Chapter 6 Notes

OSM 427

Chapter 5

1. Chapter Objectives

• Make or Buy
• Subcontracting
• Insourcing
• Outsourcing

1. What does it all mean?

1. Insourcing: refers to reversing a previous buy decision

1. *Insourcing- I previously bought it, but now I am going to make it

1. Outsourcing: refers to reversing a previous make decision        

1. *Outsourcing- I previously made it but now I am going to buy it

1. Why?

1. Products/services are added/dropped from offerings
2. As demand changes, it becomes important in terms of productivity and competitiveness  to have the right option selected.        
3. *As demand changes…..ex. If demand decreases, it now costs too much to make product, so now it makes more sense to outsource

1. Traditionally, the Make option was favored

1. *Traditionally, make option was favored- control is a big factor

1. Results: ownership of large range of facilities
2. Newer management favors outsourcing

1. Results: flexibility, focus on core competencies, speed to market

1. *Focus on Core Competencies- machine building company prints own manuals- their core competency is making machines, not printing
2. *Speed to Market- at first if it is a new product that has never been seen before, you may want to keep it close to vest. After it has been out a while, it might be easier to involve suppliers

1. Services: security, food services, accounts payable, personnel, printing, contract logistics, and even supply management

1. Why Make? (3 OR SO)

1. Quantities are too small and/or no supplier is interest

1. If it needs to come out of the box exactly the same every time

1. Quality requirements are too exacting or special processing methods are needed
2. Greater assurance of supply
3. Closer coordination of supply and demand
4. Preserve technological secrets
5. Lower cost
6. To take advantage of unused capacity
7. Keep our capacity utilization high and outsource the rest
8. Avoid supply dependency
9. Reduce risk
10. Competitive, political, social, or environmental factors

1. Ex. company who supplies undergoes civil war, railroad line you use gets damaged, ect.

1. Distance form the closest available supplier is too great
2. Market potential for the product or service is expanding rapidly
3. Forecasts of future shortages in the market or rising prices

1. Why Buy? (3 OR SO)

1. Lack of managerial or technical experience
2. Excess production capacity
3. Reduce risk
4. Customer preference for a particular brand
5. Challenges of maintaining technological leadership for noncore activity
6. Outsourcing is difficult to reverse
7. Cost accuracy
8. Flexibility
9. Insufficient volume to justify in-house production
10. Forecasts show great demand and/or technological uncertainty
11. Availability of a highly capable supplier
12. Buying outside may open up markets

1. Easiest way to start in China is a joint venture

1. The ability to bring a product or service to market faster
2. Superior supply management expertise

1. Subcontracting

1. Subcontracts can only exist when there are prime contractors who bid out part of the work to other contractors

1. Common: military, construction

1. Use of a subcontractor

1. Appropriate when placing orders for work that is difficult to define, will take a long period of time, and will be extremely costly

1. May want to use to decrease interference to your own process

1. Management of a Sub is complex: (MC?)

1. Project management- timelines, performance, needs
2. Cost control- choice of contract, incentives

1. offer an extra $1,000 to have it completed in 4 weeks instead

1. Risk- options, communication, documentation

1. Why insource?

1. Existing sources goes out of business
2. Existing source drops a product or service line
3. No other supplier is available
4. Sudden massice increase in price (aka, YOU’RE INVITED TO LEAVE)
5. Purchase of a sole source by a competitor
6. Political events or regulatory changes
7. Company has developed a unique process for product/ service

1. May want to bring in-house as a unique opportunity/ competitive opportunity

1. Quality, delivery, total cost of ownership, or flexibility would be vastly improved
2. Enhance strategic competitive advantage

1. Why outsource?

1. Focus on value-add activities and core competencies
2. But! Concerns with Outsourcing include:

1. Loss of control
2. Exposure to supplier risks: financial, commitment, implementation, lack of responsiveness
3. Unexpected fees or hidden costs (ex. Require an inspection, but it’s $300 for paperwork)
4. Difficulty in quantifying economics; conversion costs
5. Supply restraints
6. Concerns with long-term flexibility and meeting changing business requirements

1. Supply’s role in Insourcing and Outsourcing

1. Heavy involvement in the areas of:

1. Providing a comprehensive, competitive process
2. Identifying opportunities for outsourcing or insourcing
3. Aiding in the selection process (ex. Create mock-up and requirements/ considerations)
4. Identifying potential relationship issues (outsourced company may build parts for competing company/ steal information and products)
5. Developing and negotiating the contract
6. Ongoing monitoring and management of the relationship