2008 Prentice Hall, Inc. S11 – 1 Operations Management Supplement 11 – Supplement 11 – Outsourcing as a Supply Outsourcing as a Supply Chain Strategy Chain Strategy PowerPoint presentation to accompany PowerPoint presentation to accompany Heizer/Render Heizer/Render Principles of Operations Management, 7e Principles of Operations Management, 7e Operations Management, 9e Operations Management, 9e
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Operations ManagementOperations ManagementSupplement 11 – Supplement 11 – Outsourcing as a Outsourcing as a Supply Chain StrategySupply Chain Strategy
PowerPoint presentation to accompany PowerPoint presentation to accompany Heizer/Render Heizer/Render Principles of Operations Management, 7ePrinciples of Operations Management, 7eOperations Management, 9e Operations Management, 9e
Outsourcing can replace entire Outsourcing can replace entire purchasing, information systems, purchasing, information systems, marketing, finance, and operations marketing, finance, and operations departmentdepartment
Applicable to firms throughout the Applicable to firms throughout the worldworld
Making the right decision may be Making the right decision may be the difference between success the difference between success and failureand failure
Procuring from external suppliers Procuring from external suppliers service or products the firms used to service or products the firms used to provide for itselfprovide for itself
Offshoring is moving processes to a Offshoring is moving processes to a foreign 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 the the actual work is done by the outsourcing provideroutsourcing provider
Extension of the long-standing practice Extension of the long-standing practice of subcontractingof subcontracting
Outsourcing has become a major Outsourcing has become a major strategy as firms move toward strategy as firms move toward specializationspecialization Increasing expertiseIncreasing expertise
Reduced cost of reliable transportationReduced cost of reliable transportation
Rapid deployment of Rapid deployment of telecommunications telecommunications and computers and computers – the Internet– the Internet
Strategic Planning and Strategic Planning and Core CompetenciesCore Competencies
Strategic planning defines the mission Strategic planning defines the mission and goals for the organizationand goals for the organization
From this the organization determines From this the organization determines the role of each business activitythe role of each business activity
Core competencies are things the Core competencies are things the organization does better than its organization does better than its competitioncompetition
Non-core activities are good candidates Non-core activities are good candidates for outsourcingfor outsourcing
Theory of Comparative Theory of Comparative AdvantageAdvantage
If an external outsourcing provider can If an external outsourcing provider can perform activities more productively perform activities more productively than the client firm, the outsourcing than the client firm, the outsourcing
provider should do the workprovider should do the work
Outsourcing Trends and Outsourcing Trends and Political RepercussionsPolitical Repercussions
According to a survey of 53 major According to a survey of 53 major corporations, the most important corporations, the most important reasons for outsourcing are:reasons for outsourcing are:
Cost savingsCost savings 77%77%Gaining outside expertiseGaining outside expertise 70%70%Improving servicesImproving services 61%61%Focusing on core competenciesFocusing on core competencies 59%59%Gaining access to technologyGaining access to technology 56%56%
Outsourcing Trends and Outsourcing Trends and Political RepercussionsPolitical Repercussions
Outsourcing includes specific business Outsourcing includes specific business functions (computer help desks) and functions (computer help desks) and entire departments (accounting, entire departments (accounting, marketing, finance, etc.)marketing, finance, etc.)
35% of businesses said they would 35% of businesses said they would continue or expand outsourcingcontinue or expand outsourcing
40% said they would continue 40% said they would continue outsourcing but revise their arrangementsoutsourcing but revise their arrangements
Some said they would reduce outsourcingSome said they would reduce outsourcing
Outsourcing includes specific business Outsourcing includes specific business functions (computer help desks) and functions (computer help desks) and entire departments (accounting, entire departments (accounting, marketing, finance, etc.)marketing, finance, etc.)
35% of businesses said they would 35% of businesses said they would continue or expand outsourcingcontinue or expand outsourcing
40% said they would continue 40% said they would continue outsourcing but revise their arrangementsoutsourcing but revise their arrangements
Some said they would reduce outsourcingSome said they would reduce outsourcing
Outsourcing Trends and Outsourcing Trends and Political RepercussionsPolitical Repercussions
Outsourcing Trends and Outsourcing Trends and Political RepercussionsPolitical Repercussions
Political backlash can occur when jobs Political backlash can occur when jobs are outsourced to foreign countriesare outsourced to foreign countries In the U.S. state and federal laws have been In the U.S. state and federal laws have been
enacted to limit or prevent outsourcing enacted to limit or prevent outsourcing activitiesactivities
Recent data suggests more foreigners Recent data suggests more foreigners outsource jobs to the U.S. than American outsource jobs to the U.S. than American companies outsource offshorecompanies outsource offshore
Backsourcing describes the process of Backsourcing describes the process of returning work to the original firm when returning work to the original firm when outsourcing failsoutsourcing fails
As many as half of all outsourcing As many as half of all outsourcing agreements fail because of inappropriate agreements fail because of inappropriate planning and analysisplanning and analysis
Erratic power grids, government Erratic power grids, government difficulties, inexperienced managers, and difficulties, inexperienced managers, and unmotivated labor can create problemsunmotivated labor can create problems
Failure to achieve unrealistic goals Failure to achieve unrealistic goals sometimes create the impression of sometimes create the impression of failurefailure
Can be incorrectly identified as a Can be incorrectly identified as a non-core competencynon-core competency
Identify non-core Identify non-core activities that should be activities that should be outsourcedoutsourced
Just because the activity is not a Just because the activity is not a core competence for your firm core competence for your firm does not mean an outsource does not mean an outsource provider is more competent and provider is more competent and efficientefficient
Identify impact on Identify impact on existing facilities, existing facilities, capacity, and logisticscapacity, and logistics
May fail to understand the May fail to understand the change in resources and talents change in resources and talents needed internallyneeded internally
OutsourcingOutsourcing Examples ofExamples ofProcessProcess Possible RisksPossible Risks
Establish goals and Establish goals and draft outsourcing draft outsourcing agreement agreement specificationsspecifications
Goals can be set so high that Goals can be set so high that failure is certainfailure is certain
Identify and select Identify and select outsource provideroutsource provider
Can select the wrong outsource Can select the wrong outsource providerprovider
Negotiate goals and Negotiate goals and measures of measures of outsourcing outsourcing performanceperformance
Can misinterpret measures and Can misinterpret measures and goals, how they are measured, goals, how they are measured, and what they meanand what they mean
OutsourcingOutsourcing Examples ofExamples ofProcessProcess Possible RisksPossible Risks
Monitor and control Monitor and control current outsourcing current outsourcing programprogram
May be unable to control May be unable to control product development, product development, schedules, and qualityschedules, and quality
Evaluate and give Evaluate and give feedback to outsource feedback to outsource providerprovider
May have non-responsive May have non-responsive provider (i.e., one that ignores provider (i.e., one that ignores feedback)feedback)
Evaluate international Evaluate international political and currency political and currency risksrisks
County’s currency may be County’s currency may be unstable, a country may be unstable, a country may be politically unstable, or cultural politically unstable, or cultural and language differences may and language differences may inhibit successful operationsinhibit successful operations
OutsourcingOutsourcing Examples ofExamples ofProcessProcess Possible RisksPossible Risks
Evaluate coordination Evaluate coordination needed for shipping and needed for shipping and distributiondistribution
May not understand the timing May not understand the timing necessary to manage flows to necessary to manage flows to different facilities and marketsdifferent facilities and markets
Changes in facilities and processes Changes in facilities and processes needed to receive components in a needed to receive components in a different state of assemblydifferent state of assembly
Outsourcing agreements must specify Outsourcing agreements must specify results and outcomesresults and outcomes
Evaluation necessary to ensure Evaluation necessary to ensure satisfactory performancesatisfactory performance
If the outsourced product or service is If the outsourced product or service is strategically important, the relationship strategically important, the relationship needs continuing communication, needs continuing communication, understanding, trust and performanceunderstanding, trust and performance
Services may require imaginative Services may require imaginative metricsmetrics
Ethical Issues in Ethical Issues in OutsourcingOutsourcing
Seek to do no harm to Seek to do no harm to indigenous culturesindigenous cultures
Don’t use outsourcing in a Don’t use outsourcing in a way that violates religious way that violates religious holidaysholidays
Seek to do no harm to the Seek to do no harm to the ecological systems of the ecological systems of the worldworld
Don’t use outsourcing to Don’t use outsourcing to move pollution from one move pollution from one country to anothercountry to another
Seek to uphold universal Seek to uphold universal labor standardslabor standards
Don’t use outsourcing to take Don’t use outsourcing to take advantage of cheap child advantage of cheap child labor that leads to child abuselabor that leads to child abuse
Ethical Issues in Ethical Issues in OutsourcingOutsourcing
Seek to uphold basic human Seek to uphold basic human rightsrights
Don’t accept outsourcing that Don’t accept outsourcing that violates basic human rightsviolates basic human rights
Seek to pursue long-term Seek to pursue long-term involvement in foreign involvement in foreign countriescountries
Don’t use outsourcing as a Don’t use outsourcing as a short-term arrangement to short-term arrangement to reduce costs; view it as a reduce costs; view it as a long-term partnershiplong-term partnership
Seek to share knowledge Seek to share knowledge and technology with foreign and technology with foreign countriescountries
Don’t think an outsourcing Don’t think an outsourcing agreement will prevent loss of agreement will prevent loss of technology, but use the technology, but use the inevitable sharing to build a inevitable sharing to build a good relationship good relationship