Strategic outsourcing is addressed in Chapter 9. Outsourcing is the complete transfer of a business process that has been traditionally operated and managed internally to an independently owned external service provider. | 1 Chapter 9: Strategic Outsourcing Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved Outsourcing Complete transfer of a business process to an independent external organization Once the process is outsourced, assets are no longer maintained People, facilities Equipment, technology A departure from subcontracting, joint venturing, and contract manufacturing 2 Current Outsourcing Trends Popularity of outsourcing By 2005, global business process outsourcing surpassed the US$6 trillion 25~34 % of a typical executive’s budget is outsourced Composition of outsourcing contracts 76% of announced outsourcing contracts represented new deals 24% represent a combination of contract extensions, expansions, or renewals 3 Business Process Outsourcing Expected strategic benefits: Cost minimization Reduce and control operating costs Turn fixed costs into variable costs Refocus on core competencies Refocus scarce resources Acquire external . | 1 Chapter 9: Strategic Outsourcing Purchasing and Supply Chain Management, 3rd edition, Copyright © 2013, W. C. Benton Jr., All rights reserved Outsourcing Complete transfer of a business process to an independent external organization Once the process is outsourced, assets are no longer maintained People, facilities Equipment, technology A departure from subcontracting, joint venturing, and contract manufacturing 2 Current Outsourcing Trends Popularity of outsourcing By 2005, global business process outsourcing surpassed the US$6 trillion 25~34 % of a typical executive’s budget is outsourced Composition of outsourcing contracts 76% of announced outsourcing contracts represented new deals 24% represent a combination of contract extensions, expansions, or renewals 3 Business Process Outsourcing Expected strategic benefits: Cost minimization Reduce and control operating costs Turn fixed costs into variable costs Refocus on core competencies Refocus scarce resources Acquire external capabilities 4 Realizing Outsourcing Benefits 20~25% of all outsourcing relationships fail within two years Nearly half fail within five years Conditions needed to realize expected outsourcing benefits: Extensive strategic assessment of the case True commitment to a cooperative relationship Training and recruitment within outsourcing organizations focused on relationship building and management 5 Hidden Costs of Outsourcing Quality costs Supplier vendor relationship management Internal coordination Implementation of external sourcing model Government and politics-related expenses Supply chain risk management Miscellaneous financial considerations 6 1. Quality Costs The costs associated with ensuring quality Categories of quality costs: Preventative cost ., designing quality into products and processes Appraisal cost ., inspections, audits, monitoring mechanisms Internal failure cost ., scrap, rework, internal downtime External failure cost ., failure perceived by the external
