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Supply Chain Management:

Outsourcing & Off-shoring

Claire MacEachenDirector of Academic Programmes

Dundee Business School

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Lecture content The Supply Network

To outsource supply?

Trends in outsourcing Why isoutsourcing so attractive?

Can the cost savings be madeinternally?

To off-shore supply?

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The Supply Network

putting ops in the context of all otherops with which it interacts

OutputProcess/

transformInput

Transforming (facilities, staff)Transformed (materials, information, customers)

Goods and/or services

The Operations management system

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The Supply network

Plastichomeware

manufacturer

First-tiersuppliers

Packaging

supplier

Plastic

stockist

First-tiercustomers

Wholesaler

Second-tiercustomers

Retailer

Retailer

Second-tiersuppliers

Ink

supplier

Cardboard

company

Chemicalcompany

Immediate supply network

Total supply network

Direct supply

Information flow

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The Supply network

OvergateShopping

centre

First-tiersuppliers

maintenance

Security

First-tiercustomers

Retailers

Second-tiercustomers

Retail

customers

Second-tiersuppliers

Equipsupplier

Cleaningmaterials

Recruitmentagency

Downstream

Upstream

Direct supply

Information flow

Cleaning

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Supply Chain Management

Michael Dell

suppliers are partners increating value for customers

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Outsourcing

$525 billion by 2010 (TPI Index Review)

3 broad areas:

Logistics, sourcing & distribution Business process outsourcing (BPO)

IT services

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Outsourcing: Global market for

IT-enabled services (2008)Market $142 billionCustomer Interaction Services 33

Finance & Accounting Services 15

Translation, Transcription &Localization 2

Engineering & Design 1.2

HR Services 5

Data Search, Integration & Management 44

Remote Education 18Networking Consultation & Management 15

Website Services 5

Market Research 3

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What is outsourcing?

Some people think outsourcing is a wonderof a free-market economy; others see in itnothing more than an immoral disregard

for loyal employees.http://www.eweek.com/article2/0,1895,1776947,00.asp

the hiring of an outside company to

perform a task that would otherwise beperformed internallygenerally with thegoal of lowering costs and/orstreamlining workflowIAOP

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The Body shop approach Outsourcing of short term problems

or demands

e.g. use of short term contractworkers - managed internally.

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The project management

approach a specific project or section of work

performed externally

e.g. support to current applications,the provision of disaster recovery & thesupplying of training

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Total outsourcing

vendor controls substantial portion ofwork

e.g. outsourcing of significantoperations (data centre)

Newest strategy = 'keys of the

kingdom' all h/ware & s/ware movesto external ownership & control.

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How?

Identify internal competitively performedcore activities ('core competencies')

Subcontract where no competitive

advantage

Sell the non-competitive part tooutsourcing vendor

Buy back services/products - based onconsumption & agreed service levels.

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Is outsourcing a new

phenomenon?

Yes and No!

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Keys to the Kingdom ownership, operation, management& control of functions by vendor

Baseline fees

Baseline guaranteed for duration ofcontract (normally 5 10 yrs)

Services above baseline extra

'Sweetened' with financial incentives Long term consequences remain

unclear

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Why is outsourcing attractive?

Environment of downsizing & costcutting

Some benefits hard to quantify e.g. IT Reports of savings of 10- 50%

Specific reasons for outsourcing e.g.inability to constrain costs, need to sell

assets to generate cash, proximity tosuppliers

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How can outsourcing vendors

make such huge savings? economies of scale bulk purchasing agreements

spreading specialist knowledge

Raw/component availability locally Local employment market

Analogy: electricity supplier -

why buy and maintain your owngenerator when you only needthe power?

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Can the cost savings be made

internally? economies of scale internally

Streamlining data processing

Investment in new technology Business process reengineering

Internal staff :

understanding of the business more loyal to the company

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Consequences of outsourcing

Outsourcing affect all:

senior management courted by vendors

users adjust to new staff & procedures.

Managers struggle to costs or be taken over

Staff re-employed by the outsourcing vendors

'Ground zero' after 5 - 10 yrs

Confidentiality

Hidden costs

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Offshoring

Offshoring = the locationof operations outside

the country of origin.

40% of outsourcing deals

have an offshoringcomponent

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Off-shore location selection

choice factors Language

Education

Transport systems Resources

Cheap labour force

Technological advancement/industrialisation

Captive offshoring - company owned off-shore ops

Insourcing - service provider comes to you!

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Off-shoring worries

Economic Policy Unit (2004) Offshoring [online] Available from:http://www.epi.org/content.cfm/issueguide_offshoring [accessed 1/11/05]

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Job losses?

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Top trends to watch in 2010The economic recovery will result in the

resumption of delayed outsourcing deals andincreased hiring but uncertainty remains and this

could drive M&AInternational Association of Outsourcing Professionals (IAOP)

Economic uncertainty leading to M&A Short-term contracts Shifting geographies Environment and social responsibilities More maturity in offshoring & outsourcing Competition for the knowledge economy

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Consequences of Off-shoring

http://www.mckinsey.com/mgi/rp/offshoring/

Listen to the video entitled Perspective: Offshoring: Is

It A Win-Win Game?

Read http://news.bbc.co.uk/1/hi/business/4225604.stm

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References

Gibson S (2005a) Outsourcing is Growing up [online]Accessed from:http://www.eweek.com/article2/0,1895,1776947,00.asp

[Accessed on 1/11/05]

Houseman S (2009) Measuring Offshore Outsourcing:problems for economic statistics [online] Accessed from:http://www.upjohninst.org/publications/newsletter/snh_109.pdf[accessed 17/08/10]

Plunkett Research (2010) Outsourcing and OffshoringReview[online] Available from:

http://www.plunkettresearch.com/Industries/OutsourcingOffshoring/OutsourcingOffshoringTrends/tabid/183/Default.aspx [accessed 17/08/10]