OUTSOURCING

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OUTSOURCING
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OUTSOURCING

• Today Manufacturing Focus Means Learning How Not
  to Make Things - How Not to Make Parts That
  Divert a Company From Cultivating Its Skills -
  Parts Its Suppliers Could Make More
  Efficiently.
• Ravi Venkatesan

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TRANSACTIONAL DIFFICULTIES

• Bounded Rationality
• Opportunism
• Small Numbers Bargaining
• Information Impactedness

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TRANSACTION CHARACTERISTICS

• Asset Specificity
• Uncertainty
• Infrequency

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DIFFICULTIES WITH THE PROCESS

• No Formal Outsourcing Process
• Limited Cost Analysis
• Core Business Definition

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PROBERT FOUR STAGE PROCESS

• Initial Business Appraisal
• Internal/External Analysis
• Evaluation of Strategic Options
• Choose Optimal Strategy

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Key Aspects Of The Outsourcing Process

• Value Chain Perspective
• Core Competency Thinking
• Supply Base Influences

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Mc Ivors Outsourcing Framework

• Defining the Core Activities of the Business
• Formal
• Reactionary
• Evaluate the Relevant Value Chain Activities
• Evaluate the Relevant Value Chain Activities
• Total Cost Analysis of the Core Activities
• Total Cost Analysis of Core Activities
• Relationship Analysis

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STRATEGIC DECISIONS

• Identify the Strategic Strengths of the Firm
• What Does the Firm Do Really Well - Better Than
  Most Firms In The Competitive Environment?
• Design Skills
• Production Skills
• Equipment
• People
• Existing Core Competencies

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STRATEGIC DECISIONS

• Examine Current and Expected Future Environments
• Competition
• Governmental Regulatory Climate
• Changing Characteristics of Sales and Supply
  Markets
• Identify Expected Competency Requirements

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STRATEGIC CATEGORIES

• Critical to the Success of the Product, Including
  Customer Perceptions of Important Product
  Attributes
• Requires Specialised Design and Manufacturing
  Skills or Equipment, With a Limited Number of
  Capable and Competent Suppliers
• Fits Well Within the Firms Core, or Expected
  Core Competencies

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DECISION MAKING PROCEDURES
No - Outsource Yes - Further analysis required
Is it strategic?
Deal next with components and parts that make up
the strategic subsystem Can the subsystem be
broken down into families of components and parts
No - Make in-house Yes - Are families
of components and parts strategic
No - Outsource Yes - Make in-house
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DECISION MAKING PROCEDURES

• PRESENT
• SITUATION
• Capabilities
• Design
• Manufacturing
• Quality

• POTENTIAL
• SUPPLIERS
• Capabilities
• Design
• Manufacturing
• Quality

Relative Costs
Volume Requirements
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POST DECISION MAKING

• THE DYNAMIC ENVIRONMENT
• Unsatisfactory Supplier Performance
• Changing Sales Demands
• Restricted Manufacturing Capacity
• Modification of an Existing Product

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Operational/Tactical Considerations

• Cost
• Availability of Production Capacity

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ASPECTS THAT FAVOUR MAKING

• Cost Considerations (Less Expensive to Make the
  Part)
• Desire to Integrate Plant Operations
• Productive Use of Excess Plant Capacity to Help
  Absorb Fixed Overhead
• Need to Exert Direct Control Over Production
  And/or Quality
• Design Secrecy Required
• Unreliable Suppliers
• Desire to Maintain a Stable Work Force (in
  Periods of Declining Sales

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ASPECTS THAT FAVOUR BUYING

• Suppliers Research and Specialised Know-how
• Cost Considerations (Less Expensive to Buy the
  Part)
• Small Volume Requirements
• Limited Production Facilities
• Desire to Maintain a Stable Work Force (in
  Periods of Rising Sales)
• Desire to Maintain a Multiple-source Policy
• Indirect Managerial Control Considerations
• Procurement and Inventory Considerations

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TO MAKE - COST CONSIDERATIONS

• Delivered Purchased Material Costs
• Direct Labour Costs
• Any Follow-on Costs Stemming From Quality and
  Related Problems
• Incremental Inventory Carrying Costs
• Incremental Factory Overhead Costs
• Incremental Managerial Costs
• Incremental Purchasing Costs
• Incremental Costs of Capital

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TO BUY - COST CONSIDERATIONS

• Purchase price of the part
• Transportation costs
• Receiving and inspection costs
• Incremental purchasing costs
• Any follow-on costs related to quality or service

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INCREMENTAL COSTS PRODUCTION CAPACITY
Incremental costs resulting from a make decision
Additional capacity utilised as a result of a
make decision
Costs which vary proportionally with production
volume (material, labour, variable overhead
Fixed Overhead Costs, Independent of Production
Volume