4. Procurement and Outsourcing Strategies

Question 1

What is the difference between offshoring and outsourcing?

Answer 1

Outsourcing and offshoring are two different things. Offshoring means outside of country, so you can use offshore outsourcing.. (Neosourcing means e.g. from chine to mexico for an american company)

Question 2

What are the benefits of outsourcing?

Answer 2

• Economies of scale
  
  • CEM (Contract Equipment Manufacturer) can have “economies of scale” by aggregation
• Risk pooling
  
  • Buyers can transfer demand uncertainty to suppliers
  • CEMs have aggregated demand
• Reduce capital investment
  
  • Buyers can transfer investment burden to CEM (Don’t have to buy the maschines)
  • CEM can invest more as it is shared by many of its customers
• Focus on core competency
  
  • By outsourcing non-core, buyers can focus on “core-strength”.
• Increased flexibility
  
  • Critical for industries with short product life cycles or/and high-tech

Question 3

What are the outsourcing risks?

Answer 3

• Risks
  
  • Loss of competitive knowledge
    
    • Can open up opportunities for competitors
    • Can loose their abilities to develop new products, innovations etc
  • Conflicting objectives
    
    • Flexibility (buyers) vs. long-term (suppliers), stable commitments, etc.
• Consider the IBM PC example
  
  • When IBM entered PC market (1981), it outsourced design and production of almost all main components (CPU from Intel and OS from Microsoft)
  • IBM became no. 1 in the PC market (40% share by 1985)
  • Compaq entered PC market using SAME SUPPLIERS
  • IBM introduced PS/2 line computers but not very successful

Question 4

What are the dimensions to consider when evaluating whether to outsource?

And what is it a framework of?

Answer 4

Framework for make/buy decisions

Reasons for outsourcing
–Dependency on capacity
–Dependency on knowledge

Product architecture

• Modular Products
  
  • Independent components
  • Interchangeable components
  • Standard interfaces
  • Can be designed or upgraded with little regard to others
  • Customer preference determines product configurations
• Integral Product
  • Not made from off-the-shelf components
  • Are designed as a system by a top-down design approach
  • Are evaluated based on system performance not by component performance

Question 5

Based on the make/buy decision framework, when should you make it yourself or outsource/purchase?

Answer 5

Question 6

What is the framework for make/buy decisions on a component level?

Meaning: What are the criterias?

Answer 6

1. Customer Importance
   
   • Impact on customers experience and/or choice
2. Component clockspeed
   
   • Speed of related technology change
3. Competitive position
   
   • Can you make it cheaper and/or better?
4. Capable suppliers
   
   • How many
5. Architecture
   * Modular or integral

Question 7

Why is procurement strategy and decision important?

Answer 7

•Reducing procurement cost => direct impact on profit

Question 8

What is the name of the framework for procurement decision?

Answer 8

•Peter Kraljic’s supply matrix

Question 9

What is the two dimensions in Peter Kraljic’s supply matrix?

• What is part of the two dimensions?
• How do these parts impact the dimension?

Answer 9

• Procurement strategy depends on two dimensions
  ​
• Profit impact
  
  • Volume purchased
  • % of total purchased cost
  • Impact on product quality and business growth
• Supply risk
  
  • Availability (up -> down)
  • Number of suppliers (up -> down)
  • Competitive demand (Up - up)
  • Storage risk (up -> up)
  • Substitution opportunities (up-> down)

Question 10

Describe Peter Kraljic’s supply matrix

Answer 10