mgmt 524 global sourcing class two. agenda outsourcing as a business strategy definitions and...
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MGMT 524Global Sourcing
Class two
AgendaOutsourcing as a business strategyDefinitions and conceptsRationales for outsourcingThe outsourcing processRisk assessmentSuccess factorsMurphy, Ernst & Kim, Friedman, Monzcka
& Trent readingsCompletion of Scott’s case
Globalization• Globalization – Interdependent and integrated
world economy• All firms export and import – 97% of firms in US
<500 employees• 2006 over 2,500 trade treaties have been signed
vs. 181 in 1980. • Globalization of Production – low-cost factors of
production: China; “Weapons of Mass Production”
Tax Incentives and Benefits..Economic stimulation –
Emerging MarketsTax holidaysLocal content
Government InvestmentIndustrial ParksFree Trade ZonesSubsidizing R & D or other
development
Globalization’s behavioral characteristics
• Has Moore’s law has “hit the wall?”• Low-Cost Labor was initial enabler• Manufacturing “pulls” Engineering:• TTM key to maximize GM%• Access to Markets, talent, & “value chain”
Global is not local…
Effective Communication – remotelyMethods
PhoneEmailPaper – Fax, Mail, etc.
Pace and ContentTime zones
Is there ever a good time for a truly global meeting? It is always midnight for someone…
Advanced prep is VERY importantEnsure they know what you want
or you could lose another 24 hours….
LanguageBest case is dialog in local dialect (multilingual is
key skill in global companies today)English second best but need to keep crisp,
concise and avoid slangGive time for interpretation
Responsibilities of Sourcing ProfessionalsBeyond just continuity of supply..
Labor rightsChild laborWorking conditionsBenefits and hoursEmployee safety considerations
Environmental considerationsPollution/emissions/utilization of scare or
protected resources Recycling/ReclaimUtilization of hazardous materials (IE: ozone
depleting substances, lead, etc.)Who is responsible? What is produced via mfg
process? What is included in the finished product? Have we disclosed to end customer?
What is the impact to the company? (CSRs, tracking. Expensive)
Impacts of Ethical Excursions…..
Brand name erosionsCustomer Loyalty Diminished
Key customers lose confidence and will disassociate
Sales/Revenue ImpactLarger customers have Code of Ethics that
would prohibit interactionStock Price Impact
Key stockholder groups release holdings causing ripple effect in stock market
Indirect issuesDifficult to recruit talent to work at the
companiesSmaller companies lose credibility with key
supply chain players (operational and financial)
Employee Moral is diminished by the “bad press”
Towards sourcing excellenceWorld class supply base management
Intensify relations with suppliersDatabase with supplier informationDetailed audits with important suppliers
Develop and manage supplier relationshipsContinuous improvementsClassification of suppliers:
Commercial suppliersPreferred suppliersSupplier partners
Integration of suppliers in product developmentSuppliers with proved competencesUsing specific knowledge
Risk Management
What might cause disruption in supply?
Risk Mitigation plans to address
Cost Vs Risk consideration
What could happen?
Labor disputes – carriers, mfg., etc.Terrorist event Infectious disease - SAR’s, Bird Flu, etc.Military conflict – Iraqi, Korea, etc.Natural Disasters – Tsunami, earthquake,
fire, etc.Limitations of resources – Rolling blackouts
in ChinaCorruption and Political unrestPoor performance – unqualified…
Some ideas to offset the risk…Multiple Sources in Multiple Geo’sAlternate or substitute strategiesInventory strategy
HubsSafety StockOn site consignment/VMI
(Vendor Managed Inventory)Strong qualification process or
evaluationVerify capabilities directly or via
customer referralsAsk for certifications, audit
results, endorsements, etc.
Cost Vs Risk..Global Source Vs Local Source
Transportation costStorage costPotential recovery costAgility of supply lineLoss, etc…
Should consider risk from source to proximity of useUnderstand the flow of the materials in the
supply chainManufacturing location through finished
good distributionValue add should increase as
you get closer to the end customer
Ensure you understand ALL of the costs and understand the Risk What happens if the lines go down? Cost
per minute? Loss of revenue or sales?
Global Production Networks (Ernst & Kim)Questions:1)What are the largest hurdles the “Flagship”
and the “network must overcome to streamlining the GPN?
2)What are the characteristics of the GPN, examples of MNCs that fit this profile?
3)How does knowledge transfer play a part and how might it affect the transfer or outsourcing of a factory?
Virtually through ‘linkages’
The concept of global production network (GPN)
Source: Ernst & Kim, 2001
Towards sourcing excellence
Supplier integration into order fulfillment processOutsource logistic and administrative tasksConnect suppliers with information systems and production planningDevelop plans to increase value for customer through purchasing
Supplier development and quality managementSuppliers are invited to participate in suggestions for improvementSuppliers are a source of new ideas
Strategic cost managementDetailed cost models Supply chain analysis and measures to decrease supply chain costs
together with suppliersSharing of advantages is necessary
Outsourcing as a sourcing strategyPreviously:
mainly outsourcing of manufacturing activitiesTrend was for low-cost labor
Currently: complete business functions are outsourcedCommon viable business strategyInnovation & design are now includedSee Friedman article: Made in the World
Definition of outsourcing
Characteristics of outsourcing:“Normal” In-house activities performed are
transferred to a third party Assets, knowledge and sometimes employees
are sent to the external partyExtended and long term embedded relationshipBoth parties experience new costs and risk
profiles
Forms of outsourcing services
Labor outsourcingMixed & consigned
outsourcingComplete turnkey
outsourcing
Contractor provides…
Facilities Some employees
Some or all of the following:
EmployeesMaterialsProcess and SystemsTechnology and
Equipment
Facilities
Management
Employees Materials Process and Systems Technology and
Equipment Facilities Management Decision rights Codified knowledge
Host firm provides…
Some employees Materials Process and Systems Technology and
Equipment Management
Some or all of the following:
EmployeesMaterialsProcess and SystemsTechnology and
Equipment
Facilities
Management
Program management Tacit knowledge
Chandrashekar, 2000
Definitions Off-shoring: Off-shoring relates to the commissioning of
work and ownership to another country. Maintain ownership.
Partial outsourcing: only a part of an integrated function is outsourced. The coordination of the function, activities, and decision rights still lie with the client (the buyer).
Turnkey outsourcing: applies when the responsibility for the execution of the entire function (or activities) lies with the external provider. This includes not only the execution of the activities, but also the coordination of these activities. May also include decision rights and design.
Rationales for outsourcing
Strategic reasons for outsourcing
1. Improve company focus2. Gain access to world class capabilities & Markets3. Get access to resources that are not available
internally4. Accelerate reengineering benefits5. Improve customer satisfaction6. Increase flexibility7. Sharing risks
Tactical reasons for outsourcing
1. Reduce control costs and operating costs2. Free up internal resources3. Receive an important cash infusion (next slide)4. Improve performance5. Ability to manage functions that are out of control
All these reasons underlie one overall objective: to improve the overall performance of the outsourcing firm
Cash-to-Cash Cycle Time0ENLI009
Inventory days + Days sales outstanding – Average payment of supply period for materials
Inventory0OPPLAN012
Forecast Accuracy
0OPPLAN008
Production Lead Times
0OPMAKE017
Perfect Order Fulfillment
0OPDEL061
Faultless Invoices
0OPDEL023
Scheduled Achievement
0OPMAKE022Delivery
Performance to Scheduled Commit Date
0OPDEL019
Returns0OPDEL067
Scrap0OPMAKE023
Fill Rates0OPDEL025
Order Fulfillment Lead Time
0OPPLAN030
Machine wait time0OPMAKE007
Yield0OPMAKE033
Number of Supply
Sources0OPSO012Total Source
Lead Time0OPSO041
0ENLI015
Sales0ENPR026
0ENLI0030OPPLAN017
One example of why to outsource
Four phase modelPhase 1
•Market search•Preliminary assessment•Potential supplier list
Phase 2•Detailed audit•Confidentiality agreement•Approved supplier list
Phase 3•Contract negotiation•Order issue•Kick-off meeting•Execution
Phase 4•Supplier report card•Post contract review•Continuous improvement•Supplier validation
CustomerFocus
Marketbenchmark
Continuous improvement opportunities
Identification and assessment
Project execution
Audit and approval
Adapted from Momme, 2002
Three phases:Strategic phase (why, what, who?)Transition phase (how?)Operational phase (how to control?)
Figure 8.4
The outsourcing process
Competenceanalysis
Assessment & approval
Contractnegotiation
Project execution & transfer
Managingrelationship
Contracttermination
Strategic phase Transition phase Operational phase
Adapted from Momme, 2002
Strategic phase1. Motives for outsourcing
Focus on core competencesFocus on cost efficiency/ effectivenessFocus on service
2. Which activities or functions are outsourced
Transaction cost approach Core competence approach
3. Qualifications of the supplierTechnical and managerial qualities to achieve
demanded level of performance
The Transition phase
Contract negotiation Contract forms a legal basis for relationshipContracts depends on characteristics of outsourced activityThe contract type has a great impact on the success of the joint
operation
Project execution and transfer Outsourcing transition can be very complexThe transfer should be conducted using project management
principlesTest phase before going ‘life’
The operational phaseIt is in the operational phase that the outsourcing will deliver
its expected resultsSuccessful outsourcing depends heavily on close cooperation
with the supplierSix core values as being critical to a successful outsourcing
relationship
Core values Supporting factorsShared goals and objectivesMutual dependenceOpen lines for communicationConcern for the other’s profitabilityMutual commitment to customer satisfactionTrust
•Developing a personal relationship•Having professional respect•Investment of effort by top management•Commitment to continuous improvement
McQuiston (2000)
Critical success factors of outsourcing
Understanding company goals and objectivesInclusion of outsourcing in the strategic vision and planSelecting the right supplierA properly structured contractOpen communication with the individual groups involvedOngoing management of the relationship (not embeddedness)Senior executive support and involvementCareful attention to personnel issues & resourcesConstant reflection on core competencies and IP versus
outsourcing, including decision and alienable rights
www.theoutsourcinginstitute.com
Understanding integrated global sourcing (Trent & Monczka)
Questions:1) What is the difference in your and the authors
minds regarding international purchasing and global sourcing?
2) Do you agree with the levels of domestic basic sourcing to global? How does a strategy achieve this? Why are orgs moving to this level of dedication?
3) Describe two of the critical success factors of global sourcing and describe why these are the most critical?
Current and expected Sourcing Levels as a %
Murphy ArticleQuestions:1) In your opinion, can fuel prices (or
another phenomena) alter the significant momentum towards outsourcing?
2)Is there a tipping point in any strategy that makes changing inefficient? Why?
3) How would you mitigate rising fuel costs if outsourcing was essential to your strategy?
Scotts Miracle Gro Case
In-House, Outsource, or Off-Shore?
Scotts Case - AssignmentSee word document on questions to be
answered from handoutDefend your answers in detailYour conclusion should be based on both
hard and soft data, all three options can be supported
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