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Dr. Ron Lembke outsourcing
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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
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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?
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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.
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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
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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
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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
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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?
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Anybody heard of “Microsoft?”
UCSD Pascal $450 CP/M $175 MS-DOS $60 IBM: ‘05 Lenovo $1.75b MS: 2012 EBITDA $31b
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Summary Defining outsourcing Benefits of outsourcing
When to do it or not do it Lessons from IBM and Microsoft
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