1. Dr. Ron Lembke
outsourcing

2. Outsourcing - What is it?
Transfer activities to outside providers
Outside providers do activities
Resources: people, facilities, equipment
Decision-making responsibility
OEM = Original Equipment Manufacturer
name on the product, does not produce
Flextronics/Solectron, Foxconn makes it for you

3. Strategic Sourcing Has to be feasible to outsource
Assembly line balancing – probably not a step in the middle
Figure out what to buy from whom
What do we want to accomplish?
More effective!
More efficient!
Continuous Process Improvement?

4. Outsourcing – Why do it? Organizationally-driven reasons
Focus on what you do best
More flexible capacity
Employees: career paths
Improvement-driven reasons
Better quality & productivity, cycle time
Gain skills not otherwise available
Associate with superior providers
Financially-driven reasons
Reduce assets, improve ROA
Lower fixed costs
Cash from selling capital equip.

5. Make or Buy Decision Reasons to Make Reasons to Buy DIY: Lower cost
No capable suppliers
Inadequate supply
Competitive Issues
Core competencies
Specialization
Low purchase cost
Lack of capacity
Want to gain skill
Reduce inv. costs
Management focus
Patent issues

6. Other Factors Degree of coordination with other activities
Relationship-specific investments
Easy to copy technologies, or low IP (intellectual properties) protection
Second-tier sub-suppliers

7. What to not Outsource Core activities Key to the business
Do not confer competitive advantage
Strategic activities
Key source of competitive advantage
X-box – Microsoft never considered making
Flextronics in Guadalajara
$5 / hr vs. $1 in Doumen, China

8. Outsourcing Example In 1981, IBM ‘PC’. Consumers care about hardware
No one cares about the software that lets them talk to the processor.
Outsourced the OS to whom?

9. Anybody heard of “Microsoft?”
UCSD Pascal $450
CP/M $175
MS-DOS $60
IBM: ‘05 Lenovo $1.75b
MS: 2012 EBITDA $31b

10. Summary Defining outsourcing Benefits of outsourcing
When to do it or not do it
Lessons from IBM and Microsoft