding “how much” to make or “how much” to buy. The issue can be dealt with through negotiating, or structuring the outsourcing relationship in such a way it can meet monitoring needs and ensure necessary flexibility. In this respect there is a large number of outsourcing agreements between the two extremes of make and buy including partial integration and long-term contracts.
Balancing vertical integration and outsourcing: the Zara case
A clever balance between vertical integration and outsourcing. This seems today to be the “ recipe ” for success of many companies such as the Spanish Zara (controlled by the holding Inditex). With 745 stores in 56 countries, Zara is the retail clothing chain with the highest expansion rate in Europe. As against many competitors, Zara manufactures in-house more than half of all garments it sells, at the Spanish plant in La Coruna. At the core of its success is a vertically integrated model which covers all phases of the fashion process: design, manufacture, logistics and distribution to its own stores.
Country-specific advantages and Competitiveness: Porter’s diamond
Enterprises can benefit from the synergies created by the presence – within the same Country - of demanding purchasers, specialized suppliers, high-skilled human resources and developed financial and support institutions.
Demand Support Industries Factors of Production Rivalry