Management of Outsourced Operations-7

8/12/2019 Management of Outsourced Operations-7

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Management of outsourcedoperationsOutsourcing Vs Insourcing


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Outsourcing Purchasing an item, process, or service

externally when the organization has thecapability to produce it internally is equivalent to"selling jobs"

Overriding factor in considering internal versus

external products/processes / services is TOTALCOST


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Decision usually arises due to New product development, Unsatisfactory supplier / distributor performance Periods of changing sales patterns

(increasing or decreasing) Expansion of geographic sales regions


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Decision Process

1. Assess

Technology andDemand Trends

2. Assess Strategic

Alignment and CoreCompetencies

3. Conduct Total CostAnalysis of

Insourcing/OutsourcingAlternatives

4. Consider the BigPicture and Reach

Decision


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Assessing Trends What is my relative position?

Cost Quality Delivery / Responsiveness Technology Cycle times

Is this considered a core/critical current or futurecompetency? If behind, can we catch-up / surpass?


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Strategy Alignment Through BusinessPlanning

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Strategic Business Unit /Product

Manufacturing /Operations

Technology Procurement


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Factors Supporting Outsourcing Supplier has specialized know-how Cost considerations favor supplier Firm lacks ability to build item Small volume requirements Firm's capacity constraints Desire not to add workforce Uncertain volume requirements Routine item available from many sources

Building requires high capital startup costs


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Insourcing Advantages

Higher degree of control over inputs Increases visibility over the process Economies of scale and scope

Disadvantages Requires high volumes High investment Dedicated equipment has limited uses Problems with supply chain integration


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Factors Supporting Insourcing Favorable cost considerations Desire to integrate operations Use available capacity to absorb fixed overhead Control over production and quality Design secrecy required Lack of reliable suppliers Stable workforce w/ declining volumes Technical items related to core competence Strategic item or technology behind


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Costs - Insourcing Process Incremental fixed costs

Equipment investment Factory overhead Managerial costs Purchasing costs Inventory carrying costs Costs of capital & taxes Special personnel


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Make/Buy Studies Finding True In-house Costs is not Easy!

Costs of Overhead Costs of Quality Operational Costs Capital Costs

Be Careful - In-house managers can easily hidecosts! Traditional analysis only considers variable

costs


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Full Cost AnalysisINSOURCE OUTSOURCE

Variable Cost $ 5.00 ----------

Variable +Manufacturing Overhead $8.00 ----------

Variable +Manufacturing Overhead +Corporate Overhead $10.00 $7.50


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Full Cost Analysis Issues:

What costs stay and which go - validity? Opportunity for actual improvement Impact of other considerations (Quality, Delivery

Reliability, Technology, etc.)

What are the longer-term strategic implications?


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Make or Buy - Other Factors Availability of current capacity and projected

workload during life cycle of item Extremely tight quality specifications may favor in-house operations Stable and trained workforce

Need for expansion may make them unavailable Recruitment and training of an additional work force may

result in an unstable condition Tight labor markets Union contracts may present inflexible situations Conservative forecasts will benefit suppliers or result in

excessive idle time


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Make or Buy - Other Factors For specialized equipment, what is the projected

future need for such an investment?

Forecasted product demand - time and quantity Technological considerations Complex technical products Suppliers with specialized knowledge or patents Factory "focus" - what business are we in?

Supplier goodwill considerations Using suppliers only occasionally as buffers mayresult in loss of goodwill and long term damage

Avoiding proprietary data leaks Capital outlay and associated risks


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Questions to Consider - InsourcingCosts What effect will insourcing a purchased

product/process/service have on the coststructure of this and other processes carried outin-house?


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Assignment: Warehouse Decision Manufacturer is considering performing

warehouse function internally Has recently reduced its manufacturing

workforce by thirty full-time hourly employeesand three managers

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Make or Buy:Warehouse Decision

Warehouse sales reps contact a publicwarehouse electronically, where warehousepersonnel pick and pack the order and

arrange the shipment Initial benefit = decrease in per unit

warehouse charges from $2.90 to $2.36 in aprivate warehouse

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Make or Buy:Warehouse Decision

Reduced labor force (jobs for laid-off workers,with additional cost training)

Sales personnel could have offices in thewarehouse

Greater control over operations

Assume warehouse operates for ten years

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Cost of Private Warehouse Annual chargesBuilding and equipment $25,000

(depreciation of initial investment)Employee training 10,000Overhead expenses 50,000Management expenses 70,000

$155,000 Annual capacity 180,000 units

Cost per unit Annual charges $ .86($155,000 / 180,000 units)Variable costs $1.00Direct labor costs $ .50

$2.36 / unit

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Warehouse Decision List all of the advantages of insourcing the

warehouse List all of the advantages of outsourcing the

warehouse What would be your final decision, taking into

consideration of these considerations?

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Documents

Management of Outsourced Operations-7