Chapter 10: Outsourcing

Outsourcing has become a way to increase an organization's ___ to meet rapidly changing market conditions, focus on core competencies and develop a competitive advantage. As a result, the need for world class Supply Management has intensified and positioned supply managers as agents of strategic change critical to supply chain success.

Flexibility

(Favor Making) Control over production and/or quality: HEB likes to produce themselves so they can control factors such as ___ safety, and have control over quality.

Food

(Favor Buying) Multiple Sources Policy: You can be forced to use multiple suppliers if you outsource. Like ____ suppliers force companies to utilize multiple suppliers to get ____.

Potato, Potato

Factors that influence the make/buy decision: Multiple Supplier Policy: When companies have only one supplier, then that supplier may try to up their _____.; (Company's outsource to multiple suppliers, so that all of their risk doesn't lie with ____ supplier.

Prices, One

If you are in the auto industry, it is worth it to outsource and spend money to keep continuity of supply because their is a high ___ for automobiles.

Profit

Vertical integration is really the combination in one company of ___ or more stages of production normally operated by separate companies.

Two

For the last slide: Koufteros doesn't agree with point number one because ____ outsourced their engine making to Rolls Royce or GE.

Boeing

If you don't have the manufacturing capability, and making it would be costly, then you aren't gonna make your products in house. However, if you increase your manufacturing capacity, then you would rather make your products __-house.

In

____ is the practice of using an organization's own personnel or other resources to accomplish a task.

Insourcing

Factors that influence the make/buy decision: Procurement and Inventory Considerations; If I am going to make something in house then I am going to have multiple POs, vs, if I am going to outsource then I am going to have only one or two PO's and as a result of outsourcing my overall ____ investment will be reduced.

Inventory

Factors that influence the make/buy decision: If your production facilities are limited, then it may make more sense for you to buy than make.

Limited Facilities

If demand is high and recurring, make it yourself. If demand is sporadic or volatile and demand is low, ___ is more enticing for companies to do.

Outsourcing

Factors that influence the make/buy decision: Managerial Control Considerations: Data used from ___ to other suppliers may be used by a firm to check their ___ processes and costs.

Outsourcing, Internal

3) (Strategic Issues) The Creation of Strategic Vulnerabilities: Outsourcing creates many strategic ____ to your company. You tend to lose complete _____ when you outsource.

Vulnerabilities, Control

Factors that influence the make/buy decision: Stabilize a workforce( if you want a stable workforce, then you might make a certain amount of product at all times, but when peak demand occurs then you may outsource some making of your product to compensate for this peak demand rather than just hiring a bunch of temporary workers.), Retain a competent workforce ( if you want to retain a competent workforce, then your company is going to have to have full time employees who can work in periods of higher demand, rather than your company just hiring a bunch of low quality temporary workers during periods of high demand because then your company will not have a truly competent workforce if temp hires are running in and out of the company)

Workforce Stability

Factors other than costs that influence make-or-buy decisions: To maintain control over ability to produce unique parts (this would be like if a company only produced parts for individual customer orders), and continuity of supply of critical parts (This would be like saying that only we are going to produce this part because this specific part is critical to our firm's success) .

1) Production Requirements

Short Term View: Focus on ___ measurable costs.

Direct

Why is the nature of the make-or-buy decision described as "volatile"? Explain the reasoning in detail (essay question)

1.) Beware of rigid formulas and rules of thumb (Ex: don't just decide to buy something because it is a general rule of thumb to buy in this situation) 2.) The make-or-buy question is influenced by a multitude of diverse factors constantly changing (EX: Costs that are low right now for parts may change to higher prices in the near future which may affect a firms decision to make or buy) 3.) Under such situations, few easy decisions turn out both well in both the short and the long run ( It may be more effective for a firm to create a part in house while costs are currently low, however if costs rise then it may be better for a firm to outsource) 4.) Moreover, the relevant factors vary immensely from one firm to another ( Some firms can have a bigger inclination to buy if they have smaller capacities compared to large firms may have an increased tendency to make because the have larger capacities) 5.) Every company should periodically evaluate the effectiveness of its past decisions to generate information helpful in guiding future decisions (If a past decision worked well for a company, then that same decision may still not work well for the company today)

What are the four strategic issues that firms have when deciding whether to outsource or not?

1.) Core Competencies 2.) Supplier Dominance 3.)The Creation of Strategic Vulnerabilities 4.) The Dangers of Vertical Integration

What are the seven considerations that favor making? (essay question)

1.) Cost considerations 2.) Desire to integrate plant operations 3.) Use of excess plant capacity 4.) Control over production/quality 5.) Design Secrecy Required 6.) Unreliable suppliers 7.) Desire to maintain a stable workforce (in declining sales)

Major Elements included in a "To Make" Cost Analysis: What are the 8 major elements? (essay question)

1.) Delivered purchased material costs 2.) Direct Labor Costs 3.) Any follow up costs stemming from quality and related problems 4.) Incremental Inventory carrying costs 5.) Incremental factory overhead costs 6.) Incremental Managerial Costs 7.) Incremental purchasing costs 8.) Incremental costs of capital

What are the five parts of developing a framework for outsourcing?

1.) Information Gathering 2.) Strategic Roadmap 3.) Decision Flowchart 4.) Transition back plan 5.) Review System

What are the eight considerations that favor buying? (essay question)

1.) Limited Production Facilities 2.) Cost Considerations (less expensive to buy) 3.) Small-volume requirements 4.) Supplier's specialized know-how 5.) Stable work force (rising sales) 6.) Multiple-source policy 7.) Indirect managerial control considerations 8.) Procurement and Inventory considerations

What are the seven dangers of outsourcing? (essay question)

1.) Loss of Control (lose control over quality and processes) 2.) Loss of Client Focus (Lose connection, if you make it, then you know what customers want and sense what they want but the supplier really doesn't have that connection) 3.) Loss of Clarity (Failure to clearly specify what a supplier is supposed to produce can be a costly mistake) 4.) Loss of Cost Control ( Suppliers can increase the cost on firms if they are making a very customized product, and the firm really can't switch suppliers very easily) 5.) Ineffective Management ( Managers may decide to outsource just because they think that an external firm can do a certain service better when in fact the external firm actually cannot do a certain service better) 6.) Loss of confidentiality ( You don't really know what suppliers are going to do with your recipes or secrets) 7.) Double Outsourcing ( This is when suppliers outsource to another supplier)

Outsourcing can result in what three things?

1.) Lower Staffing Costs 2.) Reduced Costs 3.) More Flexibility

What are the 6 make or buy decisions at the Tactical level?

1.) Poor Supplier Performance 2.) Changing Sales Demand 3.) Restricted Manufacturing Capability 4.) Modification of Product 5.) Increased Manufacturing Capability 6.) Increased supplier capability

Major Elements included in a "To Buy" Cost Analysis: What are the five costs?

1.) Purchase Price of the part 2.) Transportation Costs 3.) Receiving and Inspection Costs 4.) Incremental Purchasing Costs 5.) Any-Follow up costs related to quality or service.

What are the two views for the time factor of cost considerations?

1.) Short Term View 2.) Long-Term View

Cost Considerations: The Capacity Factor (Two Possibilities) What are the two possibilities?

1.) We are at capacity and fixed costs are an issue 2.) We are not at capacity and fixed costs are not as much an issue

(Favor Making) Cost Consideration: HEB can make bread for only 14 cents even though they sell it for a $____. HEB makes a lot of products that have higher profit margins than brand name national products.

1.50

Factors other than costs that influence make-or-buy decisions: To control level of quality of difficult parts (This would be like if my firm is making a very technical product, then we may want to produce it in house to ensure quality standards because we believe outside firms wont be able to replicate this quality), to increase level of acceptable quality. (If you are making a very technical product, and outside suppliers cant make a product to fall within your quality standards, then it would be better for you to make it yourself)

2) Quality Requirements

On average, there are ___ parts that go into a car. Toyota is a leader in supply chain management.

20,000

(Favor Making) Unreliable Suppliers: IF you want to ensure continuity fo supply, then you can make your products yourself. Toyota charges ____ dollars a minute if suppliers are late on making shipments.

25,000

Toyota had a p-valve that had 200 different versions, a crisis hit, and then they only had one supplier that burned down. After this incident, Toyota learned that they only needed to have __ different versions of the P-value. Toyota now only has ___ different suppliers for their p valves to keep competition and ___ mitigation.

5, 2, Risk

_____% of firms fail at having a transition back up plan. People always assume the best in people. EX: Boeing laying off their plant people and then shutting down their plants; how do they get people to come back? It is going to cost them a lot to bring their people and their plants back.

90

Outsourcing complete business processes can speed up innovative change, organizations can outsource entire functions (like outsourcing HR) , consideration must be given to secrecy issues when outsourcing aspects of a part or process design.

Business Process Outsourcing Issues

A new management role is being developed as a result of strategic outsourcing becoming an emerging trend in the business world. This new management role is called the ___ ____ ____. This role manages and initiates outsourcing for direct support of the company's ___ line. Koufteros says that this role really doesn't exist in the real world.

Chief Resource Officer, Bottom

Firms can mitigate the the chances of double outsourcing happening by making sure that they write in their ____ that they do not want double outsourcing to occur. EX: Cereal company outsourced their blueberries supply to an offshore provider. They then realized that their blueberries were being outsourced from their outsourced supplier.

Contracts

(Favor Buying) Supplier's specialized know-how: Have someone make it if they know what they are doing. This is like how dell outsources the making of their monitors to Sony. Dell outsources since it would be very expensive for them to start manufacturing monitors themselves. There are very few suppliers for these products because it is very sophisticated products and because they already have the production facilities set up to ___ these monitors.

Create

2) (Strategic Issues) Supplier ____ is a disadvantage of outsourcing. You are at the mercy of your suppliers.

Dominance

1) (Strategic Issues) Core Competencies: Core Competencies are teaching and ____. You can't outsource things that you are really ____ at, however you can outsource things that you really aren't good at.

Education, Great

Companies can't replicate owning an ___ supply chain that Ford did about 100 years ago. Companies simply can't do this today.

Entire

(Favor Making) Desire to Maintain a Stable Workforce: Oil and gas did a terrible job at doing this two years ago. Oil and gas fired people two years ago, instead of cutting costs and making operations leaner. It is difficult to replace talent and get back organizational knowledge after laying off too many employees. Like oil and gas would fire people that had 50 years of experience. ____ was smart and used natural attrition (people who want to retire) instead of laying people off. Exxon didn't lay off anyone during the downturn two years ago.

Exxon

4) (Strategic Issues) The Dangers of Vertical Integration: If a decision to "make" or "insource" results in vertical integration, the critical connection between output and rewards is broken. Cost and responsiveness both suffer. Vertical integration frequently results in a loss of __________ and responsiveness

Flexibility

___, apple's and sony's supplier, in shenzhen china. They installed nets on factories because employee were killing themselves by jumping off buildings.

Foxcon

____ doesn't make any computers, they outsource all of the making of their computers.

HP

Long-Term View: Focus on direct measurable costs but they also measure ____ costs (storage, inspection, tooling, quality, etc.)

Hidden

____ Integration is the outsourcing of all non-critical activities. The idea of this type of integration is to achieve significant ___ leverage. For horizontal integration to work, a firm must identify all non-____ activities and a firm's __ competencies must be defined. In horizontal integration, all non-critical are candidates for outsourcing. EX: A&M should be able to outsource anything other than eduction and research. Like they can outsource their cafeterias.

Horizontal, Cost, Critical, Core

Outsourcing is increasing rapidly, and not just for ___, many business functions are being outsourced. Outsourcing can enable the leveraging of a ___'s expertise, and increase in ____.

Materials, Suppliers, Innovation

Factors that influence the make/buy decision: Some firms occasionally make a non-standard part. Although a firm can create this part itself in house, a firm may want to have an external supplier around in case the firm's production cannot meet demand for the part.

Multiple Source Policy

___ ___ is a way that companies can cut costs during a downturn rather than by firing people.

Natural Attrition

If your at 100% production capacity, then your total cost of production will ___ be linear, you will incur an increase in fixed costs to increase capacity once you are at 100% capacity.

Not

Outsourcing can be a problem because company's lose control over their _____. This is a problem for apple right now in dealing with factory suicides.

Operations

(Favor Buying) Small Volume Requirements: You don't want to set up the process to manufacture something if you have a small volume, you will want to ____. If you did set up a process for a small volume then your fixed costs would skyrocket.

Outsource

If a supplier is able to produce a product more efficiently than you, then you may want to _____ to them.

Outsource

Factors that influence the make/buy decision: Workforce Stability: When the market is going down and you outsource, the workforce is decreased/let go; have an incentive to not outsource and make it in house to retain workforce. If the market is booming, is it temporary or permanent? Temporary - then you should _____ to someone else to maintain stability; permanent- then you will want to hire ___ people.

Outsource, More

Why is outsourcing becoming increasingly common? Explain.

Outsourcing is becoming increasingly common because firms are realizing that outsourcing can lead to lower staffing levels, reduced costs, and more flexibility for a firm than by making a product itself. Outsourcing is also being increasingly used so firms can focus more on their core competencies instead of having to deal with their non-core competencies. Lastly, outsourcing is also being used because a majority of firms are becoming highly specialized in what they are doing. This is pushing firms to want to outsource to other firms that can perform a task in a more effective manner than they can by themselves.

_______ means that you let someone else do your work. ____ means that you are letting someone else do your work in another country.

Outsourcing, Offshoring

Once an industrial base is outsourced away from the U.S, parts and products are not available in the U.S anymore. Once an industrial base moves abroad, it is hard for companies to _____ due to lack of parts domestically now.

Reshore

EX: After boeing outsourced everything, Boeing had issues because they had shut down their plants, they fired their engineers, so it was very hard for Boeing to start _____ the production of their Dreamliners.

Reshoring

Small volume requirements can go both ways. If you are a buyer and you are looking just to get a small volume of product, then it doesn't make sense for you to produce this product in house because of high fixed costs, but if the volume is small, then sometimes suppliers will not want to produce the product for you because you only want a __ order.

Small

Firms are becoming more aware of the strategic dimension of the make/buy decision. As technology has advanced, most manufacturing firms have become much more ______. Costs of materials has continued to ___ in many industries.

Specialized, Increase

From a Strategic Level: What should not be outsourced; 1.) An item that is critical to the ____ of a product 2.) An item that requires ____ design, manufacturing skills, or equipment 3.) An item that fits well within a firm's ___ competencies.

Success, Specialized, Core

Factors that influence the make/buy decision: Firms should take advantage of a supplier's knowledge and expertise. In today's world, many industries/suppliers are highly specialized and no one company can create what henry ford created over 100 years ago. This is an incentive for companies to outsource.

Supplier's specialized knowledge and research

Factors that influence the make/buy decision: Technology Life Cycles (this is like if your company is going to have to invest in technology that will become obsolete in a few years, then your company may want to outsource to place the burden on the supplier.) , Developing or new technology (this is like how it would be better for me to make my new fiber optic cable than anyone else because I am the only one who has the processes to produce this new technology.

Technology Risk and Maturity

(Favor Buying) Stable Work Force: Companies don't just want to hire ___ employees, and then just lay them off after they make a temporary product. It costs companies a lot to train, hire, pay salary, pay for employee mistakes, pay for loss of productivity.

Temporary

(Favor Buying) Indirect Managerial Control/Considerations and procurement and inventory considerations: Make/buy; you can buy 10,000 remotes from one supplier. You would have leverage with this supplier. VS, purchasing all 50 different components for a remote from different suppliers and assembling it yourself. This option would be ___ for your company because you would have to deal with 50 suppliers and have hundreds of purchase orders with each supplier. You would also have a lot of inventory if you create a product rather than just outsourcing it.

Worse

(Favor Making) Design Secrecy Required: If you outsource secretive recipes, then your recipe could get out to other companies rather than if you had just made the product ____.

Yourself