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Heizer supp 11
This document outlines a presentation on outsourcing as a supply chain strategy. It includes an introduction to outsourcing, types of activities that can be outsourced, and strategies for evaluating outsourcing options. Key methodologies discussed include using factor rating to evaluate country and provider risks, and using break-even analysis to determine cost-effectiveness of outsourcing. Advantages, disadvantages, and ethical issues related to outsourcing are also covered.
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Heizer supp 11
- 1. Operations Management Supplement 11 – Outsourcing as a Supply Chain Strategy PowerPoint presentation to accompany Heizer/Render Principles of Operations Management, 7e Operations Management, 9e © 2008 Prentice Hall, Inc. S11 – 1
- 2. Outline What is Outsourcing? Types of Outsourcing Strategic Planning and Core Competencies The Theory of Comparative Advantage Outsourcing Trends and Political Repercussions © 2008 Prentice Hall, Inc. S11 – 2
- 3. Outline – Continued Risks in Outsourcing Methodologies for Outsourcing Evaluating Multiple Criteria with Factor Rating Break-even Analysis © 2008 Prentice Hall, Inc. S11 – 3
- 4. Outline – Continued Advantages and Disadvantages of Outsourcing Advantages of Outsourcing Disadvantages of Outsourcing Audits and Metrics to Evaluate Outsourcing Performance Ethical Issues in Outsourcing © 2008 Prentice Hall, Inc. S11 – 4
- 5. Learning Objectives When you complete this supplement you should be able to: 1. Explain how core competencies relate to outsourcing 2. Describe the risks of outsourcing 3. Use factor rating to evaluate both country and provider outsourcers © 2008 Prentice Hall, Inc. S11 – 5
- 6. Learning Objectives When you complete this supplement you should be able to: 4. Use break-even analysis to determine if outsourcing is cost- effective 5. List the advantages and disadvantages of outsourcing © 2008 Prentice Hall, Inc. S11 – 6
- 7. Outsourcing Outsourcing can replace entire purchasing, information systems, marketing, finance, and operations department Applicable to firms throughout the world Making the right decision may be the difference between success and failure © 2008 Prentice Hall, Inc. S11 – 7
- 8. What is Outsourcing? Procuring from external suppliers service or products the firms used to provide for itself Offshoring is moving processes to a foreign country but retaining control Firms that outsource are called clients, the actual work is done by the outsourcing provider Extension of the long-standing practice of subcontracting © 2008 Prentice Hall, Inc. S11 – 8
- 9. What is Outsourcing? Outsourcing has become a major strategy as firms move toward specialization Increasing expertise Reduced cost of reliable transportation Rapid deployment of telecommunications and computers – the Internet © 2008 Prentice Hall, Inc. S11 – 9
- 10. Examples of Outsourcing Call centers in French Angola Legal and finance service in the Philippines EDS handling information technology for Nextel IBM providing travel and payroll for P&G Solectron producing IBM computers © 2008 Prentice Hall, Inc. S11 – 10
- 11. Types of Outsourcing Common processes outsourced are Purchasing Finance/accounting Logistics Customer relations R&D Sales/marketing Operations Training Service management Legal processes Human resources Outsourcing implies a legally binding contract © 2008 Prentice Hall, Inc. S11 – 11
- 12. Strategic Planning and Core Competencies Strategic planning defines the mission and goals for the organization From this the organization determines the role of each business activity Core competencies are things the organization does better than its competition Non-core activities are good candidates for outsourcing © 2008 Prentice Hall, Inc. S11 – 12
- 13. Strategic Planning and Core Competencies Sony, An Outsourcing Post-sales service Company Financial Logistics functions Outsourcers could Parts manufacture Core Competency Distribution provide Best in the world at electromechanical miniaturization Marketing design Accounting Employee benefit Maintenance management Real estate management Figure S11.1 © 2008 Prentice Hall, Inc. S11 – 13
- 14. Theory of Comparative Advantage If an external outsourcing provider can perform activities more productively than the client firm, the outsourcing provider should do the work ga rdless of This a pplies re n hic al locatio the geograp © 2008 Prentice Hall, Inc. S11 – 14
- 15. Outsourcing Trends and Political Repercussions According to a survey of 53 major corporations, the most important reasons for outsourcing are: Cost savings 77% Gaining outside expertise 70% Improving services 61% Focusing on core competencies 59% Gaining access to technology 56% © 2008 Prentice Hall, Inc. S11 – 15
- 16. Outsourcing Trends and Political Repercussions Outsourcing includes specific business functions (computer help desks) and entire departments (accounting, marketing, finance, etc.) 35% of businesses said they would continue or expand outsourcing 40% said they would continue outsourcing but revise their arrangements Some said they would reduce outsourcing © 2008 Prentice Hall, Inc. S11 – 16
- 17. Outsourcing Trends and Political Repercussions Outsourcing includes specific business functions (computer help desks) and entire departmentsing experiences are (accounting, Not all outsourc marketing, tory c finance, etc.) satisfa 35% of businesses saidlearn about is still a lot to they wouldrove There or expand outsourcing p continue urcing as a method to im outso 40% roductivity p said they would continue outsourcing but revise their arrangements Some said they would reduce outsourcing © 2008 Prentice Hall, Inc. S11 – 17
- 18. Outsourcing Trends and Political Repercussions Political backlash can occur when jobs are outsourced to foreign countries In the U.S. state and federal laws have been enacted to limit or prevent outsourcing activities Recent data suggests more foreigners outsource jobs to the U.S. than American companies outsource offshore Backsourcing describes the process of returning work to the original firm when outsourcing fails © 2008 Prentice Hall, Inc. S11 – 18
- 19. Risks in Outsourcing Outsourcing can be risky As many as half of all outsourcing agreements fail because of inappropriate planning and analysis Erratic power grids, government difficulties, inexperienced managers, and unmotivated labor can create problems Failure to achieve unrealistic goals sometimes create the impression of failure © 2008 Prentice Hall, Inc. S11 – 19
- 20. Risks in Outsourcing Outsourcing Examples of Process Possible Risks Identify non-core Can be incorrectly identified as a competencies non-core competency Identify non-core Just because the activity is not a activities that should be core competence for your firm outsourced does not mean an outsource provider is more competent and efficient Identify impact on May fail to understand the existing facilities, change in resources and talents capacity, and logistics needed internally Table S11.1 © 2008 Prentice Hall, Inc. S11 – 20
- 21. Risks in Outsourcing Outsourcing Examples of Process Possible Risks Establish goals and Goals can be set so high that draft outsourcing failure is certain agreement specifications Identify and select Can select the wrong outsource outsource provider provider Negotiate goals and Can misinterpret measures and measures of goals, how they are measured, outsourcing and what they mean performance Table S11.1 © 2008 Prentice Hall, Inc. S11 – 21
- 22. Risks in Outsourcing Outsourcing Examples of Process Possible Risks Monitor and control May be unable to control product current outsourcing development, schedules, and program quality Evaluate and give May have non-responsive feedback to outsource provider (i.e., one that ignores provider feedback) Evaluate international County’s currency may be political and currency unstable, a country may be risks politically unstable, or cultural and language differences may inhibit successful operations Table S11.1 © 2008 Prentice Hall, Inc. S11 – 22
- 23. Risks in Outsourcing Outsourcing Examples of Process Possible Risks Evaluate coordination May not understand the timing needed for shipping and necessary to manage flows to distribution different facilities and markets Table S11.1 © 2008 Prentice Hall, Inc. S11 – 23
- 24. Risks in Outsourcing Outsourcing brings other issues: Employment Changes in facilities and processes needed to receive components in a different state of assembly Vastly expanded logistics issues © 2008 Prentice Hall, Inc. S11 – 24
- 25. Methodologies for Outsourcing Evaluating Multiple Criteria with Factor Rating Break-even Analysis © 2008 Prentice Hall, Inc. S11 – 25
- 26. Rating International Risk Factors Nine factors rated 0-3, 0 is no risk, 3 is high risk Risk Factor England Mexico Spain Canada Economic: Labor cost/ laws 1 0 2 1 Economic: Capital availability 0 2 1 0 Economic: Infrastructure 0 2 2 0 Culture: Language 0 0 0 0 Culture: Social norms 2 0 1 2 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 © 2008 Prentice Hall, Inc. S11 – 26
- 27. Rating Outsourcing Providers Seven factors rated 1-5 and an importance weight Outsourcing Providers Factor Importance BIM S.P.C. Telco (criterion) Weight (U.S.) (India) (Israel) 1. Can reduce operating costs .2 3 3 5 2. Can reduce capital investment .2 4 3 3 3. Skilled personnel .2 5 4 3 4. Can improve quality .1 4 5 2 5. Can gain access to .1 5 3 5 technology not in company 6. Can create additional capacity .1 4 2 4 7. Aligns with policy/ .1 2 3 5 philosophy/culture Total and Averages 1.0 3.9 3.3 3.8 Table S11.3 © 2008 Prentice Hall, Inc. S11 – 27
- 28. Break-Even Analysis First define total cost in-house TCin = Fin + (Vin x Xin) where TCin is the total cost of an item produced in-house Fin is the total in-house fixed cost Vin is the variable cost/unit produced in-house Xin is the total number of units produced in-house © 2008 Prentice Hall, Inc. S11 – 28
- 29. Break-Even Analysis The total cost under outsourcing is TCout = Fout + (Vout x Xout) At break-even Xin = Xout and TCin = TCout Fin + (Vin x X) = Fout + (Vout x X) Solving for X Fin – Fout X= Vout – Vin © 2008 Prentice Hall, Inc. S11 – 29
- 30. Outsourcing Break-Even Example Fixed cost at Toledo plant = $2 million Variable cost/toy = $3 Fixed cost at Astro plant = $1 million Variable cost/toy = $4 Annual demand = 1.1 million toys Fin – Fout 2,000,000 – 1,000,000 X= = Vout – Vin 4–3 = 1,000,000 units Since demand > break-even point, produce in Toledo © 2008 Prentice Hall, Inc. S11 – 30
- 31. Advantages of Outsourcing Cost savings Gaining outside experience Improving operations and service Focusing on core competencies Gaining outside technologies Other advantages © 2008 Prentice Hall, Inc. S11 – 31
- 32. Disadvantages of Outsourcing Increased transportation costs Loss of control Creating future competition Negative impact on employees Longer-term impact © 2008 Prentice Hall, Inc. S11 – 32
- 33. Audits and Metrics Outsourcing agreements must specify results and outcomes Evaluation necessary to ensure satisfactory performance If the outsourced product or service is strategically important, the relationship needs continuing communication, understanding, trust and performance Services may require imaginative metrics © 2008 Prentice Hall, Inc. S11 – 33
- 34. Ethical Issues in Outsourcing Ethics Principle Outsourcing Linkage Seek to do no harm to Don’t use outsourcing in a indigenous cultures way that violates religious holidays Seek to do no harm to the Don’t use outsourcing to ecological systems of the move pollution from one world country to another Seek to uphold universal Don’t use outsourcing to take labor standards advantage of cheap child labor that leads to child abuse Table S11.4 © 2008 Prentice Hall, Inc. S11 – 34
- 35. Ethical Issues in Outsourcing Ethics Principle Outsourcing Linkage Seek to uphold basic human Don’t accept outsourcing that rights violates basic human rights Seek to pursue long-term Don’t use outsourcing as a involvement in foreign short-term arrangement to countries reduce costs; view it as a long-term partnership Seek to share knowledge Don’t think an outsourcing and technology with foreign agreement will prevent loss of countries technology, but use the inevitable sharing to build a good relationship Table S11.4 © 2008 Prentice Hall, Inc. S11 – 35
Editor's Notes
- #8 Points which might be emphasized include: - Statistical process control measures the performance of a process, it does not help to identify a particular specimen produced as being “good” or “bad,” in or out of tolerance. - Statistical process control requires the collection and analysis of data - therefore it is not helpful when total production consists of a small number of units - While statistical process control can not help identify a “good” or “bad” unit, it can enable one to decide whether or not to accept an entire production lot. If a sample of a production lot contains more than a specified number of defective items, statistical process control can give us a basis for rejecting the entire lot. The issue of rejecting a lot which was actually good can be raised here, but is probably better left to later.
- #9 Points which might be emphasized include: - Statistical process control measures the performance of a process, it does not help to identify a particular specimen produced as being “good” or “bad,” in or out of tolerance. - Statistical process control requires the collection and analysis of data - therefore it is not helpful when total production consists of a small number of units - While statistical process control can not help identify a “good” or “bad” unit, it can enable one to decide whether or not to accept an entire production lot. If a sample of a production lot contains more than a specified number of defective items, statistical process control can give us a basis for rejecting the entire lot. The issue of rejecting a lot which was actually good can be raised here, but is probably better left to later.
- #10 Points which might be emphasized include: - Statistical process control measures the performance of a process, it does not help to identify a particular specimen produced as being “good” or “bad,” in or out of tolerance. - Statistical process control requires the collection and analysis of data - therefore it is not helpful when total production consists of a small number of units - While statistical process control can not help identify a “good” or “bad” unit, it can enable one to decide whether or not to accept an entire production lot. If a sample of a production lot contains more than a specified number of defective items, statistical process control can give us a basis for rejecting the entire lot. The issue of rejecting a lot which was actually good can be raised here, but is probably better left to later.
- #35 Students should understand both the concepts of natural and assignable variation, and the nature of the efforts required to deal with them.
- #36 Students should understand both the concepts of natural and assignable variation, and the nature of the efforts required to deal with them.