Outsourcing as a Supply Chain Strategy

• Zafiruddin Junaidi• Ghazanfer Ali• Abdullah Sufi• Amir Khan

Group Members:

Instructor:• Sir Saquib Ali

Department of Chemical Engineering University of Karachi

What is Outsourcing?Types of Outsourcing

Strategic Planning and Core CompetenciesThe Theory of Comparative

Advantage

Outsourcing Trends and Political Repercussions

Outline

Outline – Continued

Risks in Outsourcing Methodologies for

OutsourcingEvaluating Multiple Criteria

with Factor RatingBreak-even Analysis

Outline – Continued

Advantages and Disadvantages of OutsourcingAdvantages of OutsourcingDisadvantages of Outsourcing

Audits and Metrics to Evaluate Outsourcing Performance

Ethical Issues in Outsourcing

What is Outsourcing?

Procuring from external suppliers service or products the firms used to provide for itself

Offshoring is moving processes to a foreign country but retaining control

Firms that outsource are called clients, the actual work is done by the outsourcing provider

Extension of the long-standing practice of subcontracting

What is Outsourcing?

Outsourcing has become a major strategy as firms move toward specialization Increasing expertise Reduced cost of reliable

transportation Rapid deployment of

telecommunications and computers – the Internet

Outsourcing

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

Applicable to firms throughout the world

Making the right decision may be the difference between success and failure

Examples of Outsourcing

Call centers in French Angola Legal and finance service in the

Philippines EDS handling information

technology for Nextel IBM providing travel and

payroll for P&G Solectron producing

IBM computers

Types of Outsourcing

Common processes outsourced are

Purchasing Logistics R&D Operations Service management Human resources

Finance/accounting Customer relations Sales/marketing Training Legal processes

Outsourcing implies a legally binding contract

Strategic Planning and Core Competencies

Strategic planning defines the mission and goals for the organization

From this the organization determines the role of each business activity

Core competencies are things the organization does better than its competitors

Non-core activities are good candidates for outsourcing

Core Competency

Best in the world at electromechanical

miniaturization design

Figure S11.1

Sony, An Outsourcing CompanyOutsourcers could provide

Post-sales service

Logistics

Distribution

Accounting

Maintenance

Real estate management

Marketing

Parts manufacture

Financial functions

Employee benefit management

Strategic Planning and Core Competencies

Theory of Comparative Advantage

If an external outsourcing provider can perform activities more

productively than the client firm, the outsourcing provider should do the

work

This applies regardless of the

geographical location

Outsourcing Trends and Political Repercussions

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

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

Outsourcing Trends and Political Repercussions

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

35% of businesses said they would continue or expand outsourcing

40% said they would continue outsourcing but revise their arrangements

Some said they would reduce outsourcing

Not all outsourcing experiences are satisfactory

There is still a lot to learn about outsourcing as a method to improve productivity

Outsourcing Trends and Political 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 activities

Recent data suggests more foreigners outsource jobs to the U.S. than American companies outsource offshore

Backsourcing describes the process of returning work to the original firm when outsourcing fails

Outsourcing Trends and Political Repercussions

Risks in Outsourcing

Outsourcing can be risky As many as half of all outsourcing

agreements fail because of inappropriate planning and analysis

Erratic power grids, government difficulties, inexperienced managers, and unmotivated labor can create problems

Failure to achieve unrealistic goals sometimes create the impression of failure

Table S11.1

Outsourcing Examples ofProcess Possible Risks

Identify non-core competencies

Can be incorrectly identified as a non-core competency

Identify non-core activities that should be outsourced

Just because the activity is not a 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 in Outsourcing

Table S11.1

Outsourcing Examples ofProcess Possible Risks

Establish goals and draft outsourcing agreement specifications

Goals can be set so high that failure is certain

Identify 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 in Outsourcing

Table S11.1

Outsourcing Examples ofProcess Possible Risks

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 in Outsourcing

Employment Changes in facilities and

processes needed to receive components in a different state of assembly

Vastly expanded logistics issues

Outsourcing brings other issues:

Risks in Outsourcing

Methodologies for Outsourcing

Evaluating Multiple Criteria with Factor Rating

Break-even Analysis

Rating International Risk Factors

Nine factors rated 0-3, 0 is no risk, 3 is high risk

Risk Factor England Mexico Spain Canada

Economic: Labor cost/ laws 1 0 2 1

Economic: Capital availability 0 2 1 0

Economic: Infrastructure 0 2 2 0

Culture: Language 0 0 0 0

Culture: Social norms 2 0 1 2

Migration: Uncontrolled 0 2 0 0

Politics: Ideology 2 0 1 2

Politics: Instability 0 1 2 2

Politics: Legalities 3 0 2 3

Total risk rating scores 8 7 11 10

Table S11.2

Rating Outsourcing Providers

Table S11.3

Seven factors rated 1-5 and an importance weight

Outsourcing Providers

Factor(criterion)

Importance Weight

BIM (U.S.)

S.P.C. (India)

Telco (Israel)

1. Can reduce operating costs .2 3 3 5

2. Can reduce capital investment .2 4 3 3

3. Skilled personnel .2 5 4 3

4. Can improve quality .1 4 5 2

5. Can gain access to technology not in company

.1 5 3 5

6. Can create additional capacity .1 4 2 4

7. Aligns with policy/ philosophy/culture

.1 2 3 5

Total and Averages 1.0 3.9 3.3 3.8

Break-Even Analysis

First define total cost in-house

TCin = Fin + (Vin x Xin)

where

TCin is the total cost of an item produced in-houseFin is the total in-house fixed costVin is the variable cost/unit produced in-houseXin is the total number of units produced in-house

The total cost under outsourcing is

TCout = Fout + (Vout x Xout)

At break-even Xin = Xout and TCin = TCout

Fin + (Vin x X) = Fout + (Vout x X)

Solving for X

X =Fin – Fout

Vout – Vin

Break-Even Analysis

Outsourcing Break-Even Example

Fixed cost at Toledo plant = $2 millionVariable cost/toy = $3

Fixed cost at Astro plant = $1 millionVariable cost/toy = $4

Annual demand = 1.1 million toys

2,000,000 – 1,000,000

4 – 3X = =

Fin – Fout

Vout – Vin

= 1,000,000 units Sincedemand > break-even point,

produce in Toledo

Advantages of Outsourcing

Cost savings Gaining outside experience Improving operations and

service Focusing on core competencies Gaining outside technologies Other advantages

Disadvantages of Outsourcing

Increased transportation costs Loss of control Creating future competition Negative impact on employees Longer-term

impact

Ethical Issues in Outsourcing

Seek to do no harm to indigenous cultures

Don’t use outsourcing in a way that violates religious holidays

Seek to do no harm to the ecological systems of the world

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

Seek to uphold universal labor standards

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

Ethics Principle Outsourcing Linkage

Table S11.4