Essentials of Procurement

(719N1)
Week 4: Global Sourcing
 Learning objectives

• What is Outsourcing and how it is defined?

• Why companies outsource part of their business
processes.
• How to structure the process of outsourcing.
• The most important risks and pitfalls related to
outsourcing.
 What is Outsourcing?

“Outsourcing can be described as the transfer of

activities that were previously conducted in-house, to a
third party”.

-- Van Weele(2018, pp.1990)

Outsourcing is about a business
making a choice

What should
business do
itself?

What should a
business buy
from others?
 Outsourcing as a business concept

• Outsourcing can be described as the transfer of activities

that were previously conducted in-house, to a third party.
The company divests itself of the resources to fulfil a
particular activity to another company, to focus more
effectively on its own competence.
• Outsourcing in US became a standard business practice
among all companies in all industries by 2000. (Outsourcing
Institute, 2000)
• The global market of outsourced services in the US
increased from $45 billion in 2000 to $104 billion in 2014.
Classic examples of business processes
that “outsourced”

Delivery/Logistics Call Centres Computer systems

Image sources:
1. https://www.logisticsbusiness.com/post-psrcel/ups-releases-first-quarter-earnings/
2. https://callminer.com/blog/25-tips-best-practices-for-identifying-the-best-call-center-services
3. https://cloudblogs.microsoft.com/industry-blog/financial-services/2019/05/31/digital-stewardship-in-the-insurance-industry/
Make or Buy
 Linking Outsourcing to Make-or-Buy
Decision
• Central to outsourcing is make-or-
buy decisions.

• Make-or-Buy Decision: A strategic

choice to produce goods/services
in-house or purchase them from
external suppliers.

• Make-or-Buy is a broader strategic

decision that may lead to
outsourcing, offshoring, or keeping
production in-house.
The difference of Offshoring and
Outsourcing

Offshoring Outsourcing
The work is done overseas Someone external does the work
 Question

Introduction:
In 2019, Dyson, a British technology company
known for its vacuum cleaners and other
innovative products, announced the relocation
of its headquarters from the UK to Singapore.

Question:
Dyson moved its headquarters from the UK to
Singapore in 2019. Does this scenario
represent outsourcing or offshoring?

This Photo by Unknown Author is licensed under CC BY-ND

 When Should a Firm Make or Buy?
o How can a firm decide with Two Factors:
components to manufacture and
which to outsource?
o Dependence on Capacity
• Firm has the knowledge and the
o It is suggested that firms should skills required to produce the
focus on core competencies component
and outsource non-core. • For various reasons decides to
outsource
o Question: how to determine
which is which? o Dependence on Knowledge
• Firm does not have the people,
o Fine & Whitney (2002) framework skills, and knowledge required to
produce the component
• Outsources in order to have access
to these capabilities.

Fine, C.H. and Whitney, D.E., 2002. Is the make-buy decision Adapted from Simchi-Levi, Kaminski & Simchi-Levi (2008)
process a core competence?.
 Product Architectures
Modular Products Integral Products
o Products made by combining o Made from components having
different products, e.g. PC. highly-related functionalities, e.g.
o Each component is independent aircrafts.
of one other and is o Not made from off-the-shelf
interchangeable. components.
o Typically involves standard o Designed as a system by taking a
interfaces. top-down design approach.
o Customer preference determines o Evaluated on system
the product configuration. performance, not on component
performance.

This Photo by Unknown Author is licensed under CC BY-NC-ND

Adapted from Simchi-Levi, Kaminski & Simchi-Levi (2008)
 Fine & Whitney (1996) Framework

Product Dependency on Independent for Independent for

knowledge and knowledge, dependent for knowledge and
capacity capacity capacity

Modular Outsourcing is risky Outsourcing is an opportunity Opportunity to reduce cost

through outsourcing

Integral Outsourcing is very risky Outsourcing is an option Keep production internal

Fine, C.H. and Whitney, D.E., (2002). Is the make-buy decision process a core competence?
https://bit.ly/2J58MNu

University of Sussex Business School –

Activity
o Considering the following
products/components: Composite Materials,
Fuselage+Avionics, Engines, and Landing
Gear:

o Using the Fine & Whitney (2002)

framework, discuss the decision by
Boeing to outsource the design and
manufacturing of the 787 Dreamliner.
Rationales for outsourcing
Why outsourcing?
Example: Indian Outsourcing 2.0
 Outsourcing

• What are key reasons the company give for

outsourcing? What benefits are they seeking?
 Reasons to outsource

Strategic reasons Tactical Reasons

1. Improve company focus
2. Gain access to world class
capabilities
3. Get access to resources that are
not available internally
4. Improve customer satisfaction
5. Increase flexibility
6. Sharing risks
7. Business Process
Reengineering benefit
1. Reduce control costs and
operating costs
2. Free up internal resources
3. Improve performance
4. Ability to manage functions that
are out of control
5. Receive an important cash
infusion

All these reasons underlie one overall objective: to improve the

overall performance of the outsourcing firm
Advantages and disadvantages of
outsourcing
The Outsourcing process
Activity: Case study
LEGO Case
 Questions
• What were LEGO’s main expectations and learnings from the
relationship with Flextronics?

• What are the key challenges in maintaining a relationship like the one
between LEGO and Flextronics?

• How can LEGO handle the supply chain complexity to improve

knowledge sharing, flexibility and coordination?

• Discuss the key considerations when outsourcing or offshoring

production.
 Summary
• Outsourcing has become popular as a business strategy in many
industries around the world.
• Most companies start outsourcing to benefit from cost
advantages and to create more focus.
• The new strategy involves the decision to move an activity, that
was conducted in house, to an outside provider.
• Offshoring is similar to outsourcing; it usually relates to services
and is located in a low-cost country.
• The outsourcing strategy should be in line with the overall
corporate strategy.
• As a result of outsourcing, the traditional balance of power
between the outsourcing company and its provider changes.