Chapter 18 Make or Buy, Insourcing and Outsourcing

18- 3 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Reasons to Make Instead of Buy Quantities are too small and/or no supplier is interested Quality requirements are too exacting or unusual and require special processing methods Greater assurance of supply Closer coordination of supply and demand Preserve technological secrets To take advantage of unused capacity Keep our capacity utilization high and outsource the rest Avoid supply dependency Competitive, political, social or environmental factors Personal preference Preservation of the status quo: Decisions to make are hard to reverse

18- 4 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Reasons to Buy Instead of Make Lack of administrative or technical experience Excess production capacity Customer preference for a particular brand Problems maintaining technological leadership for a noncore product Preservation of the status quo: Decisions to outsource are hard to reverse Flexibility Trend to outsourcing: Focus on core activities and outsource the balance of the company’s requirements Superior supply management expertise Lower overhead costs

18- 5 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Research: Reasons for Outsourcing 1995 Cost reduction Headcount reduction Focus on core competencies Acquire and deploy peripheral knowledge or process technology Minimize inventory and materials handling Reduce development and production cycle times Improve efficiency Reaction to positive media reports 1998 Reduce and control operating costs Improve company focus Gain access to world-class capabilities Free internal resources for other purposes Resources are not available internally Accelerate reengineering benefits Function difficult to manage/out of control Make capital funds available Share risks Cash infusion Source: Information drawn from the following sources: Leenders, et al., “Fleet Management’s Contribution and Outsourcing,” op. cit. pp ; “Making Way for the Virtual Enterprise,” Purchasing, December 15, 1994, p. 18; and Mary C. Lacity and Rudy Hirscheim, Information Systems Outsourcing, (New York: John Wiley & Sons, 1993).

18- 6 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Risks of Outsourcing Loss of control Higher exit barriers Exposure to supplier risks -e.g., financial, commitment to relationship, response time, quality, service Unexpected/unanticipated costs Difficulty quantifying economies Conversion costs Supply restraints Possibility of being tied to obsolete technology Concerns with long-term flexibility

18- 7 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. The Outsourcing Matrix Should Be In-House Should Be Outsourced Currently In-House Currently Outsourced

18- 8 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. The Outsourcing Decision Is the activity strategic? Is the activity critical to the business but not strategic? Create a RFP. Gather supplier bids/proposals. Is the supplier’s bid/proposal more desirable than the internal option? Could the internal option achieve similar results? Negotiate a contract to ensure that expectations are realized No Keep the function in-house Keep the function in-house Keep the function in-house Keep the function in-house Yes Is the activity strategic? Is the activity critical to the business but not strategic? Create a RFP. Gather supplier bids/proposals. Is the supplier’s bid/proposal more desirable than the internal option? Could the internal option achieve similar results? Negotiate a contract to ensure that expectations are realized No Keep the function in-house Keep the function in-house Keep the function in-house Keep the function in-house Yes

18- 9 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Purchasing’s Role in Outsourcing Providing a comprehensive, competitive process Identifying opportunities for outsourcing Aiding in selection of sources Identifying potential relationship issues Developing and negotiating the contract Ongoing monitoring and management of the relationship Source: Lisa Ellram and Arnold Maltz, Outsourcing: Implications for Supply Management, Tempe, AZ: Center for Advanced Purchasing Studies, 1997.