Outsourcing and Subcontracting Lecture Notes

Flashcards reviewing key concepts, advantages, disadvantages, and factors related to outsourcing and subcontracting.

What is outsourcing?

It is the transfer or sale of ownership of assets previously associated with particular activities to an external party.

What is subcontracting?

It is when another business takes an assigned task or part of a task from another business under a contract.

Why is it difficult to distinguish between outsourcing and subcontracting?

It requires knowing the history of the main organization to determine if it previously owned the business to which activities are being transferred. The terms are often used interchangeably because the contract's operation is similar.

How can outsourcing help businesses with capacity utilization problems?

By allowing firms to increase supply to match demand without expanding their own factory size, or reduce supply to match a fall in demand by decreasing outsourced work, without changing factory size.

How does available capacity influence a business's decision to outsource?

If a business has high spare capacity, it will produce in-house. If there is a shortage of capacity, outsourcing becomes a more financially viable solution.

When might expertise influence a business to outsource or not outsource?

A business with considerable expertise may be reluctant to outsource. However, if the outsourcing provider has better skills, outsourcing can lead to more efficient production.

Why can quality considerations be a risk when outsourcing?

It becomes more difficult for the business to control the quality of the products or services, potentially leading to lower quality and reputational damage.

How does the nature of demand impact outsourcing decisions?

Businesses may outsource to protect against sudden fluctuations in demand. If demand is stable, they may prefer to produce in-house.

What are some additional benefits of outsourcing?

Faster reaction to demand changes, access to specialized and efficient providers, ability to focus on core business, and handling non-standard orders without disrupting normal production.

What is a major disadvantage of outsourcing related to product quality?

The quality of the product is no longer directly under the firm's control, and an unreliable provider can negatively impact the business's reputation.

How can excessive outsourcing harm a company's operational capabilities?

It can erode a company's operations base and hinder its ability to initiate research and implement changes.

Is outsourcing always a cheaper option?

No, because the outsourced producer also seeks profit, it may sometimes be more expensive to outsource than to produce in-house.

What risk does sharing confidential information entail when outsourcing?

The firm risks losing its competitive advantage if the supplier steals its confidential methods and patents.

How does cost influence the decision to outsource, particularly offshoring?

If production is not a core competency, it can be outsourced to benefit from lower costs in other countries, such as lower wage levels and reduced rental payments.

What kind of risks are associated with outsourcing, and can you give examples?

Outsourcing can increase risk due to loss of control over operations and know-how. Examples include Toyota's quality issues with outsourced accelerators and Boeing's quality problems with the 'Dreamliner' due to high outsourcing.

How can outsourcing impact a firm's profit?

It can potentially result in lower profits for the primary business, as the outsourced business also makes a profit from that element of production.

Provide the key term definition for Outsourcing.

The transfer of activities, previously conducted in-house, to a third party, outside of the business.

Provide the key term definition for Offshoring.

Used to describe outsourcing/subcontracting when the activity being transferred takes place in a different country to the contracting company.