Outsourcing and the Outsourcing and the Supply ChainSupply Chain

““It’s time for companies to turn some of It’s time for companies to turn some of their focus away from automation to their focus away from automation to supply chain management.” - Kupersupply chain management.” - Kuper

By: Jamie Desjarlais

The Supply ChainThe Supply Chain

Manufacturer

Distributor

Distributor

Suppliers

Customers

The Bullwhip EffectThe Bullwhip Effect

In The Supply Chain

“wildest action”

Change in customer demands ripple

through entire chainInitiates action

The bullwhip effect can cause costly disruptions to upstream members of a supply chain as the

variance in orders increases.

Supply Chain ManagementSupply Chain Management

Management needs Management needs to evaluate costs and to evaluate costs and consider how they consider how they impact business impact business results.results.

Managing costs is of Managing costs is of greater importance greater importance than where parts than where parts come from.come from.

CostsCosts

Costs are incurred due to:Costs are incurred due to:

Uncertainties in demand, supply, and Uncertainties in demand, supply, and processes.processes.

AssumptionsAssumptions

DelaysDelays

VolatilityVolatility

Work forceWork force

As a result, profit and market share are As a result, profit and market share are affected.affected.

One Way To Control CostsOne Way To Control Costs

Outsourcing = Outsourcing = allotting work to allotting work to suppliers and suppliers and distributors to provide distributors to provide needed services and needed services and materials and to materials and to perform those perform those processes that the processes that the organization does not organization does not perform themselves. perform themselves. –Krajewski 109.–Krajewski 109.

Who Out Sources?Who Out Sources?

Usually small to medium sized companies Usually small to medium sized companies who lack experience in areas look to who lack experience in areas look to outsource.outsource.

Service oriented organizations are Service oriented organizations are suggested to stay away from outsourcing suggested to stay away from outsourcing Customer Relationship Management Customer Relationship Management systems because of confidentiality of systems because of confidentiality of customer information.customer information.

Who Out Sources (cont’d)Who Out Sources (cont’d)

Business entities with a tight budget.Business entities with a tight budget.

Those looking for more expertise in an Those looking for more expertise in an area they are lacking.area they are lacking.

Areas that are overworked.Areas that are overworked.

Two Types of OutsourcingTwo Types of Outsourcing

DomesticDomestic

Outsourcing within Outsourcing within the same country a the same country a business is located.business is located.

OffshoreOffshore

Outsourcing services Outsourcing services from companies in from companies in another country.another country.

Reasons For Offshore OutsourcingReasons For Offshore Outsourcing

1.1. Cost Containment: Cost for employees are on Cost Containment: Cost for employees are on the rise (i.e.. Healthcare) the rise (i.e.. Healthcare) Result: Companies look overseas for lower Result: Companies look overseas for lower cost and therefore stop hiring here.cost and therefore stop hiring here.

3.3. Invest In Innovations: R&D is on the decline, Invest In Innovations: R&D is on the decline, therefore businesses here are falling behind as therefore businesses here are falling behind as other countries are heavily investing in other countries are heavily investing in innovations. The U.S. needs to start taking innovations. The U.S. needs to start taking those same risks underdeveloped countries those same risks underdeveloped countries are taking.are taking.

Offshore Outsourcing cont’d.Offshore Outsourcing cont’d.

1.1. Science and Math Education: Computer Science and Math Education: Computer science and IT graduates are declining in science and IT graduates are declining in the US and Europe, but rising in other the US and Europe, but rising in other countries.countries.

2.2. Outsourcing overseas is occurring Outsourcing overseas is occurring because IT departments will listen over because IT departments will listen over there.there.

Outsourcing and the Supply ChainOutsourcing and the Supply Chain

Outsourcing increases the complexity of Outsourcing increases the complexity of the supply chain.the supply chain. Transfer point of ownership and information Transfer point of ownership and information

increases the complexity.increases the complexity. Creates risk for delays and information Creates risk for delays and information

distortion.distortion.

Outsourcing and the Supply Chain Outsourcing and the Supply Chain

Management needs to weigh many factors Management needs to weigh many factors besides costs.besides costs. They need to consider its employees that They need to consider its employees that

could be affected.could be affected. Competencies of potential out sourcesCompetencies of potential out sources CustomersCustomers

Management must have a deep and Management must have a deep and accurate understanding of processes and accurate understanding of processes and the number of players on the rise.the number of players on the rise.

Risk ManagementRisk Management

Assessing risk is a must when looking Assessing risk is a must when looking overseas.overseas.

Managers look at historical and future Managers look at historical and future trends to create some insurance against trends to create some insurance against unpredictable but probable changes in the unpredictable but probable changes in the supply chain.supply chain.

Challenge: Measuring the impact of Challenge: Measuring the impact of uncertainty of business performance.uncertainty of business performance.

Risk Management cont’d Risk Management cont’d

Result Risk management provides Result Risk management provides insurance against unpredictable, but not insurance against unpredictable, but not unlikely eventsunlikely events

Keys to Outsourcing OffshoreKeys to Outsourcing Offshore

Diversification!Diversification! Analogy: Much like a Analogy: Much like a

stock portfolio.stock portfolio. Investing in many Investing in many

different stocks different stocks reduces risk of loss.reduces risk of loss.

Same with outsourcing, companies Same with outsourcing, companies must position processes in different must position processes in different

geographies.geographies.

Three Major Variables To DiversifyThree Major Variables To Diversify

1.1. GeographyGeography

2.2. System development lifecycleSystem development lifecycle

3.3. Business processBusiness process

This will allow a company to obtain a This will allow a company to obtain a better business strategy, save costs and better business strategy, save costs and keep risk within tolerable levels.keep risk within tolerable levels.

DiversificationDiversification

Flexibility is createdFlexibility is created With this added flexibility companies are With this added flexibility companies are

able to protect themselves from changes able to protect themselves from changes in political, regulatory, and/or economic in political, regulatory, and/or economic conditions.conditions.

New taxes, exchange rates, or increases New taxes, exchange rates, or increases in wage rates give reason for businesses in wage rates give reason for businesses to reposition outsourced applications as to reposition outsourced applications as well.well.

Wrap upWrap up

Managers of supply chains need to evaluate costs and Managers of supply chains need to evaluate costs and must be educated on the processes they manage when must be educated on the processes they manage when considering outsourcing applications of the chain.considering outsourcing applications of the chain.

Outsourcing involves risk taking. Those risks need to be Outsourcing involves risk taking. Those risks need to be weighed in management’s decision making process.weighed in management’s decision making process.

Diversifying outsourced applications helps reduce risk Diversifying outsourced applications helps reduce risk much like a stock portfolio does for an investor.much like a stock portfolio does for an investor.

BibliographyBibliography

Kanan, Nari. “Viewpoints of an Entrepreneur.” A Kanan, Nari. “Viewpoints of an Entrepreneur.” A Business Intelligence Blog. 27 March 2004. Business Intelligence Blog. 27 March 2004. http://www.techupdate.comhttp://www.techupdate.com

Kleinhammer, Rod. Nelson, Todd. Warner, AJ. Kleinhammer, Rod. Nelson, Todd. Warner, AJ. “Outsourcing: Balancing the Risks.” June 2003. “Outsourcing: Balancing the Risks.” June 2003. http://www.darwingmag.com/read/060103/risk.htmlhttp://www.darwingmag.com/read/060103/risk.html..

Krajewski, Lee. Krajewski, Lee. Operations Management: Operations Management: Processes and Value Chains.Processes and Value Chains. New Jersey: New Jersey: Pearson Education, Inc. 2002Pearson Education, Inc. 2002

Bibliography cont’d.Bibliography cont’d.

Kuper, Andre. “Risk Management In The Kuper, Andre. “Risk Management In The Supply Chain.” 15 June 2004. Supply Chain.” 15 June 2004. http://www.ascet.comhttp://www.ascet.com

Mello, Adrian. “Making Sense of CRM Mello, Adrian. “Making Sense of CRM Outsourcing.” 10 April 2002. Outsourcing.” 10 April 2002. http://www.techupdate.comhttp://www.techupdate.com