Outsourcing

CONSTRUCTION SUPPLY CHAIN MANAGEMENT (MGT60803/QSB 2433)

Objectives Today

• Definition• Decision making• Consideration in make-or-buy decision• Drivers of outsourcing• Type of outsourcing• Benefits of outsourcing• Problems of outsourcing• Implementing outsourcing

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Definition

• “Outsourcing is not simply another word of buying. It is the process of taking a whole section or function of a company and giving the responsibility for the relevant activities to an outside contractor.”

• This will lead to a long-term and mutually dependent relationships.

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Definition

• In construction industry, engaging sub-contractor is an outsource activity.

• Subcontracting is generally outsource on project based term.

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Project Organization Chart

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Decision Making

• Outsourcing is concerned with make-or-buy decisions.

• There are different levels of make-or-buy decision (Probert, 1995). The general levels are:-(a) Strategic make-or-buy decisions(b) Tactical make-or- buy decisions

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Decision Making

• Strategic make-or-buy decisions determine the shape and capability of the organization’s manufacturing operation by influencing:-- What products to make.- What investment to make in machines and labor to make the products.

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Decision Making

- ability to develop new products and processes as the knowledge and skills gained by manufacturing in-house may be critical for future applications.- the selection of suppliers / sub-con as they may need to be involved in design and production processes.

**New product – e.g. Green Building

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Decision Making

• Tactical make-or-buy decisions deal with the issue of a temporary imbalance of manufacturing of capacity:-

- Changes in demand may make it impossible to make everything in-house.

- A fall in demand may cause the enterprise to bring in-house work that was

previously bought-out.

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Decision Making

• In such situations, managers require criteria for choosing between the available options.

• Such criteria may be quantitative, qualitative or both.

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Considerations in Make-or-buy Decisions

• Quantitative factors:-- Chance to use up idle capacity and resources- Potential lead time reduction- Greater purchasing power within larger orders of a particular material- Large overhead recovery base- Transfer risks- Costs of work is known in advance

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Considerations in Make-or-buy Decisions

• Quantitative factors:-- Quantities required too small for economic production- Avoidance of costs of specialist machinery or labor- Reduction in inventory

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Considerations in Make-or-buy Decisions

• Qualitative factors:-- Ability to manage resources- Commercial and contractual advantages- Worries are eliminated regarding such matters as the stability and continuing viability of suppliers - Maintaining secrecy/privacy

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Considerations in Make-or-buy Decisions

• Qualitative factors:-- Ability to control quality when purchased from outside- Availability of vendor’s specialist expertise, machine and / or patents

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Drivers of Outsourcing

• There are FIVE main drivers for considering outsourcing:-(a) Quality(b) Cost of outsourcing(c) Finance(d) Core business(e) Cooperation

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Drivers of Outsourcing

(a) Quality- Actual capacity is temporary insufficient to

comply with demand.- The quality motive can be subdivided into

three aspects:- increased quality demands, shortage of qualified personnel, outsourcing as a transition period.

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Drivers of Outsourcing

(b) Cost of Outsourcing-Outsourcing is a possible solution to decrease costs and is compatible with a cost leadership strategy.-By controlling and decreasing costs, a company can increase its competitive position.

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Drivers of Outsourcing

(c) Finance-A company has a limited investment budget.-The funds must be used for investments in core business activities (long-term decisions).

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Drivers of Outsourcing

(d) Core business-A core business is a primary activity that enables an organization to generate revenues.-To concentrate on core business activities is a strategic decision.

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(e) Cooperation-Cooperation between companies can lead to conflict.-In order to avoid such conflict, those activities that are produced by both organizations should be subject to total outsourcing.

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Drivers of Outsourcing

Type of Outsourcing

• Outsourcing options can be categorized as:-(a)Body Shop Outsourcing- Is a situation where management uses

outsourcing as a means of meeting short-term requirements, such as a shortage of in-house skills to meet a temporary demand.

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Type of Outsourcing

(b) Project Management Outsourcing-Is employed for all or part of a particular project, such as developing a new IT project, training in new skills (New system, new machine).(c) Total outsourcing- Is where the outsourcing supplier is given full responsibility for a selected area.

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Subcontractor Selection Process

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Benefits of Outsourcing

• Frees management time• Reduced staff costs• Increased flexibility• Cost certainty• Reduction in staff management problems• Improved consistency of service• Reduced capital requirement

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Benefits of Outsourcing

• Reduced risk (transfer risk)• Gain access to world class capabilities

(expertise/specialization)• Improve organization focus (core business)

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Possible Problems of Outsourcing

• High staff turnover• Poor project management skills• Lack of commitment to the client or industry• Shallow expertise• Insufficient documentation• Lack of control• Overdependence on suppliers

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Possible Problems of Outsourcing

• Over-promising at the negotiation stage• Lack of flexibility (control by sub-contractor)• Divergent/different interests of the customer

and provider• Cultural mismatches between customer and

provider organizations

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Implementing Outsourcing

1. Consider the alternatives.2. Set up working party to consider

- What to outsource- Why (strategic reasons)- Cost comparisons of internal and external provision- Anticipated benefits and problems- Possible effects on staff, capital, finance and competitiveness

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Implementing Outsourcing

3. Prepare, as appropriate, a technical performance, specification and Service Level Agreement (SLA).4. Consider possible supplier5. Invite tender6. Evaluate tender7. Post-tender negotiation8. Award contract9. Set up management control and monitoring processes

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Discussions

• How can a construction company reduced the costs by using outsourcing?

• How to minimize the problems of outsourcing in construction industry?

• List out the tasks can be outsourcing to outsider in order to minimize costs and increase efficiency in construction project.

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