Elucidating the effect of outsourcing on the supplier relationship Kevin Shihping Huang Yu-Tang Lo Lopin Kuo

outline 1. Introduction1. Introduction 2. Literature review2. Literature review –2.1 Outsourcing –2.2 System dynamics 3. Establishment of casual loop diagram3. Establishment of casual loop diagram 4. Outsourcing effect on supplier relation4. Outsourcing effect on supplier relation 5. Conclusion5. Conclusion

1. Introduction The classic case of IBMThe classic case of IBM –At the beginning: improved IBM’s product to market speed –Final : so called “Intel Inside” phenomenon eventually replaced IBM Outsourcing is more than managing its related benefits and risks.Outsourcing is more than managing its related benefits and risks. The nature of outsourcing arrangements could significantly impact the outcome.The nature of outsourcing arrangements could significantly impact the outcome.

1. Introduction (con.) Maps out the necessary outsourcing factors affecting supplier relation.Maps out the necessary outsourcing factors affecting supplier relation. The interrelationships of these outsourcing factors are also examined closely through system dynamics diagram of outsourcing.The interrelationships of these outsourcing factors are also examined closely through system dynamics diagram of outsourcing.

2.1 Outsourcing Literature review OutsourcingOutsourcing –Benefits/risks analysis –Industry characteristics analysis

2.1 Outsourcing Literature review Benefits/risks analysisBenefits/risks analysis –Benefits: reducing transaction costsreducing transaction costs increasing product to market speedincreasing product to market speed improving production and financial flexibilityimproving production and financial flexibility strengthening specialization.strengthening specialization. –Risks: loss control of OEM’s contract manufacturers (CMs)loss control of OEM’s contract manufacturers (CMs) loss learning opportunityloss learning opportunity potential loss of critical skills.potential loss of critical skills.

2.1 Outsourcing Literature review Industry characteristics analysisIndustry characteristics analysis –Fine (2000) points out that the nature of industry structure affects outsourcing outcome. –Industry characteristics include: vertical/integral industry structurevertical/integral industry structure industry speedindustry speed product specificationproduct specification technological performancetechnological performance the dependent relationship between the OEMs and CMsthe dependent relationship between the OEMs and CMs the novelty of the productthe novelty of the product

2.1 Outsourcing Literature review

2.2 System Dynamics System dynamics (SD)System dynamics (SD) –A methodology –studying and managing complex feedback systems –SD aids the decision making process through the understanding of systemic forces SD focuses on:SD focuses on: –interactive relation The simplest way to adopt System Dynamics approach is use a causal loop diagram (CLD) to analyze a complex managerial problem.The simplest way to adopt System Dynamics approach is use a causal loop diagram (CLD) to analyze a complex managerial problem.

2.2 System Dynamics Causal Loop Diagram (CLD) example: Net Withdrawals Bank Cash Reserves Perceived Solvency of Bank + - -

2.2 System Dynamics Causal Loop Diagram (CLD) example: Environmental Quality Pressure to Clean up Environment Cleanup Effort + + -

3. Establishment of CLD

Whole Causal Loop Diagram

4. Outsourcing effect on supplier relation The first loop is a positive loop in which benefits of outsourcing is visible.The first loop is a positive loop in which benefits of outsourcing is visible. –Modularization through outsourcing reduces costsreduces costs improves product to market speedimproves product to market speed provides OEMs with greater profitabilityprovides OEMs with greater profitability allows CMs to concentrate on the improvements of the subsystemallows CMs to concentrate on the improvements of the subsystem eventually translates into greater end product performance and better customer approvaleventually translates into greater end product performance and better customer approval

4. Outsourcing effect on supplier relation The second loop demonstrates outsourcing effects.The second loop demonstrates outsourcing effects. –CM’s capability and knowledge improve dramatically and might eventually surpass that of OEMs’ –To maintain control of the industry, it is essential for OEMs to maintain a good level of knowledge on critical components.

4. Outsourcing effect on supplier relation The third loop reveals the result of CMs’ effort to make product improvement.The third loop reveals the result of CMs’ effort to make product improvement. –As CMs capabilities improve, CMs might try to integrate into subsystems and such strategy could eventually erode OEMs’ profit.

4. Outsourcing effect on supplier relation The forth loop describes OEMs’ counter strategy.The forth loop describes OEMs’ counter strategy. –CMs become less dependent on OEMs in terms of capacity and knowledge. OEMs feel threaten by CMs. Consequently, OEMs would try to move towards the integration of the entire architecture in order to protect its market position.

5. Conclusion more than outsourcing benefits and risksmore than outsourcing benefits and risks Some factors also influence supplier relationship tremendously.Some factors also influence supplier relationship tremendously. –knowledge dependency –capacity dependency –product novelty –product architecture

5. Conclusion All these factors were scattered and fragmented without any visible method that places the interrelationship of outsourcing into a single context.All these factors were scattered and fragmented without any visible method that places the interrelationship of outsourcing into a single context. To supplement such a gap, this article applies SD analysis to describe the interactions among these outsourcing factors.To supplement such a gap, this article applies SD analysis to describe the interactions among these outsourcing factors.

5. Conclusion From cooperation to competitionFrom cooperation to competition Not necessary all the outsourcing relationship end up in a competitive outcome.Not necessary all the outsourcing relationship end up in a competitive outcome. Of course, there are forces such as product complexity and knowledge dependency that prevent such scenario from happening.Of course, there are forces such as product complexity and knowledge dependency that prevent such scenario from happening. It is critical for outsourcing participants to be conscious about knowledge over dependency and product complexity.It is critical for outsourcing participants to be conscious about knowledge over dependency and product complexity.

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