Question

Explain the outsourcing decision process in a manufacturing production based company with five (5) relevant examples.

Answer 1

Outsourcing decision process

Outsourcing is when a company decides to purchase a product or service from another company rather than make the product or perform the service itself. When companies make the decision to outsource, there are a lot of considerations.

The Matrix, shown in below, identifies the two most important factors that you should consider when you're thinking about outsourcing a task:

1. The strategic importance of the task. Does the task in question give your business a competitive advantage?
2. The task's impact on your operational performance. How much does the task contribute to the smooth running of your organization? And how much disruption does it cause if it's done badly.

The Matrix is divided into quadrants, as follows:

• Form a strategic alliance. Some tasks are strategically important, but contribute little to operational performance, so could be outsourced safely to a trusted partner. A strategic alliance  is a good option for these types of tasks. In an alliance, the partners share control of the task and work together, but remain independent.

For example, a car manufacturer could align with an advertising agency. The manufacturer is closely involved in the message and tone of the advertisements, but the content and production are handled by the agency.

• Retain. Tasks in this quadrant are high in strategic importance and have a big impact on operational performance. Retain these tasks in-house, so that you keep the maximum level of control.
  
  For our car maker, the assembly process is strategically critical, and would usually be retained. It is one of the organization's core competences , and it makes a massive contribution to the smooth running of the organization.
• Outsource. Activities in this quadrant are important for successful operational performance, but are not strategically important. These can be outsourced with little risk.
  
  For example, the car maker could outsource delivery to dealerships. Delivering cars to dealers is generally not a source of competitive advantage, as it doesn't affect the customer's experience. But it does impact operational performance. For example, if the transporters are late, stock builds up at the manufacturing plant, and dealers don't have the vehicles they need in their showrooms.
• Eliminate. Some tasks are not important to your organization's overall strategy, and don't make a significant contribution to its day-to-day operational performance. You could think about eliminating these activities completely.
  
  But consider the potential impact of ditching an activity, as it may still be important to your team or organization. For example, let's say your company runs a subsidized crèche. It might be expensive to run, and it isn't part of your core operation, but it may help you to attract staff (strategic importance), and to reduce absences related to childcare (operational performance).

How to Use the Outsourcing Decision process

So, now that we've seen what each quadrant in the Matrix means, let's see how you can use it to determine whether you should outsource a task.

Step 1: Identify the Task's Strategic Importance

Analyze the task's strategic importance to your business. Is it vital to your company's competitive advantage? Is it part of what makes your business unique? Does it play a major part in your customers' choice of your products or services over those of your competitors?

Step 2: Identify the Task's Contribution to Operational Performance

Decide how important this task is to your company's day-to-day running. Will your operations "grind to a halt" if it's done badly, or not done at all?

Step 3: Plot the Task on the Matrix

When you've worked out where your task or process lies on the vertical axis of strategic importance, and on the horizontal axis of operational performance, you can plot the task onto the matrix.

The quadrant in which the task falls will give you a strong indication as to whether you should outsource it, retain it, eliminate it, or form a strategic alliance.

Of course, this is only a starting point for your outsourcing decision. You need to consider each situation carefully, and use your specialized knowledge of your organization, your suppliers, and your industry as a whole to judge each situation on its own merits.

Examples outsourcing decision process

Some common outsourcing activities include: human resource management, facilities management, supply chain management, accounting, customer support and service, marketing, computer aided design, research, design, content writing, engineering, diagnostic services, and legal documentation.”

Key points

The Outsourcing Decision process is a good starting point for making decisions about whether or not to outsource tasks in your business.

Tasks that are strategically important to your organization should usually be kept in-house. This enables leaders to control the most vital processes.

Tasks that must be done for an organization to be operationally effective, but which aren't important to overall strategy, can often be outsourced safely.

For strategically important but operationally insignificant tasks, you may benefit from forming a strategic alliance with an external supplier.

The “right” manufacturing outsourcing strategy is different for every organization, so assess your internal strengths and resources before adopting an outsourcing strategy. Companies looking to take full advantage of the benefits of outsourced manufacturing face a variety of challenges— from securing the best pricing to creating an approach that works across several different product lines. Through years of working with original equipment manufacturers (OEMs) and contract manufacturers (CMs), Arena has identified trends and industry best practices associated with success in outsourced manufacturing. This guide examines several of those to help you determine an outsourcing model that increases company revenue, minimizes errors and unnecessary costs, optimizes product quality and inventory levels, and ultimately speeds your time-to-market. Best Practices in Outsourced Manufacturing How much of your production process should you outsource Best Practices In Outsourced Manufacturing When preparing for production, should you outsource purchasing, inventory management and assembly, or just assemble