Outsourcing Strategy

 Presented By:
 Akshay Kumar
 Hiteshwar Chauhan
 Niten Kumar
 Sumit Kumar
 Abhishek Verma

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 Meaning
Strategic Outsourcing involves
separating out some of company’s value
creation activities within a business and
letting them be performed by a specialist
in that activity.

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 Introduction
 Outsourcing components have increased
progressively over the years
 Some industries have been outsourcing
for an extended time
 Fashion Industry (all manufacturing
outsourced)
 Electronics Industry
 Cisco (major suppliers across the world)
 Apple (over 70% of components outsourced)

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Not Just Manufacturing but Product
Design, Too…
 Taiwanese companies now design and
manufacture most laptop sold around the
world
 Brands such as Hewlett-Packard and
PalmOne collaborate with Asian suppliers
on the design of their PDAs.

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 Nike’s outsourcing strategy
 Business model
 Design
 Development
 Marketing and sales
 Nike currently produces their products in
more than 800 contract factories
throughout the world.

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 Contd.
 Nike will also focus on making a strong
effort in price leadership. There products
in the past have been concentrated in the
higher end of the pricing category. We will
now make an entrance into lower price
categories with our quality products. This
will enable us to capture an even greater
hold on market share.

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Framework for Make/Buy Decisions
 How can the firm decide on which
component to manufacture and which to
outsource?
 Focus on core competencies
 How can the firm identify what is in the core?
 What is outside the core?

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 Two Main Reasons for
Outsourcing
 Dependency on capacity
 Firm has the knowledge and the skills
required to produce the component
 Dependency on knowledge
 Firm does not have the people, skills, and
knowledge required to produce the
component
 Outsources in order to have access to these
capabilities.

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Questions/Issues with Outsourcing
 Why do many technology companies
outsource manufacturing, and even
innovation, to Asian manufacturers?
 What are the risks involved?
 Should outsourcing strategies depend on
product characteristics, such as product
clockspeed, and if so how?

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 Outsourcing Benefits
 Focus on core competency
 Buyer can focus on its core strength
 Allows buyer to differentiate from its competitors
 Increased flexibility
 The ability to better react to changes in customer
demand
 The ability to use the supplier’s technical knowledge to
accelerate product development cycle time
 The ability to gain access to new technologies and
innovation.
 Critical in certain industries:
 High tech where technologies change very frequently
 Fashion where products have a short life cycle

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 Outsourcing Risks
Loss of Competitive Knowledge
 Outsourcing critical components to suppliers
may open up opportunities for competitors
 Outsourcing implies that companies lose their
ability to introduce new designs based on their
own agenda rather than the supplier’s agenda
 Outsourcing the manufacturing of various
components to different suppliers may prevent
the development of new insights, innovations,
and solutions that typically require cross-
functional teamwork

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 Outsourcing Risks
Conflicting Objectives
 Demand Issues
 In a good economy
 Demand is high
 Conflict can be addressed by buyers who are willing to
make long-term commitments to purchase minimum
quantities specified by a contract
 In a slow economy
 Significant decline in demand
 Long-term commitments entail huge financial risks for
the buyers
 Product design issues
 Buyers insist on flexibility
 would like to solve design problems as fast as possible
 Suppliers focus on cost reduction
 implies slow responsiveness to design changes.
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Examples of Outsourcing Problems
IBM
 PC market entry in 1981
 Outsourced many components to get to market
quickly
 40% market share by 1985 beating Apple as the
top PC manufacturer
 Other competitors like Compaq used the same
suppliers
 IBM tried to regain market by introducing the
PS/2 line with the OS/2 system
 IBM market share shrunk to 8% in 1995
 Behind Compaq’s 10% leading share
 Led to eventual sale of PC business to Lenovo

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Examples of Outsourcing Problems
Cisco
 2000 problem:
 Forced to announce a $2.2 billion write-down for
obsolete inventory
 Significant reduction in demand for
telecommunication infrastructure
 Problem in its virtual global manufacturing
network.
 For several years Cisco Systems has embraced
outsourcing as a practice to leverage global skills
to expand its engineering/product development
and IT capabilities. By using its own network-
based tools to track projects and vendor financials
online, Cisco has been able to shrink its
governance budget and improve its service levels.
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 Outsourcing Benefits and Risks
Benefits
 Economies of scale
 Aggregation of multiple orders reduces costs, both in
purchasing and in manufacturing
 Risk minimizing
 Demand uncertainty transferred to the suppliers
 Suppliers reduce uncertainty through the risk-pooling
effect
 Reduce capital investment
 Capital investment transferred to suppliers.
 Suppliers’ higher investment shared between
customers.

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 Outsourcing Decisions at Toyota
 About 30% of components in-sourced
 Engines:
 Company has knowledge and capacity
 100% of engines are produced internally
 Transmissions
 Company has the knowledge
 Designs all the components
 Depends on its suppliers’ capacities
 70 % of the components outsourced
 Vehicle electronic systems
 Designed and produced by Toyota’s suppliers.
 Company has dependency on both capacity and
knowledge

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 Outsourcing Decisions at Toyota
 Toyota seems to vary its outsourcing
practice depending on the strategic role of
the components and subsystems
 The more strategically important the
component, the smaller the dependency on
knowledge or capacity.

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 Product Architectures
 Modular product
 Made by combining different components
 Components are independent of each other
 Components are interchangeable
 Standard interfaces are used
 Customer preference determines the product
configuration.
 Integral product
 Made up from components whose functionalities are
tightly related. =
 Not made from off-the-shelf components.
 Designed as a system by taking a top-down design
approach.
 Evaluated on system performance, not on component
performance
 Components perform multiple functions.
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 A Framework for Make/Buy
Decisions
Product Dependency on Independent for Independent for
knowledge and knowledge, knowledge and
capacity dependent for capacity
capacity
Modular Outsourcing is risky Outsourcing is an Opportunity to reduce
opportunity cost through
outsourcing

Integral Outsourcing is very Outsourcing is an Keep production

risky option internal

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 Hierarchical Model to Decide
Whether to Outsource or Not
 Customer Importance
 How important is the component to the customer?
 What is the impact of the component on customer experience?
 Does the component affect customer choice?
 Component Clockspeed
 How fast does the component’s technology change relative to
other components in the system?
 Competitive Position
 Does the firm have a competitive advantage producing this
component?
 Capable Suppliers
 How many capable suppliers exist?
 Architecture
 How modular or integral is this element to the overall
architecture of the system?
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 Examples of Decisions
Criteria Example 1 Example 2 Example 3 Example 4

Customer Important Not important Important Important

Importance
Clockspeed High Slow High Slow

Competitive Competitive No advantage No advantage No advantage

Position Advantage
Capable X X Key variable to
Suppliers decide
strategy
Architecture X X Key variable to
decide
strategy
DECISION Inhouse Outsource Inhouse, Outsource with
Acquire modular;
supplier, Inhouse or
Partnership joint
development
with integral.
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 SUMMARY
 Outsourcing has both benefits and risks

 Buy/make decisions should depend on:

 Whether a particular component is modular or integral

 Whether or not a firm has the expertise and capacity to

manufacture a particular component or product.

 Variety of criteria including customer importance,

technology clock speed, competitive position, number of
suppliers, and product architecture.

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