This document provides an overview of outsourcing as a supply chain strategy. It discusses what outsourcing is, the theory of comparative advantage, strategic planning and core competencies as they relate to outsourcing. It also covers the risks, advantages, and disadvantages of outsourcing, as well as how to evaluate outsourcing performance and ethical issues related to outsourcing.

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Outsourcing as a Supply
S11 Chain Strategy
What is Outsourcing?
Outline
Strategic Planning and Core
Competencies
The Theory of Comparative
PowerPoint presentation to accompany
Heizer and Render Advantage
Operations Management, 10e
Principles of Operations Management, 8e Risks in Outsourcing
PowerPoint slides by Jeff Heyl
Evaluating Outsourcing Risk
with Factor Rating
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Outline – Continued Learning Objectives
When you complete this supplement
Advantages and Disadvantages you should be able to:
of Outsourcing
1. Explain how core competencies
Advantages of Outsourcing g
relate to outsourcing
Disadvantages of Outsourcing 2. Describe the risks of outsourcing
Audits and Metrics to Evaluate 3. Use factor rating to evaluate both
Performance country and provider outsourcers
Ethical Issues in Outsourcing 4. List the advantages and
disadvantages of outsourcing
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Supply-
Supply-Chain Management Outsourcing
Outsourcing can replace entire
The objective is to build a chain of purchasing, information systems,
suppliers that focuses on marketing, finance, and operations
maximizing value to the ultimate
g department
customer Applicable to firms throughout the
world
Making the right decision may be
the difference between success
and failure
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2. 10/16/2010
What is Outsourcing? What is Outsourcing?
Procuring from external suppliers Outsourcing has become a major
service or products that are normally strategy as firms move toward
part of an organization specialization
Offshoring is moving processes to a
1.
1 Increasing expertise
foreign country but retaining control
2. Reduced cost of reliable
Extension of the long-standing practice
transportation
of subcontracting
3. Rapid deployment of
telecommunications and computers
– the Internet
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Examples of Outsourcing Types of Outsourcing
Call centers for Brazil in Angola Common processes outsourced are
Legal and finance service in the Purchasing Finance/accounting
Philippines Logistics Customer relations
IBM providing travel and R&D Sales/marketing
payroll for P&G Operations Training
ADP processing payroll Service management Legal processes
for thousands of firms Human resources
Blue Cross sending
patients to India Outsourcing implies a legally binding
contract
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Desirable Outsourcing Strategic Planning and
Destinations Core Competencies
Rank Country Score Rank Country Score Strategic planning defines the mission
1 India 6.9 46 Ukraine 4.9 and goals for the organization
2 China 6.6 47 France 4.9 From this the organization determines
3 Malaysia 6.1 48 Turkey 4.8 the role of each business activity
4 Thailand 6.0 49 Portugal 4.8
Core competencies are things the
5 Brazil 5.9 50 Ireland 4.2
organization does better than its
Table S11.1 competition
Non-core activities are good candidates
for outsourcing
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3. 10/16/2010
Strategic Planning and Theory of Comparative
Core Competencies Advantage
Sony, Post-sales
If an external outsourcing provider can
service
An Outsourcing
Company Financial
Logistics
perform activities more productively
functions
g
than the client firm, the outsourcing
Outsourcers
could
Parts
manufacture
Core
Competency Distribution provider should do the work
Best in the world at
provide electromechanical
miniaturization
Marketing design Accounting
Employee
benefit Maintenance
management
Real estate
management
Figure S11.1
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Outsourcing Trends and Outsourcing Trends and
Political Repercussions Political Repercussions
According to a survey of 53 major Outsourcing includes specific business
corporations, the most important functions (computer help desks) and
reasons for outsourcing are: entire departments (accounting,
marketing, finance, etc.)
marketing finance etc )
Cost savings 77% 35% of businesses said they would
Gaining outside expertise 70% continue or expand outsourcing
Improving services 61% 40% said they would continue
Focusing on core competencies 59% outsourcing but revise their arrangements
Gaining access to technology 56%
Some said they would reduce outsourcing
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Outsourcing Trends and Outsourcing Trends and
Political Repercussions Political Repercussions
Political backlash can occur when jobs
Outsourcing includes specific business
are outsourced to foreign countries
functions (computer help desks) and
entire departments (accounting, In the U.S. state and federal laws have been
marketing, finance, etc.)
marketing finance etc ) enacted to limit or prevent outsourcing
p g
activities
35% of businesses said they would Recent data suggests more foreigners
continue or expand outsourcing outsource jobs to the U.S. than
40% said they would continue American companies outsource offshore
outsourcing but revise their arrangements Backsourcing describes the process of
Some said they would reduce outsourcing returning work to the original firm when
outsourcing fails
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4. 10/16/2010
Risks of Outsourcing Risks of Outsourcing
Outsourcing can be risky Outsourcing Examples of
Process Possible Risks
As many as half of all outsourcing Identify non-core Can be incorrectly identified as a
agreements fail because of inappropriate competencies non-core competency
planning and analysis Identify non-core Just because the activity is not a
activities that should be
ti iti th t h ld b core competence f your firm
t for fi
Erratic power grids, government outsourced does not mean an outsource
difficulties, inexperienced managers, and provider is more competent and
efficient
unmotivated labor can create problems
Identify impact on May fail to understand the
Failure to achieve unrealistic goals existing facilities, change in resources and talents
sometimes creates the impression of capacity, and logistics needed internally
failure
Table S11.2
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Risks of Outsourcing Risks of Outsourcing
Outsourcing Examples of Outsourcing Examples of
Process Possible Risks Process Possible Risks
Establish goals and Goals can be set so high that Monitor and control May be unable to control product
draft outsourcing failure is certain current outsourcing development, schedules, and
agreement program quality
p
specifications
Evaluate and give May have non-responsive
Identify and select Can select the wrong outsource feedback to outsource provider (i.e., one that ignores
outsource provider provider provider feedback)
Negotiate goals and Can misinterpret measures and Evaluate international County’s currency may be
measures of goals, how they are measured, political and currency unstable, a country may be
outsourcing and what they mean risks politically unstable, or cultural
performance and language differences may
inhibit successful operations
Table S11.2 Table S11.2
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Risks of Outsourcing Risks of Outsourcing
Outsourcing Examples of
Process Possible Risks Outsourcing brings other issues:
Evaluate coordination May not understand the timing
needed for shipping and necessary to manage flows to Employment
distribution different facilities and markets
Changes in facilities and processes
needed to receive components in a
different state of assembly
Vastly expanded logistics issues
Table S11.2
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5. 10/16/2010
Evaluating Outsourcing Rating International
Risk Factors
Factor rating method Nine factors rated 0-3, 0 is no risk, 3 is high risk
Risk Factor England Mexico Spain Canada
Country risk Economic: Labor cost/ laws 1 0 2 1
problems Economic: Capital availability 0 2 1 0
Provider
P id Economic: Infrastructure
E i I f t t 0 2 2 0
Culture: Language 0 0 0 0
selection
Culture: Social norms 2 0 1 2
problems Migration: Uncontrolled 0 2 0 0
Politics: Ideology 2 0 1 2
Politics: Instability 0 1 2 2
Politics: Legalities 3 0 2 3
Total risk rating scores 8 7 11 10
Table S11.2
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Rating Outsourcing Providers Advantages of Outsourcing
Seven factors rated 1-5 and an importance weight
Outsourcing Providers
Cost savings
Factor Importance BIM S.P.C. Telco
(criterion) Weight (U.S.) (India) (Israel) Gaining outside experience
1. Can reduce operating costs .2 3 3 5
2. Can reduce capital investment .2 4 3 3 Improving operations and service
3. Skilled personnel .2 5 4 3
4. Can improve quality .1 4 5 2 Focusing on core competencies
5. Can gain access to .1 5 3 5
technology not in company Gaining outside technologies
6. Can create additional capacity .1 4 2 4
7. Aligns with policy/
philosophy/culture
.1 2 3 5 Other advantages
Total and Averages 1.0 3.9 3.3 3.8
Table S11.3
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Disadvantages of Outsourcing Audits and Metrics
Outsourcing agreements must specify
Increased transportation costs results and outcomes
Loss of control Evaluation necessary to ensure
satisfactory performance
Creating future competition
If the outsourced product or service is
Negative impact on employees strategically important, the relationship
Longer-term needs continuing communication,
understanding, trust and performance
impact
Services may require imaginative
metrics
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6. 10/16/2010
Ethical Issues in Ethical Issues in
Outsourcing Outsourcing
Ethics Principle Outsourcing Linkage Ethics Principle Outsourcing Linkage
Do no harm to indigenous Avoid outsourcing in a way Uphold basic human rights Don’t accept outsourcing that
cultures that violates religious violates basic human rights
holidays
Pursue long term involvement Don’t use outsourcing as a
long-term Don t
Do no harm to the ecological Don’t use outsourcing to short-term arrangement to
systems move pollution from one reduce costs; view it as a
country to another long-term partnership
Share knowledge Don’t think an outsourcing
Uphold universal labor Don’t use outsourcing to take
and technology agreement will prevent loss of
standards advantage of cheap child
technology, but use the
labor that leads to employee
inevitable sharing to build a
abuse
good relationship with
outsourcing firms
Table S11.5 Table S11.5
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