Dr. Ron Lembke
OUTSOURCING
Outsourcing - What is it?
Transfer activities to outside providers
Outside providers do activities
Resources: people, facilities, equipment
Decision-making responsibility
OEM = Original Equipment Manufacturer
name on the product, does not produce
Flextronics/Solectron, Foxconn makes it for
you
Strategic Sourcing
Has to be feasible to outsource
Assembly line balancing – probably not a
step in the middle
Figure out what to buy from whom
What do we want to accomplish?
More effective!
More efficient!
Continuous Process Improvement?
Outsourcing – Why do it?
Organizationally-driven reasons
Focus on what you do best
More flexible capacity
Employees: career paths
Improvement-driven reasons
Better quality & productivity, cycle time
Gain skills not otherwise available
Associate with superior providers
Financially-driven reasons
Reduce assets, improve ROA
Lower fixed costs
Cash from selling capital equip.
Make or Buy Decision
Reasons to Make
DIY: Lower cost
No capable
suppliers
Inadequate supply
Competitive Issues
Core competencies
Specialization
Reasons to Buy
Low purchase cost
Lack of capacity
Want to gain skill
Reduce inv. costs
Management focus
Patent issues
Other Factors
Degree of coordination with other
activities
Relationship-specific investments
Easy to copy technologies, or low IP
(intellectual properties) protection
Second-tier sub-suppliers
What to not Outsource
Core activities
Key to the business
Do not confer competitive advantage
Strategic activities
Key source of competitive advantage
X-box – Microsoft never considered making
Flextronics in Guadalajara
$5 / hr vs. $1 in Doumen, China
Outsourcing Example
In 1981, IBM ‘PC’.
Consumers care about
hardware
No one cares about the
software that lets them
talk to the processor.
Outsourced the OS to
whom?
Anybody heard
of “Microsoft?”
UCSD Pascal $450
CP/M
$175
MS-DOS
$60
IBM: ‘05 Lenovo $1.75b
MS: 2012 EBITDA $31b
Summary
Defining outsourcing
Benefits of outsourcing
When to do it or not do it
Lessons from IBM and Microsoft