OUTSOURCING Dr. Ron Lembke

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

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?

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.

Make or Buy Decision 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 Reasons to Make Reasons to Buy

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

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

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?

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

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