Question

Background: Frutronics Inc. is a $2 billion dollar firm with sales in consumer products and government systems and services. Founded in 1937, Futronics Inc. has been providing reliable communications services for well over half a century. Due to a sharp increase in competition, flattened sales and external economic conditions, Futuronics is implementing a corporate overhead reduction program. The proposal is to replace the company’s central office stores by outside vendors and presents recommendations. Requirements: In a two-three page paper, discuss the option to implement outsourcing the central office functions, so as to reduce overhead and still maintain or even improve quality. The outsourcing vendors must supply the appropriate mechanism to make ordering easy, efficiently, quickly and at a cost savings. The vendors chosen must supply the current 500 products in the warehouse. If outsourcing is not the chosen action suggest strategies can be taken to reduce costs in-house?

Answer 1

Outsourcing describes a company’s decision to purchase a product or service from an outside supplier than producing it in house. Through this option, an entity can concentrate resources on its core business competencies while capitalizing on the expertise of other firms that are more efficient, effective or knowledgeable at specialized tasks that are peripheral to those core business competencies. The benefits that are likely to derive out of it are as below:

It can allow management and employees to focus on core competencies and strategic revenue generating activities.

It can improve efficiency and effectiveness by gaining outside expertise or scale

It can provide access to current technologies at reasonable cost without the risk of obsolescence

It can reduce expenses by gaining capabilities without incurring overhead costs like staffing, benefits, space etc.

May improve the quality and or timeliness of products or services.

Companies thinking of outsourcing should consider these key cautions:

• it may cost more to go outside for specific expertise
• it can result in a loss of in-house expertise and capabilities
• can reduce process control
• may reduce control over quality
• may lead to less flexibility depending on the external supplier
• it may result in less personalized service
• Creates privacy and confidentiality issues
• It can result in giving knowledge away and lead to competitors obtaining expertise, scale of operations, customers and the likes
• Potential for employee morale and loyalty issues

Relevant costs represent the short term costs to make the item in house. They are the incremental or differential costs which include the variable costs to manufacture the product as well as any avoidable fixed costs related to manufacturing the product and foregone contributions caused by manufacturing the product. Relevant costs are those that can be avoided or eliminated by buying externally.

If the relevant costs are less than the purchase price, the decision should be to keep production inside. If the outside purchase price is less than these avoidable costs the logical decision is to outsource.