Ch. 11: Outsourcing

Outsourcing

• Contracting out services that need to be unertaken on a regular basis

• Complete transfer of a business process to an independant business

• : HR, equipment and people

Outsourcing Core Value-Chain Activities

• Supply chain: Manufacturing

• Downstream activities: Distribution

Outsourcing Support Activities

• HRM

• R&D

• Facilities management

Problems of Outsourcing

• 20%-25% of relationships fail within first 2 years, 50% in first 5 years

  • Hidden costs

• Loss of key skills/competencies

• Unreliability of suppliers

• Poor contracts

• Employee morale

• Dependency

• Communication problems

Benefits of Outsourcing

• Cost minimization: Fixed costs, inventory, and operational

• Refocus on core competencies

• Operational performance improvements: Flexibility, quality and reduced cycle time

• Increased market share

Conditions Needed for OS

• Extensive strategic assessment

• True commitment to cooperative relatinship

• Training and recruitment within outsourcing orgs focus on relationship building

Hidden Costs of Outsourcing

• Quality costs

• Supplier-Vendor relationship management

• Supply chain risk management

• Implementation fo external sourcing model

• Govt. and politcal related expenses

• Internal coordination

Hidden Costs of Outsourcing: Quality Costs

• Preventative costs

• Appraisal costs

• Interal failure costs

• External failure

Hidden Costs of Outsourcing: Supplier-Vendor Relationship Management

• Relationship building and coordination

• 3%-10% of annual contract value

• IT structure, development programs, high labour and travel costs

Hidden Costs of Outsourcing: Internal Coordination

• OH expenses

• Payrollm benefits, utility and IT

• Does not mean signifcant reduction of costs

Hidden Costs of Outsourcing: Implementation of External Sourcing Model

• Supplier search, evaluation, and contracting costs (~3% of contract value)

• Transitions taking over 10 months, including asset transfer and travel

• Training new suppliers and additional internal staff support

• Lower efficiency at contract start and training relationship managers

Hidden Costs of Outsourcing: Product Service Design and Development

• Relationship between product/service architecture and coordination cost

• Tightly integrated designs involve tacit knowledge and high knowledge sharing

• Higher coordination costs make them less suitable for external sourcing

Hidden Costs of Outsourcing: Government and Politics Related Expenses

• Ensuring compliance to laws, regulations and customs

• Legal expenses, lobbying efforts and travel

• Taxations, tariffs, and quota systems

• Local content obligations

Hidden Costs of Outsourcing: Supply Chain Risk Management

• Key factor

• 4 iterative phases of risk management

  • Risk assessment

  • Risk mitigation

  • Risk monitoring

  • Contingency planning

Hidden Costs of Outsourcing: Miscellaneous Financial Considerations

• Learning curve cost reductions from cumulative volume

• Suppliers aggregate demand across multiple customers

• Outsourcing cost benefits depend on market competition, power balance, and opportunism risk

Process of Outsourcing

• Strategic Eval

• Financial eval

• Vendor search and contracting

• Transition to external sourcing model

• Activity and relationship management

Evaluating the Business Case

1. Strategic Evaluation: Understand the strategic value of the activity or system

2. Financial Evaluation: Short- and long-term financial evaluation
   • Evaluation of conditional factors

3. Supplier Selection
   • Supplier profiles
   • Clearly establish expectations

4. Contract Development
   • Key governance tool of the relationship
   • Risk of suppliers acting counter to the objectives of the buyer

Buyers’ Outsourcing Risks (BOR)

• Potential operational, financial, reputational, and legal dangers a company faces when OS

• Risks

  • Poor quality

  • Data breaches

  • Hidden costs

  • Overdependancy

• BOR= PA X NC

• PA: The probability that an adverse event will occur

• NC: Negative consequences if the adverse event occurs

Consensus Transition Plan

• Communication criteria

• Personnel criteria

• Transition criteria

Cultural Distance

• Negative effect on control and coordination

• Individualistic cultures usually lead to higher costs

• Inter-firm management

Three Criteria for Outsourcing

• Strategic: Weigh (1) relative strategic value of process, (2) capability and efficiency of external supply base

• Optimal operational arrangements: e.g. how difficult to integrate outsourced operations

• Capacity to make the major organizational changes associated with outsourcing

Real-Time Visibility and Monitoring

• Asset tracking: Monitor movement of goods, ensuring partners are meeting delivery schedules

  • GPS, RFID, IoT

• Control Towers: Cloud-based SCM platforms to centralize data

SCM and Performance

• AI-Powered Performance Analytics: Leverage to benchmark partners

  • : Supplier performance, quality ratings

• Automated Communication: Streamline communication

• : Chatbots and AI assistants

• Digitalized Contracts: Ensure compliance

Predictive and Advanced Optimization (AO

• Demand forecasting

• Scenario Planning and “What-if” analysis

• Intelligence Routing: Optimize shipping

Process Automation (RPA)

• Automated Ordering and Invoicing: Implement Robotic Process Automation (RPA)

• Automated Data Entry: Use Intelligent Document Processing (IDP) to extract data

Future Trends

• Third party logistics

• Cognitive Procurement: AI negotiating with supplier systems directly

• Predictive Risk Mitigation: AI spotting emerging geopolitical or weather
  risks before they impact operations