Lecture Purchasing and supply chain management (3rd/e): Chapter 9 - W. C. Benton
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Chapter 9:
Strategic Outsourcing
Purchasing and Supply Chain Management
3rd edition
Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.
Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013,
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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Once the process is outsourced, assets are no longer
maintained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
contract manufacturing
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Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.
Current Outsourcing Trends
•
•
Popularity of outsourcing
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By 2005, global business process outsourcing surpassed the
US$6 trillion
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25~34 % of a typical executive’s budget is outsourced
Composition of outsourcing contracts
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76% of announced outsourcing contracts represented new deals
•
24% represent a combination of contract extensions, expansions,
or renewals
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Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.
Business Process Outsourcing
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Expected strategic benefits:
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Cost minimization
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Reduce and control operating costs
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Turn fixed costs into variable costs
Refocus on core competencies
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Refocus scarce resources
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Acquire external capabilities
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Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.
Realizing Outsourcing Benefits
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•
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20~25% of all outsourcing relationships fail within two
years
Nearly half fail within five years
Conditions needed to realize expected outsourcing
benefits:
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Extensive strategic assessment of the case
•
True commitment to a cooperative relationship
•
Training and recruitment within outsourcing organizations
focused on relationship building and management
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Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.
Hidden Costs of Outsourcing
1.
Quality costs
2.
Supplier vendor relationship management
3.
Internal coordination
4.
Implementation of external sourcing model
5.
Government and politicsrelated expenses
6.
Supply chain risk management
7.
Miscellaneous financial considerations
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Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.
1. Quality Costs
•
The costs associated with ensuring quality
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Categories of quality costs:
Preventative cost
1.
•
Appraisal cost
2.
•
e.g., inspections, audits, monitoring mechanisms
Internal failure cost
3.
•
4.
i.e., designing quality into products and processes
e.g., scrap, rework, internal downtime
External failure cost
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Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.
2. Supplier Vendor
Relationship Management
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The high cost of relationship building and coordination
•
•
External sourcing of strategic products and services
Costs of relationship
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At least 3~10% of the annual contract value
•
High labor and travel expenses of purchasing personnel
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IT infrastructure and management costs
•
Supplier development programs costs
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Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.
3. Internal Coordination
•
•
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The overhead expenses incurred solely due to the
decision to internally source a product or service
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Payroll, benefits management
•
Utility, IT
Thus, external sourcing is expected to eliminate this
cost.
However, external sourcing does not equate to
significant reduction in internal coordination costs.
•
In many cases, outsourcing is unable to free up the anticipated
level of internal resources.
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Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.
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
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Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.
5. Product Service Design and Development
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•
The intertwined relationship between:
•
Product or service architecture
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Cost of coordination
Tightly coupled or integrated product designs are
associated with:
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Tacit and less easily codified knowledge
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Higher knowledge sharing requirements
•
Higher coordination cost
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Therefore, it may not be appropriate for external
Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.
•
6. Government and Politics Related
Expenses
•
•
Costs involved with ensuring compliance with
governmental laws, regulations, and even local
business customs
Includes:
•
Legal expenses incurred to learn about a foreign
location’s laws and regulations
•
Lobbying efforts and travel
•
Taxation, tariffs, quota systems
•
Local content obligations
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Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.
7. Supply Chain Risk Management
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•
Outsourcing as one of the key factors driving increased
levels of supply chain risk
4 iterative phases of risk management:
1)
Risk assessment
2)
Risk mitigation
3)
Risk monitoring
4)
Contingency planning
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Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.
8. Miscellaneous Financial Considerations
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Cost improvement from the learning curve associated
with cumulative volume
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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
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Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.
Evaluating the Business Case
Strategic evaluation
1.
•
Understand the strategic value of the activity or system
Financial evaluation
2.
•
Short and longterm financial evaluation
•
Evaluation of conditional factors
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Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.
Questions?
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Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved.
