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OutlineOutline
What is Outsourcing?What is Outsourcing?
Types of OutsourcingTypes of Outsourcing
Strategic Planning and CoreStrategic Planning and CoreCompetenciesCompetencies
The Theory of ComparativeThe Theory of Comparative
AdvantageAdvantage Outsourcing Trends and PoliticalOutsourcing Trends and Political
RepercussionsRepercussions
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IntroductionIntroduction
SourcingSourcing --all of firms activities used toall of firms activities used tomanage external resources.manage external resources.
Strategic sourcingStrategic sourcing--managing the firmsmanaging the firmsexternal resources to support firms long termexternal resources to support firms long term
goals.goals.
Drivers of Strategic SourcingDrivers of Strategic Sourcing Reduce costs & delivery cycle timesReduce costs & delivery cycle times
Improve quality & longImprove quality & long--term financial performanceterm financial performance
Increase number of global competitorsIncrease number of global competitors
Increase customer focusIncrease customer focus
Reduce high costs of globalization & materials,Reduce high costs of globalization & materials,
Deliver more innovative products more frequentlyDeliver more innovative products more frequently
& cheaply than competitors& cheaply than competitors
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Outsourcing ProgramsOutsourcing Programs
(Cont.)(Cont.)InsourcingInsourcing ((backsourcingbacksourcing)) --reverting to inreverting to in--house production whenhouse production whenquality, delivery, and services do not meetquality, delivery, and services do not meetexpectationsexpectations
CoCo--sourcing (selective sourcing)sourcing (selective sourcing)--the sharing of a process or functionthe sharing of a process or functionbetween internal staff and an externalbetween internal staff and an external
provider & provides flexibility to decideprovider & provides flexibility to decidewhat areas to outsource, when, and forwhat areas to outsource, when, and forhow long.how long.
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Developing SuccessfulDeveloping Successful
Sourcing StrategiesSourcing StrategiesSuccessful Sourcing StrategiesSuccessful Sourcing Strategies areare
different for functional products & fordifferent for functional products & for
innovative products.innovative products.
Functional ProductsFunctional Products --MRO items & otherMRO items & othercommonly low profit margins with relativelycommonly low profit margins with relativelystable demands & high levels of competition.stable demands & high levels of competition.
Innovative ProductsInnovative Products --characterized by shortcharacterized by shortproduct life cycles, volatile demand, high profitproduct life cycles, volatile demand, high profit
margins, & relatively less competition.margins, & relatively less competition.
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Developing SuccessfulDeveloping SuccessfulSourcing Strategies (Cont.)Sourcing Strategies (Cont.)
Framework for supply chainFramework for supply chainstrategy development (Fig. 4.1):strategy development (Fig. 4.1):
Step 1Step 1 -- The firms suppliers are classified asThe firms suppliers are classified asbelonging either to the innovative orbelonging either to the innovative or
functional category.functional category.Step 2Step 2 -- The goals & strategies of theThe goals & strategies of theinbound portion of the supply chain areinbound portion of the supply chain aredeveloped.developed.
Step3Step
3-- Supply chain capabilities areSupply chain capabilities areevaluated & compared to requiredevaluated & compared to required
performance.performance.
Step 4Step 4 -- Set goals for improving capabilities.Set goals for improving capabilities.
Step 5Step 5 --Implement work plan.Implement work plan.
Ste 6 Ste 6 - - Monitor ro ress & ad ust the workMonitor ro ress & ad ust the work
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OutlineOutline ContinuedContinued
Risks in OutsourcingRisks in Outsourcing
Methodologies for OutsourcingMethodologies for Outsourcing Evaluating Multiple Criteria withEvaluating Multiple Criteria with
Factor RatingFactor Rating
BreakBreak--even Analysiseven Analysis
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OutlineOutline ContinuedContinued
Advantages and DisadvantagesAdvantages and Disadvantagesof Outsourcingof Outsourcing
Advantages of OutsourcingAdvantages of Outsourcing
Disadvantages of OutsourcingDisadvantages of Outsourcing
Audits and Metrics to EvaluateAudits and Metrics to Evaluate
Outsourcing PerformanceOutsourcing Performance
EthicalIssues in OutsourcingEthicalIssues in Outsourcing
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OutsourcingOutsourcing
Outsourcing can replace entireOutsourcing can replace entirepurchasing, information systems,purchasing, information systems,
marketing, finance, and operationsmarketing, finance, and operationsdepartmentdepartment
Applicable to firms throughout theApplicable to firms throughout theworldworld
Making the right decision may beMaking the right decision may bethe difference between successthe difference between successand failureand failure
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What is Outsourcing?What is Outsourcing?
Procuring from external suppliersProcuring from external suppliersservice or products the firms used toservice or products the firms used to
provide for itselfprovide for itself
Offshoring is moving processes to aOffshoring is moving processes to aforeign country but retaining controlforeign country but retaining control
Firms that outsource are called clients,Firms that outsource are called clients,
the actual work is done by thethe actual work is done by theoutsourcing provideroutsourcing provider
Extension of the longExtension of the long--standing practicestanding practiceof subcontractingof subcontracting
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What is Outsourcing?What is Outsourcing?
Outsourcing has become a majorOutsourcing has become a majorstrategy as firms move towardstrategy as firms move towardspecializationspecialization
Increasing expertiseIncreasing expertise
Reduced cost of reliable transportationReduced cost of reliable transportation
Rapid deployment ofRapid deployment oftelecommunicationstelecommunicationsand computersand computers
the Internetthe Internet
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Examples of OutsourcingExamples of Outsourcing
Call centers in French AngolaCall centers in French Angola
Legal and finance service in theLegal and finance service in the
PhilippinesPhilippines EDS handling informationEDS handling information
technology for Nexteltechnology for Nextel
IBM providing travel andIBM providing travel and
payroll for P&Gpayroll for P&G
Solectron producingSolectron producingIBM computersIBM computers
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Types of OutsourcingTypes of Outsourcing
Common processes outsourced areCommon processes outsourced are
PurchasingPurchasing
LogisticsLogistics
R&DR&D
OperationsOperations
Service managementService management
Human resourcesHuman resources
Finance/accountingFinance/accounting
Customer relationsCustomer relations
Sales/marketingSales/marketing
TrainingTraining
Legal processesLegal processes
Outsourcing implies a legally bindingOutsourcing implies a legally bindingcontractcontract
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Strategic Planning andStrategic Planning and
Core CompetenciesCore Competencies Strategic planning defines the missionStrategic planning defines the mission
and goals for the organizationand goals for the organization
From this the organization determinesFrom this the organization determinesthe role of each business activitythe role of each business activity
Core competencies are things theCore competencies are things theorganization does better than itsorganization does better than itscompetitioncompetition
NonNon--core activities are good candidatescore activities are good candidatesfor outsourcingfor outsourcing
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Risks in OutsourcingRisks in Outsourcing
Outsourcing can be riskyOutsourcing can be risky
As many as half of all outsourcingAs many as half of all outsourcing
agreements fail because of inappropriateagreements fail because of inappropriateplanning and analysisplanning and analysis
Erratic power grids, governmentErratic power grids, governmentdifficulties, inexperienced managers, anddifficulties, inexperienced managers, and
unmotivated labor can create problemsunmotivated labor can create problems Failure to achieve unrealistic goalsFailure to achieve unrealistic goals
sometimes create the impression ofsometimes create the impression offailurefailure
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Risks in OutsourcingRisks in Outsourcing
Table S11.1Table S11.1
OutsourcingOutsourcing Examples of Examples ofProcessProcess Possible RisksPossible Risks
Identify nonIdentify non--corecorecompetenciescompetencies
Can be incorrectly identified as aCan be incorrectly identified as anonnon--core competencycore competency
Identify nonIdentify non--corecoreactivities that should beactivities that should beoutsourcedoutsourced
Just because the activity is not aJust because the activity is not acore competence for your firmcore competence for your firmdoes not mean an outsourcedoes not mean an outsourceprovider is more competent andprovider is more competent andefficientefficient
Identify impact onIdentify impact onexisting facilities,existing facilities,capacity, and logisticscapacity, and logistics
May fail to understand theMay fail to understand thechange in resources and talentschange in resources and talentsneeded internallyneeded internally
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Risks in OutsourcingRisks in Outsourcing
Table S11.1Table S11.1
OutsourcingOutsourcing Examples of Examples ofProcessProcess Possible RisksPossible Risks
Monitor and controlMonitor and controlcurrent outsourcingcurrent outsourcing
programprogram
May be unable to control productMay be unable to control productdevelopment, schedules, anddevelopment, schedules, and
qualityquality
Evaluate and giveEvaluate and givefeedback to outsourcefeedback to outsourceproviderprovider
May have nonMay have non--responsiveresponsiveprovider (i.e., one that ignoresprovider (i.e., one that ignoresfeedback)feedback)
Evaluate internationalEvaluate internationalpolitical and currencypolitical and currencyrisksrisks
Countys currency may beCountys currency may beunstable, a country may beunstable, a country may bepolitically unstable, or culturalpolitically unstable, or culturaland language differences mayand language differences mayinhibit successful operationsinhibit successful operations
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Risks in OutsourcingRisks in Outsourcing
Table S11.1Table S11.1
OutsourcingOutsourcing Examples of Examples ofProcessProcess Possible RisksPossible Risks
Evaluate coordinationEvaluate coordinationneeded for shipping andneeded for shipping and
distributiondistribution
May not understand the timingMay not understand the timingnecessary to manage flows tonecessary to manage flows to
different facilities and marketsdifferent facilities and markets
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Risks in OutsourcingRisks in Outsourcing
EmploymentEmployment
Changes in facilities and processesChanges in facilities and processesneeded to receive components in aneeded to receive components in adifferent state of assemblydifferent state of assembly
Vastly expanded logistics issuesVastly expanded logistics issues
Outsourcing brings other issues:Outsourcing brings other issues: