Outsourcing: A Growth Industry Strategic Issues Core Competencies Supplier Dominance The Creation of Strategic Vulnerabilities The Dangers of Vertical Integration Horizontal Integration New Product Development and Outsourcing Lean Manufacturing Tactical Decisions Factors Influencing Make-or-Buy Decisions Cost Considerations Time Capacity Control of Production and Quality Business Process Outsourcing Technology Risk and Maturity Unreliable Suppliers Suppliers’ Specialized Knowledge and Research Small-Volume Requirements Limited Facilities Factors Influencing Make-or-Buy Decisions Cost Considerations Time Capacity Control of Production and Quality Business Process Outsourcing Technology Risk and Maturity Unreliable Suppliers Suppliers’ Specialized Knowledge and Research Small-Volume Requirements Limited Facilities Factors Continued Work Force Stability Multiple-Source Policy Managerial and Control Considerations Procurement and Inventory Considerations Netsourcing The Volatile Nature of the Make-or-Buy Situation Dangers of Outsourcing Administration of Make-or-Buy Activities Chief Resource Officer Framework for Outsourcing Executive Level Involvement

1. 10-1
Chapter 10
Outsourcing

2. 10-2
Key Concepts
• Outsourcing: A Growth Industry
• Strategic Issues
» Core Competencies
» Supplier Dominance
» The Creation of Strategic Vulnerabilities
» The Dangers of Vertical Integration
• Horizontal Integration
» New Product Development and Outsourcing
» Lean Manufacturing
• Tactical Decisions

3. 10-3
Key Concepts
• Factors Influencing Make-or-Buy
Decisions
» Cost Considerations
» Time
» Capacity
» Control of Production and Quality
» Business Process Outsourcing
» Technology Risk and Maturity
» Unreliable Suppliers
» Suppliers’ Specialized Knowledge and Research
» Small-Volume Requirements
» Limited Facilities

4. 10-4
Key Concepts
• Factors Continued
» Work Force Stability
» Multiple-Source Policy
» Managerial and Control Considerations
» Procurement and Inventory Considerations
• Netsourcing
• The Volatile Nature of the Make-or-Buy Situation
» Dangers of Outsourcing
• Administration of Make-or-Buy Activities
» Chief Resource Officer
» Framework for Outsourcing
» Executive Level Involvement

5. 10-5
Outsourcing and Supply Management
• Outsourcing has become a way to
increase an organization’s flexibility to
meet rapidly changing market conditions,
focus on core competencies and develop
competitive advantage.
• As a result, the need for world class
Supply Management has intensified and
positioned supply managers as agents of
strategic change critical to supply chain
success.

6. 10-6
Outsourcing: A Growth Industry
• Outsourcing is increasing rapidly
» Not just materials, many business functions
are being outsourced
• Outsourcing can enable:
» Leveraging of the supplier’s expertise
» Increases in innovation
• And result in:
» lower staffing levels
» reduced costs
» more flexibility

7. 10-7
Strategic Issues
• Core Competencies
• Supplier Dominance
• The Creation of Strategic Vulnerabilities
• The Dangers of Vertical Integration

8. 10-8
Horizontal Integration
• Outsourcing all non-critical activities is a
trend
» The idea is to achieve significant cost leverage
• To identify non-critical activities, the firm’s
core competencies must be defined
» All other activities are candidates for
outsourcing

9. 10-9
From A Strategic Level: What Should Not Be
Outsourced
1. An item that is critical to the success of
the product
2. An item that requires specialized design,
manufacturing skills or equipment
3. An item that fits well within the firm’s
core competencies

10. 10-10
Strategic Analytic Procedure for Subsystems and
Components
Is the
subsystem
strategic?
Outsource
No
Can the
subsystem be broken
into families?
Yes
Are families
strategic?
Yes
Yes
No
Make In-House
NoNo
Based on
Figure 10-1

11. 10-11
Make or Buy at Tactical Level
• Poor supplier performance
• Changing sales demand
• Restricted manufacturing capability
• Modification of product
• Increased manufacturing capability
• Improved supplier capability

12. 10-12
Considerations Which Favor Making
1. Cost considerations
2. Desire to integrate plant operations
3. Use of excess plant capacity
4. Control over production and/or quality
5. Design secrecy required
6. Unreliable suppliers
7. Desire to maintain a stable work force

13. 10-13
Considerations Which Favor Buying
1. Limited production facilities
2. Cost considerations (less expensive to
buy)
3. Small-volume requirements
4. Suppliers’ specialized know-how
5. Stable work force (rising sales)
6. Multiple-source policy
7. Indirect managerial control
considerations
8. Procurement and inventory
considerations

14. 10-14
Major Elements Included
in a “To Make” Cost Analysis
1. Delivered purchased material costs
2. Direct labor costs
3. Any follow-on costs stemming from
quality and related problems
4. Incremental inventory carrying costs
5. Incremental factory overhead costs
6. Incremental managerial costs
7. Incremental purchasing costs
8. Incremental costs of capital

15. 10-15
Major Elements Included
in a “To Buy” Cost Analysis
1. Purchase price of the part
2. Transportation costs
3. Receiving and inspection costs
4. Incremental purchasing costs
5. Any follow-on costs related to quality or
service

16. 10-16
Cost Considerations
• The time factor (two views)
» Short-term view
– Focus on direct measurable costs
» Long-term view
– Also measure hidden costs (storage, inspection,
tooling, quality, etc.)
• The capacity factor (2 possibilities)
» 1. We are at capacity
– Fixed costs are an issue
» 2. We are not at capacity
– Fixed costs are not as much an issue

17. 10-17
Incremental Costs from “Make” Decision
When Operating at 80% Capacity
Figure 10-2

18. 10-18
Other Factors Influencing the Make/Buy Decision
• Production Requirements
» To maintain control over ability to produce unique parts
» Continuity of supply of critical parts
• Quality Requirements
» To control level of quality of difficult parts
» To increase level of acceptable quality
• Business Process Outsourcing Issues
» Outsourcing complete business processes can speed up innovative
change.
» Organizations can outsource entire functions
» Consideration must be given to secrecy issues when outsourcing
aspects of a part or process design.

19. 10-19
Other Factors Influencing the Make/Buy Decision
• Technology Risk and Maturity
» Technology life-cycles
» Developing or new technology
• Unreliable suppliers
• Suppliers’ Specialized Knowledge and Research
» Take advantage of suppliers’ knowledge and expertise
» Many industries/suppliers are highly specialized
• Small Volume Requirements
• Limited Facilities

20. 10-20
Other Factors Influencing the Make/Buy Decision
• Workforce Stability
» Stabilize the workforce
» Retain a competent workforce
• Multiple-Source Policy
• Managerial Control Considerations
» Data gained from outsourcing can be used to check internal
processes and costs
• Procurement and Inventory Considerations

21. 10-21
Netsourcing
• Many companies are not readily staffed to
keep a company competitive in e-business
• As a result, companies are outsourcing
infrastructure development and
maintenance to “Netsourcers”
• Netsourcing has become popular since it
allows:
» A quick e-business presence
» Flexibility to make changes
» Sustained performance
» Support without the need to train or hire
specialized personnel

22. 10-22
The Volatile Nature of the Make-or-Buy Decision
• Beware of rigid formulas and rules of thumb
• The make-or-buy question is influenced by a
multitude of diverse factors constantly changing
• Under such conditions, few easy decisions turn
out well in both the short and the long run
• Moreover, the relevant factors vary immensely
from one firm to another
• Every company should periodically evaluate the
effectiveness of its past decisions to generate
information helpful in guiding future decisions

23. 10-23
Dangers of Outsourcing
• Loss of control
• Loss of client focus
• Loss of clarity
• Loss of cost control
• Ineffective management
• Loss of confidentiality
• Double outsourcing

24. 10-24
Administration of Make-or-Buy Activities
• Chief Resource Officer
» Manages and initiates outsourcing for direct
support to the company’s bottom line
• Framework for outsourcing
» Information gathering
» Strategic roadmap
» Decision flowchart
» Transition back plan
» Review system
• Executive level involvement

25. 10-25
Concluding Remarks
• Firms are becoming more aware of the
strategic dimension of the make-or-buy
decision
• As technology has advanced, most
manufacturing firms have become much
more specialized
• Cost of materials has continued to
increase in many industries