Outsourcing
Outsourcing refers to a
holistic approach in
determining how and
where to procure goods
and services
Reasons 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
(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 outof-control functions
Traditional vs. new supplier
partnerships
• 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 outsourcing
• 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 Framework
High
NOVELTY
(outsource/in-house)
Strategic
value of
product
/service
Low
PROPRIETARY
(in-house)
Technology
Quality
Service
Technology
Quality
COMMODITY
(outsourcing)
ULTILITY
(outsourcing)
Price
Cooperation
Service
Low
High
Criticality of the product/service
Insourcing – Vertical
Integration
• 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
Outsourcing
• 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 leadtimes/capacity
– “Hollowing out” the
corporation
Example: Supplier Evaluation Scheme
A supplier is assessed on three criteria:
quality, on-time delivery, and service. The
maximum rating for quality is 100 points
and 50 points each are assigned to on-time
delivery and service. This, there are 200
total possible points for rating of the
supplier.
If the total drops below say, 160, the
supplier must allow the customer to
perform an on-site evaluation audit. For
overseas suppliers, an audit may be
contracted out to a consultant at the
suppliers expense.
Four Key Attributes for
Evaluating A Supplier
• Technical ability
• Manufacturing facilities
• Financial strength
• Managerial competence
The Power matrix of
Supplier-Buyer Relationship
High
Buyer Dominance
Inter-dependence
(defensive position)
Relative utility
and scarcity of
buyer’s
resources for
suppliers
Independence
Supplier Dominance
(adverse selection)
(moral hazard)
Low
Low
High
Relative utility and scarcity of supplier resources for buyers
Source: Andrew Cox, 2000