Supply Chain Management:

Outsourcing & Off-shoring

Claire MacEachen
Director of Academic Programmes
Dundee Business School

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Lecture content
 The Supply Network
 To outsource supply?
 Trends in outsourcing Why is
outsourcing so attractive?
 Can the cost savings be made
internally?
 To off-shore supply?

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The Supply Network
putting ops in the context of all other
ops with which it interacts
The Operations management system

Process/
Input Output
transform

Transforming (facilities, staff) Goods and/or services

Transformed (materials, information, customers)

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The Supply network

Second-tier First-tier First-tier Second-tier

suppliers suppliers customers customers

Chemical Wholesaler
company Plastic Retailer
stockist
Cardboard Plastic
company homeware
Retailer
manufacturer
Packaging
Ink
supplier
supplier

Immediate supply network

Total supply network
Direct supply
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Information flow
The Supply network

Second-tier First-tier First-tier Second-tier

suppliers suppliers customers customers

Recruitment
agency Security

Overgate
Cleaning Retailers Retail
Cleaning Shopping
materials customers
centre

Equip
maintenance
supplier

Downstream
Upstream
Direct supply
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Information flow
 Supply Chain Management
Michael Dell

“…suppliers are partners in

creating value for customers”

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 Outsourcing
 $525 billion by 2010 (TPI Index Review)

3 broad areas:
 Logistics, sourcing & distribution
 Business process outsourcing (BPO)
 IT services

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Outsourcing: Global market for
IT-enabled services (2008)
Market $142 billion
Customer Interaction Services 33
Finance & Accounting Services 15
Translation, Transcription & Localization 2
Engineering & Design 1.2
HR Services 5
Data Search, Integration & Management 44
Remote Education 18
Networking Consultation & Management 15
Website Services 5
Market Research 3
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 What is outsourcing?
“Some people think outsourcing is a wonder
of a free-market economy; others see in it
nothing more than an immoral disregard
for loyal employees.”
http://www.eweek.com/article2/0,1895,1776947,00.asp

“…the hiring of an outside company to

perform a task that would otherwise be
performed internally…generally with the
goal of lowering costs and/or streamlining
workflow” IAOP
 
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The Body shop approach
 Outsourcing of short term problems
or demands
 e.g. use of short term contract
workers - managed internally.

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The project management
approach
 a specific project or section of work
performed externally
 e.g. support to current applications,
the provision of disaster recovery & the
supplying of training

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Total outsourcing

vendor controls substantial portion of

work
e.g. outsourcing of significant
operations (data centre)
Newest strategy = 'keys of the
kingdom' all h/ware & s/ware moves
to external ownership & control.

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How?
 Identify internal competitively performed
core activities ('core competencies')
  Subcontract where no competitive
advantage
  Sell the non-competitive part to
outsourcing vendor
  Buy back services/products - based on
consumption & agreed service levels.

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Is outsourcing a new
phenomenon?

Yes and No!

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‘Keys to the Kingdom’
 ownership, operation, management
& control of functions by vendor
 Baseline fees
 Baseline guaranteed for duration of
contract (normally 5 10 yrs)
 Services above baseline extra
 'Sweetened' with financial incentives
 Long term consequences remain
unclear
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Why is outsourcing attractive?
 Environment of downsizing & cost
cutting
 Some benefits hard to quantify e.g. IT
 Reports of savings of 10- 50%
 Specific reasons for outsourcing e.g.
inability to constrain costs, need to sell
assets to generate cash, proximity to
suppliers

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Why outsource?

 Cost
 Technical expertise
 Technical advancement

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How can outsourcing vendors
make such huge savings?
 economies of scale
 bulk purchasing agreements
 spreading specialist knowledge
 Raw/component availability locally
 Local employment market

Analogy: electricity supplier -

why buy and maintain your own
generator when you only need
the power?

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Can the cost savings be made
internally?
 economies of scale internally
 Streamlining data processing
 Investment in new technology
 Business process reengineering
 Internal staff :
 understanding of the business
 more loyal to the company

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Consequences of outsourcing
 Outsourcing affect all:
 senior management courted by vendors
 users adjust to new staff & procedures.
 Managers struggle to costs or be taken over
 Staff re-employed by the outsourcing vendors

 'Ground zero' after 5 - 10 yrs

 Confidentiality
 Hidden costs

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Offshoring

Offshoring = the location

of operations outside
the country of origin.

40% of outsourcing deals

have an offshoring
component

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 Off-shore location selection
 choice factors
 Language
 Education
 Transport systems
 Resources
 Cheap labour force
 Technological advancement/industrialisation

Captive offshoring - company owned off-shore ops

Insourcing - service provider comes to you!

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Off-shoring worries

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Economic Policy Unit (2004) Offshoring [online] Available from:
http://www.epi.org/content.cfm/issueguide_offshoring [accessed 1/11/05]
Job losses?

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Top trends to watch in 2010
“The economic recovery will result in the
resumption of delayed outsourcing deals and
increased hiring but uncertainty remains and this
could drive M&A”
International Association of Outsourcing Professionals (IAOP)

• Economic uncertainty leading to M&A

• Short-term contracts
• Shifting geographies
• Environment and social responsibilities
• More maturity in offshoring & outsourcing
• Competition for the ‘knowledge economy’

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Consequences of Off-shoring

http://www.mckinsey.com/mgi/rp/offshoring/
Listen to the video entitled “Perspective: Offshoring: Is
It A Win-Win Game?”

Read http://news.bbc.co.uk/1/hi/business/4225604.stm

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References
• Gibson S (2005a) Outsourcing is Growing up [online]
Accessed from:
http://www.eweek.com/article2/0,1895,1776947,00.asp
• [Accessed on 1/11/05]
• Houseman S (2009) Measuring Offshore Outsourcing:
problems for economic statistics [online] Accessed from:
http://www.upjohninst.org/publications/newsletter/snh_10
9.pdf
[accessed 17/08/10]
• Plunkett Research (2010) Outsourcing and Offshoring
Review [online] Available from:
http://www.plunkettresearch.com/Industries/OutsourcingO
ffshoring/OutsourcingOffshoringTrends/tabid/183/Default.a
spx
[accessed 17/08/10]
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