Strategic outsourcing is addressed in Chapter 9. Outsourcing is the complete transfer of a business process that has been traditionally operated and managed internally to an independently owned external service provider.
Chapter9: StrategicOutsourcing PurchasingandSupplyChainManagement 3rdedition PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013, Outsourcing • Complete transfer of a business process to an independent external organization Once the process is outsourced, assets are no longer maintained • People, facilities • Equipment, technology A departure from subcontracting, joint venturing, and contractmanufacturing PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. CurrentOutsourcingTrends Popularityofoutsourcing By2005,globalbusinessprocessoutsourcingsurpassedthe US$6trillion • 25~34 % of a typical executive’s budget is outsourced Composition of outsourcing contracts • 76% of announced outsourcing contracts represented new deals • 24% represent a combination of contract extensions, expansions, or renewals Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved. Business Process Outsourcing • Expected strategic benefits: • • Cost minimization • Reduce and control operating costs • Turn fixed costs into variable costs Refocusoncorecompetencies Refocusscarceresources Acquireexternalcapabilities PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. RealizingOutsourcingBenefits • 20~25% of all outsourcing relationships fail within two years Nearly half fail within five years Conditions needed to realize expected outsourcing benefits: • Extensive strategic assessment of the case • True commitment to a cooperative relationship • Training and recruitment within outsourcing organizations focused on relationship building and management Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved. Hidden Costs of Outsourcing Quality costs Supplier vendor relationship management Internal coordination Implementation of external sourcing model Government and politicsrelated expenses Supply chain risk management Miscellaneous financial considerations PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. 1.QualityCosts Thecostsassociatedwithensuringquality Categoriesofqualitycosts: Preventativecost Appraisal cost • e.g., inspections, audits, monitoring mechanisms Internal failure cost • i.e., designing quality into products and processes e.g., scrap, rework, internal downtime Externalfailurecost PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. 2.SupplierVendor RelationshipManagement Thehighcostofrelationshipbuildingandcoordination Externalsourcingofstrategicproductsandservices Costs of relationship • At least 3~10% of the annual contract value • High labor and travel expenses of purchasing personnel • IT infrastructure and management costs • Supplier development programs costs PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. 3.InternalCoordination Theoverheadexpensesincurredsolelyduetothe decisiontointernallysourceaproductorservice Payroll,benefitsmanagement Utility,IT Thus,externalsourcingisexpectedtoeliminatethis cost However,externalsourcingdoesnotequateto significantreductionininternalcoordinationcosts Inmanycases,outsourcingisunabletofreeuptheanticipated levelofinternalresources PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. 4. Implementation of External Sourcing Model • Activities associated with switching sources: • Supplier search, evaluation, and contracting • The transfer of physical assets • Domestic and international travel during startup • Training of the new source 10 Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved. 5. Product Service Design and Development • • The intertwined relationship between: • Product or service architecture • Cost of coordination Tightly coupled or integrated product designs are associated with: • Tacit and less easily codified knowledge • Higher knowledge sharing requirements • Higher coordination cost 11 Therefore,itmaynotbeappropriateforexternal PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. 6.GovernmentandPoliticsưRelated Expenses Costsinvolvedwithensuringcompliancewith governmentallaws,regulations,andevenlocal business customs Includes: • Legal expenses incurred to learn about a foreign location’s laws and regulations • Lobbying efforts and travel • Taxation, tariffs, quota systems • Localcontentobligations 12 PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. 7.SupplyChainRiskManagement Outsourcingasoneofthekeyfactorsdrivingincreased levelsofsupplychainrisk 4iterativephasesofriskmanagement: 1) Risk assessment 2) Risk mitigation 3) Risk monitoring 4) Contingency planning 13 Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved. 8. Miscellaneous Financial Considerations • Cost improvement from the learning curve associated with cumulative volume • • External suppliers can aggregate the demands of their multiple customers Cost improvement by outsourcing firm is determined by: • Competitive conditions in the supply market • Power structures • Threat of opportunistic behavior by the external supplier 14 Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved. Evaluating the Business Case Strategic evaluation • Understandthestrategicvalueoftheactivityorsystem Financialevaluation Shortưandlongưtermfinancialevaluation Evaluationofconditionalfactors 15 PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved. Questions? 16 Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved. ... Truecommitmenttoacooperativerelationship Trainingandrecruitmentwithinoutsourcingorganizations focusedonrelationshipbuildingandmanagement PurchasingandSupplyChainManagement,3rdedition,Copyrightâ2013,W.C.BentonJr.,Allrightsreserved.... Local content obligations 12 Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved. 7. Supply Chain Risk Management • • Outsourcing as one of the key factors driving increased ... Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved. Questions? 16 Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.