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