Chapter 5 slides: Insourcing and Outsourcing

Vertical Integration

Performing upstream or downstream activities within the firm

Benefits of vetical integration

Fewer disruptions, more control, higher margins.

Cons of vertical integration

Less specialization, flexibility, capacity bottlenecks, lower competetive pressure on internal stages.

Insourcing

Bringing an activity back inside the organization after external purchase. A sourcing and capability building decision

Difficulties of insourcing

Terminating or redesigning existing supply conracts

Building or rebuilding supply network

Developing internal design,production maangement capabilities

Outsourcing

Obtaining an activty from an external supplier

Benefits of outsourcing

Lower production cost, stronger focus on core compentencies, greater volume flexibility, less internal conflict

Downsides of outsourcing

Transaction costs, relationship management, potential loss of internal compentencies, greater risk of disruption

Categorize the four supplier types

I Profficient supplier

II Dependable supplier

III At arms-length supplier

IV Risky supplier

Subcontracting

A tiered structure where a primary contractor hires secondary contractors

When is subcontracting needed

When needs are complex

What aspects of subcontracting is harder to control

Cost, schedule, quality, conformance to specifications

Service triad

An outsorcuing model where the supplier serves the buyers customer directly

Third party logistics

A provider bundles services such as transportation, warehousing, operations support

The three ways to outsource the supply and logistics function

Procure to Pay (recurring purchase/payment activities)

Source to Contract (sourcing analysis, supplier selection, contracting)

Source to pay (Integrated S2C+P2P process)

Modern Outsourcing

Firms may outsource entire processes and customer facing activities

Agency Theory and Supplier Risk

When firms overrely on external suppliers they face performance, quality and incentive alingment risks

Common supplier risks

Inability to cope with demand flunctuation, delivery disruption, non competetive pricing, low quality gaps

Managerial responses to supplier risks

Supplier certification, development, quality management programs, target costing

Human factors of market failiure

Bounded rationality from desicon makers

Opportunism out of self interest

Atmosphere (in house vs outsourcing)

Transactional factors of market failiure

Uncertainty, limited competition, information asymmetry between parties

Effective SCM today

Close, long term relationships with one or two partners with high levels of interactive development.

Open market negation > Co-operartion > Coordination > Collaboration

price based discussion > limited supplies > information linkages > Supply chain integration

Medium concentration practices

VMI & CPFR, information sharing, joint sharing

Low/High concentration practices

Logistics and production resource sharing, contracts