W3 Flashcards
what is outsourcing
- sub contracting some of the firms internal activities to outside providers (making use of outside resources)
- outsourcing has slowly moved to core activities (manufacturing) not just peripheral ones like cleaning
- outsourcing is followed by the decision to source suitable suppliers - this typically involves global sourcing
reasons for outsourcing
- reduce costs
- free up time to focus on core activities
- improve quality
evaluation of outsourcing
advs:
- economies of scale - aggregating orders lowers costs
- transfers uncertainty - demand uncertainty taken on by suppliers
- allows focus on core competencies - enables company to focus o skills and knowledge that differentiate from comp
disadv:
- loss of comp knowledge - may open up opportunities for comp, shows that the company might be losing ability to produce new designs
- conflicting objvs - may be flexible but the ideas might clash between buyer and supplier
- delegation of control
Make or Buy?
- this question is to find out whether or not to outsource
- make = keep activity in house
- buy = outsource
- make = vertical integration (buy out) the supplier
3rd option = alliance - form a partnership with suppliers
Reasons for making:
- core competencies
- lower production costs
- protect quality
Reasons for outsourcing/ buying:
- free management time
- obtain technical skills
- reduce inventory costs
Outsourcing model (Arnold, 2000)
(look at diagram)
- key question - is an activity core or non core to the business
- don’t just focus on cost, is it core to the company?
- anything core = keep in house (make)
- anything that isn’t = outsource
- if it compliments the core you can chose either
- if it is vital core competency outsourcing could lose the uniqueness that makes the company
transaction cost economics (TCE)
TCE = engaging with the transactions with suppliers
- contract costs
- bargaining and decision costs
Related to make or buy:
- asset specificity is an important factor
- if it has high custom = costs will be higher (vice versa)
- if the business outsources smth with high custom suppliers could exploit and have high opportunism so keep it in house (look at photo)
Hierarchies:
- another important factor is the top to bottom structure of a company (hierarchies)
- if it is cheaper to go through all levels of management than outsource keep it in house
TCE criticisms
- focuses on cost minimisation not value maximisation
- implies all firms facing similar transactional attributes will reach similar conclusions regarding make or buy
Resource based view (RBV)
RBV = considers the firm as a bindle of resources and capabilities
- core competencies = comp adv:
- they are valuable / rare / inimitable (hard to copy)
- the more you have the more competitive you become (look at photo)
approach to make or buy: (look at diagram)
- Companies seek to develop core competencies internally, leaving those that are non core to be developed and supplied externally - keep core activities internal and those that aren’t outsource
combination of TCE and RBV (diagram)
- make / buy / ally - using TCE and RBV
- TCE = when the asset spec is low and can strongly safeguard opportunism - outsource
- if it is core to the company in the RBV and had high asset spec with high opportunism - keep it in house
Global sourcing (model)
- global sourcing = sourcing a specific product in a different continent
- traditional motive is about cost (low cost countries)
Advs:
- offers access to new suppliers that offer quality/ new tech etc
- access to scarce materials
Global vs Local:
- local does not mean good and global does not mean bad
- shipping fruit overseas by boat can be sustainable
- air freight food is problematic for the enivtonment (doesn’t happen all the time)
- local = higher costs - labour / legislation etc.
sustainable challenges for outsourcing
- low costs may mean low ethical standards (cheap labour)
- outsourcing = more pollution through transport