OUTSOURCING

One of the most critical decisions made in any organization concerns make or buy. When any
organization starts its life, a whole series of make or buy decisions need to be made and as the
organization grows and as it adds or drops products and/or services from its offerings, make or
buy decisions continue to be made
Make-or-buy decision:
- Can occur at any stage of companies (when new, when introduce new products…)
- Can be viewed as both strategic and tactical decisions.
 Strategic if it considers future analysis and whether it is in line with its core competency.
 Tactical if it considers only cost saving or insufficient current capacity.

REASONS FOR MAKE / BUY

MAKE BUY
 Cost considerations (less expensive to make • Lack of expertise
the part). • Suppliers' research and specialized know-
 Desire to integrate plant operations how exceeds that of the buyer
 Productive use of excess plant capacity to • cost considerations (less expensive to buy
help absorb fixed overhead (using existing the item)
idle capacity) • Small-volume requirements
 Need to exert direct control over production • Insufficient production facilities
and/or quality • Desire to maintain a multiple-source
 Design secrecy is required to protect policy
proprietary technology • Procurement and inventory considerations
 Unreliable or no competent suppliers • Brand preference
• Item not essential to the firm's strategy
 Desire to maintain a stable workforce (in
periods of declining sales)
 Quantity too small to interest a supplier
 Control of lead time, transportation, and
warehousing costs
 Greater assurance of continual supply
 Provision of a second source
 Political, social or environmental reasons
(union pressure)
Make In House (Three Major Considerations)
1. The item is critical to the success of the product, including customer perception of important
product attributes;
2. The item requires specialized design and manufacturing skills or equipment, and the number of
capable and reliable suppliers is extremely limited;
3. The item fits well within the firm's core competencies, or within those the firm must develop to
fulfil future plans.

OUTSOURCING
Definition: Subcontracting a service that could have been done in house, to a third party who can
do the job more efficiently and can provide a unique advantage, with the aim to achieve the
competitive advantage by producing the products or services at lower cost and higher quality.
Different Ways of Outsourcing: Offshoring, Nearshoring, Domestic Outsourcing
Types of Outsourcing
BPO or business process outsourcing

 outsourcing of specific business task

 back office (internal functions) vs front office outsourcing (customer related)
ITO or information technology outsourcing: a subset of BPO (back office)
KPO or knowledge process outsourcing: required advance R&D. (New concept)
What Drive Outsourcing?
1. Organizational Driven: Organization wants to focus on only what it can do well.
2. Financially Driven: Do not need to invest on facilities / Avoid setting up cost and acquiring
other resources / Free up investments and resources for other use.
3. Improvement Driven: Gain access to technology and expertise that are not available internally
4. Revenue Driven: Accessing supplier’s market / Offshore and nearshore outsourcing provide
new opportunities
5. Cost Driven: reduce cost through economies of scales
Benefits:

 Turn fixed cost to variable

 Reduce capital investment
 Meet downsizing objectives
 Tap into supplier’s expertise
Risks:
 Union/lay off: layoffs often result, and even in cases where the service provider (3 rd party)
hires former employees, they are often hired back at lower wages with fewer benefits.
 Loss of control
 Exposure to supplier risks: financial strength, loss of supplier commitment, slow
implementation, promised features or services not available, lack of responsiveness, poor
daily quality
 Unexpected fees or “extra use” charges
 Difficulties in quantifying economics, conversion costs
 Supply restraints
 Possibility of being tied to obsolete technology “being locked-in”
 Concerns with long-term flexibility and meeting changing business requirements
How to make Outsourcing successful:
 Good business planning (clearly identify activities, objectives, etc.) and have clear SOW
 Evaluation and selection process: being able to choose capable supplier
 Contracting: include important clauses
 Measurement: constantly measure, monitor
 Periodic review: identify weaknesses to improve