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Strategic Outsourcing and Business Model Definition

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Title: Strategic Outsourcing and Business Model Definition


1
Strategic Outsourcing and Business Model
Definition
  • Andrea Tracogna

2
The next business model?
3
Different reasons for not making the economics
of outsourcing (1)
  • The search for flexibility. Manufacturers of
    original equipment (OEM) outsource production
    when demand is high and cancel it when orders are
    cancelled or demand falls. Thanks to the
    substitution effect between fixed and variable
    costs they obtain higher cost elasticity.
  • 2. Lower costs, especially when the firm can
    benefit from suppliers economies of scale (a
    supplier can integrate demand from a large number
    of clients, as against the purchasing firm) and
    economies of specialisation (a supplier can
    specialise in single activities and reach
    world-class levels of excellence).

4
Different reasons for not making the economics
of outsourcing (2)
  • Less investments in fixed (machinery, equipment,
    production lines, transport systems) and working
    capital (input and output stocks), which are
    undertaken by suppliers. Less investments in RD
    as firms can take advantage of the numerous
    innovations available on the outside supply
    market.
  • 4. A greater focus on client needs and services
    and product development activities, i.e. on key
    activities for value creation

5
The Nike model
  • Nike employs approximately 30,000 people
    worldwide.
  • Nike brand has some 1,000 contract factories in
    the Americas, EMEA, North Asia and South Asia,
    providing more than 800,000 jobs to local
    communities.
  • From its headquarters in Beaverton, Oregon, Nike
    manages a worldwide virtual company combining
    internal RD functions with a low cost
    manufacturing strategy.
  • Its Air Max model is designed in sites in
    Oregon and Tennessee and developed jointly by
    American and Asian technicians in the USA, Taiwan
    and South Korea. Shoes are then assembled in
    South Korea (mans size) and Indonesia (boys
    size) from dozens of components supplied by firms
    in Japan, South Korea, Taiwan, Indonesia and the
    United States.

6
Nikes value chain?
INFRASTRUCTURAL ACTIVITIES
HRM
SUPPORT ACTIVITIES
MARGINS
NPD AND TECHNOLOGY
PROCUREMENT
INBOUND LOGISTICS
OPERATIONS
OUTBOUND LOGISTICS
MARKETING AND SALES
SERVICES
MARGINS
PRIMARY ACTIVITIES
7
Nike as a supply chain orchestrators
  • Focus on a portion of the value chain
  • Emphasize partnering
  • Invest in brands
  • Minimize tangible investments
  • Arbitrage international factor price differencies

8
Managing the supply chain
Technology
Communities
Market research
Research
Manufacturers
Suppliers
Distributors
End users
Suppliers suppliers
Consultants
Other Services
Logistics
Design
9
Outsourcing trends in car manufacturing
  • The car industry is undergoing dramatic changes
    as manufacturing is today increasingly moving to
    supply markets, while OEMs or vehicle brand
    holders are focusing on design, engineering and
    marketing.
  • For instance, Porsche Boxter and the Porsche
    Cayman are completely assembled by Valmet, a
    Finnish engineering company.

Canadian company Magna assembles cars for all
major carmakers and has bought from them various
plants including the site in Styria (Austria)
where Mercedes-Benz E-Class, Jeep Grand Cherokee,
Chrysler Voyager, Saab 93 Convertible, BMW X3 are
assembled.
10
What is Business Process Outsourcing (BPO)?
  • Pre-manufacturing activities
  • Design and engineering
  • Consulting in packaging
  • Concurrent engineering
  • Production tests
  • Prototyping
  • Manufacturing and accessory activities
  • Logistics management of supplies
  • Assembly
  • Packaging
  • Quality controls
  • Post-manufacturing activities
  • Distribution logistics
  • Technical assistance services
  • Management of spare parts

11
Contract electronics manufacturing
Foxconn is the world leader for joint-design,
joint-development, manufacturing, assembly and
after-sales services to global Computer,
Communication and Consumer-electronics ("3C")
leaders. 
12
IT-enabled outsourcing
  • Thanks to digitalisation and information
    technologies, outsourced activities can now be
    carried out remotely at locations that are very
    far from the company that outsourced them. These
    activities include
  • Data centre management,
  • Web hosting and website management,
  • Data entry services,
  • Accounting services,
  • Customer services, such as direct marketing, call
    centres and help desk services,
  • Text and graphic editing services,
  • Management of distance learning platforms

13
Key principles of strategic outsourcing
  1. Carry out in-house only activities that are
    critical to the value chain and in which the firm
    has a competitive edge.
  2. Outsource activities in which suppliers have a
    competitive edge in terms of volumes, efficiency
    and quality.
  3. Use outsourcing as a means of generating the
    incentives necessary to improve internal
    performance.
  4. Limit your vulnerability in the event of a
    break-up of relationships with suppliers or
    overall market failure.

14
ZARA the exception to the rule?
15
The Zara paradox
  • Localization of operations
  • Commitment to fixed assets
  • Downwards vertical integration
  • Premium image and stores without advertising
  • (Fast) followership

16
Zaras value chain?
INFRASTRUCTURAL ACTIVITIES
HRM
SUPPORT ACTIVITIES
MARGINS
NPD AND TECHNOLOGY
PROCUREMENT
INBOUND LOGISTICS
OPERATIONS
OUTBOUND LOGISTICS
MARKETING AND SALES
SERVICES
MARGINS
PRIMARY ACTIVITIES
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