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S11S11 Outsourcing as a Supply Chain Strategy

Outsourcing as a Supply Chain Strategy

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PowerPoint presentation to accompany PowerPoint presentation to accompany Heizer and Render Heizer and Render Operations Management, 10e Operations Management, 10e Principles of Operations Management, 8ePrinciples of Operations Management, 8e

PowerPoint slides by Jeff Heyl

OutlineOutlineWhat is Outsourcing?Strategic Planning and Core Competencies

The Theory of Comparative

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The Theory of Comparative Advantage

Risks in OutsourcingEvaluating Outsourcing Risk with Factor Rating

Outline Outline –– ContinuedContinued

Advantages and Disadvantages of Outsourcing

Advantages of Outsourcing

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Disadvantages of OutsourcingAudits and Metrics to Evaluate PerformanceEthical Issues in Outsourcing

Learning ObjectivesLearning ObjectivesWhen you complete this supplement When you complete this supplement you should be able to:you should be able to:

1. Explain how core competencies relate to outsourcing

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g2. Describe the risks of outsourcing3. Use factor rating to evaluate both

country and provider outsourcers4. List the advantages and

disadvantages of outsourcing

SupplySupply--Chain ManagementChain Management

The objective is to build a chain of The objective is to build a chain of suppliers that focuses on suppliers that focuses on

maximizing value to the ultimate maximizing value to the ultimate

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ggcustomercustomer

OutsourcingOutsourcingOutsourcing can replace entire purchasing, information systems, marketing, finance, and operations department

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Applicable to firms throughout the worldMaking the right decision may be the difference between success and failure

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What is Outsourcing?What is Outsourcing?Procuring from external suppliers service or products that are normally part of an organizationOffshoring is moving processes to a

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foreign country but retaining controlExtension of the long-standing practice of subcontracting

What is Outsourcing?What is Outsourcing?Outsourcing has become a major strategy as firms move toward specialization1 Increasing expertise

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1. Increasing expertise2. Reduced cost of reliable

transportation3. Rapid deployment of

telecommunications and computers – the Internet

Examples of OutsourcingExamples of Outsourcing

Call centers for Brazil in AngolaLegal and finance service in the PhilippinesIBM providing travel and

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IBM providing travel and payroll for P&GADP processing payroll for thousands of firmsBlue Cross sending patients to India

Types of OutsourcingTypes of OutsourcingCommon processes outsourced are

PurchasingLogisticsR&D

Finance/accountingCustomer relationsSales/marketing

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R&DOperationsService managementHuman resources

Sales/marketingTrainingLegal processes

Outsourcing implies a legally binding contract

Desirable Outsourcing Desirable Outsourcing DestinationsDestinations

Rank Country Score Rank Country Score1 India 6.9 46 Ukraine 4.92 China 6.6 47 France 4.9

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3 Malaysia 6.1 48 Turkey 4.84 Thailand 6.0 49 Portugal 4.85 Brazil 5.9 50 Ireland 4.2

Table S11.1

Strategic Planning and Strategic Planning and Core CompetenciesCore Competencies

Strategic planning defines the mission and goals for the organizationFrom this the organization determines

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the role of each business activityCore competencies are things the organization does better than its competitionNon-core activities are good candidates for outsourcing

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Strategic Planning and Strategic Planning and Core CompetenciesCore Competencies

Sony, An Outsourcing CompanyOutsourcers

Post-sales service

LogisticsFinancial functions

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Core Competency

Best in the world at electromechanical

miniaturization design

Figure S11.1

Outsourcers could provide

Distribution

Accounting

Maintenance

Real estate management

Marketing

Parts manufacture

Employee benefit management

Theory of Comparative Theory of Comparative AdvantageAdvantage

If an external outsourcing provider can perform activities more productively than the client firm, the outsourcing

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gprovider should do the work

Outsourcing Trends and Outsourcing Trends and Political RepercussionsPolitical Repercussions

According to a survey of 53 major According to a survey of 53 major corporations, the most important corporations, the most important reasons for outsourcing are:reasons for outsourcing are:

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Cost savings 77%Gaining outside expertise 70%Improving services 61%Focusing on core competencies 59%Gaining access to technology 56%

Outsourcing Trends and Outsourcing Trends and Political RepercussionsPolitical Repercussions

Outsourcing includes specific business functions (computer help desks) and entire departments (accounting, marketing finance etc )

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marketing, finance, etc.)35% of businesses said they would continue or expand outsourcing40% said they would continue outsourcing but revise their arrangementsSome said they would reduce outsourcing

Outsourcing includes specific business functions (computer help desks) and entire departments (accounting, marketing finance etc )

Outsourcing Trends and Outsourcing Trends and Political RepercussionsPolitical Repercussions

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marketing, finance, etc.)35% of businesses said they would continue or expand outsourcing40% said they would continue outsourcing but revise their arrangementsSome said they would reduce outsourcing

Outsourcing Trends and Outsourcing Trends and Political RepercussionsPolitical 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

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p gactivities

Recent data suggests more foreigners outsource jobs to the U.S. than American companies outsource offshoreBacksourcing describes the process of returning work to the original firm when outsourcing fails

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Risks of OutsourcingRisks of OutsourcingOutsourcing can be riskyAs many as half of all outsourcing agreements fail because of inappropriate planning and analysis

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Erratic power grids, government difficulties, inexperienced managers, and unmotivated labor can create problemsFailure to achieve unrealistic goals sometimes creates the impression of failure

Risks of OutsourcingRisks of OutsourcingOutsourcingProcess

Examples of Possible Risks

Identify non-core competencies

Can be incorrectly identified as a non-core competency

Identify non-core ti iti th t h ld b

Just because the activity is not a t f fi

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activities that should be outsourced

core competence for your firm does not mean an outsource provider is more competent and efficient

Identify impact on existing facilities, capacity, and logistics

May fail to understand the change in resources and talents needed internally

Risks of OutsourcingRisks of OutsourcingOutsourcingProcess

Examples ofPossible Risks

Establish goals and draft outsourcing agreement specifications

Goals can be set so high that failure is certain

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pIdentify and select outsource provider

Can select the wrong outsource provider

Negotiate goals and measures of outsourcing performance

Can misinterpret measures and goals, how they are measured, and what they mean

Risks of OutsourcingRisks of OutsourcingOutsourcingProcess

Examples ofPossible Risks

Monitor and control current outsourcing program

May be unable to control product development, schedules, and quality

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Evaluate and give feedback to outsource provider

May have non-responsive provider (i.e., one that ignores feedback)

Evaluate international political and currency risks

County’s currency may be unstable, a country may be politically unstable, or cultural and language differences may inhibit successful operations

Risks of OutsourcingRisks of OutsourcingOutsourcingProcess

Examples ofPossible Risks

Evaluate coordination needed for shipping and distribution

May not understand the timing necessary to manage flows to different facilities and markets

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Risks of OutsourcingRisks of Outsourcing

EmploymentChanges in facilities and processes

Outsourcing brings other issues:

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Changes in facilities and processes needed to receive components in a different state of assemblyVastly expanded logistics issues

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Evaluating OutsourcingEvaluating Outsourcing

Factor rating methodCountry risk problemsP id

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Provider selection problems

Rating International Rating International Risk FactorsRisk Factors

Nine factors rated 0-3, 0 is no risk, 3 is high riskRisk Factor England Mexico Spain CanadaEconomic: Labor cost/ laws 1 0 2 1Economic: Capital availability 0 2 1 0E i I f t t 0 2 2 0

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Economic: Infrastructure 0 2 2 0Culture: Language 0 0 0 0Culture: Social norms 2 0 1 2Migration: Uncontrolled 0 2 0 0Politics: Ideology 2 0 1 2Politics: Instability 0 1 2 2Politics: Legalities 3 0 2 3Total risk rating scores 8 7 11 10

Table S11.2

Rating Outsourcing ProvidersRating Outsourcing Providers

Seven factors rated 1-5 and an importance weightOutsourcing Providers

Factor(criterion)

Importance Weight

BIM (U.S.)

S.P.C. (India)

Telco (Israel)

1. Can reduce operating costs .2 3 3 5

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Table S11.3

2. Can reduce capital investment .2 4 3 33. Skilled personnel .2 5 4 34. Can improve quality .1 4 5 25. Can gain access to

technology not in company.1 5 3 5

6. Can create additional capacity .1 4 2 47. Aligns with policy/

philosophy/culture.1 2 3 5

Total and Averages 1.0 3.9 3.3 3.8

Advantages of OutsourcingAdvantages of Outsourcing

Cost savingsGaining outside experienceImproving operations and service

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Improving operations and serviceFocusing on core competenciesGaining outside technologiesOther advantages

Disadvantages of OutsourcingDisadvantages of Outsourcing

Increased transportation costsLoss of controlCreating future competition

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Creating future competitionNegative impact on employeesLonger-term impact

Audits and MetricsAudits and MetricsOutsourcing agreements must specify results and outcomesEvaluation necessary to ensure satisfactory performance

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If the outsourced product or service is strategically important, the relationship needs continuing communication, understanding, trust and performanceServices may require imaginative metrics

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Ethical Issues in Ethical Issues in OutsourcingOutsourcing

Do no harm to indigenous cultures

Avoid outsourcing in a way that violates religious holidays

Ethics Principle Outsourcing Linkage

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Do no harm to the ecological systems

Don’t use outsourcing to move pollution from one country to another

Uphold universal labor standards

Don’t use outsourcing to take advantage of cheap child labor that leads to employee abuse

Table S11.5

Ethical Issues in Ethical Issues in OutsourcingOutsourcing

Uphold basic human rights Don’t accept outsourcing that violates basic human rights

Pursue long-term involvement Don’t use outsourcing as a

Ethics Principle Outsourcing Linkage

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Pursue long term involvement Don t use outsourcing as a short-term arrangement to reduce costs; view it as a long-term partnership

Share knowledge and technology

Don’t think an outsourcing agreement will prevent loss of technology, but use the inevitable sharing to build a good relationship with outsourcing firms

Table S11.5

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