OUTSOURCINGDr. Ron Lembke
Outsourcing - What is it?
Transfer activities to outside providersOutside providers do activitiesResources: people, facilities, equipmentDecision-making responsibility
OEM = Original Equipment Manufacturername on the product, does not produce
Flextronics/Solectron, Foxconn makes it for you
Strategic Sourcing
Has to be feasible to outsourceAssembly line balancing – probably not a step in the middle
Figure out what to buy from whomWhat do we want to accomplish?
More effective!More efficient!
Continuous Process Improvement?
Outsourcing – Why do it?Organizationally-driven reasons
Focus on what you do bestMore flexible capacity Employees: career paths
Improvement-driven reasonsBetter quality & productivity, cycle timeGain skills not otherwise available
Associate with superior providers Financially-driven reasons
Reduce assets, improve ROALower fixed costsCash from selling capital equip.
Make or Buy Decision
DIY: Lower costNo capable suppliersInadequate supplyCompetitive IssuesCore competenciesSpecialization
Low purchase costLack of capacityWant to gain skillReduce inv. costsManagement focusPatent issues
Reasons to Make Reasons to Buy
Other Factors
Degree of coordination with other activitiesRelationship-specific investmentsEasy to copy technologies, or low IP (intellectual properties) protection
Second-tier sub-suppliers
What to not Outsource
Core activitiesKey to the businessDo not confer competitive advantage
Strategic activitiesKey source of competitive advantage
X-box – Microsoft never considered makingFlextronics in Guadalajara$5 / hr vs. $1 in Doumen, China
Outsourcing Example
In 1981, IBM ‘PC’.Consumers care about hardwareNo one cares about the software that lets them talk to the processor. Outsourced the OS to whom?
Anybody heard of “Microsoft?”
UCSD Pascal $450CP/M $175MS-DOS $60
IBM: ‘05 Lenovo $1.75bMS: 2012 EBITDA $31b
Summary
Defining outsourcingBenefits of outsourcingWhen to do it or not do itLessons from IBM and Microsoft
