The Next Wave of Outsourcing

[15.10.2006]

For each company there are the same questions: What shall we outsource? Better: What shall we keep in-house?

For the calculation it is necessary to know all costs including the overhead costs. In countries with low wages reduced productivity must be considered and compared, the costs for capital and logistics must be calculated.

These considerations are the reason for production outsourcing from US-companies to Mexico or Central Europe and not to China.

Boston Consulting Group developed 5 models as support for outsourcing decisions with different models of the supply chain:

For the decision in which country a production can be outsourced, the management must be informed about the specific conditions including production and logistic facilities of the low wage countries.

An especially difficult problem is always local management and local employees. One possibility is to recruit an expert experienced in the economy of the selected country. In any case, even if the company is using expatriates, clear orders must be given. The own organization and all processes must be analyzed. Researchers have shown that in those fields uncertainty and incomprehension can be found. Everything should be documented. A good quality control system is necessary.

Criteria:
From the experience point the critical question is: What must be kept in-house?

To find the right answer it is necessary to know the opinion of the whole organization. The collected information must be given directly to the CEO as basis for the decisions. Only then one over-regional responsible person must be appointed for all actions. In big organizations an establishment of a task force could also be a solution. 

The definition of the aims must be cross-functional, with detailed time schedules and with an aspect of a bonus.

The impact on the supply chain must be considered and new orders – for new suppliers – under quality rules could be a part of the solution. The management has to be open for all information, remarks and critical questions about the outsourcing project. Risks must be calculated and reduced.

Following that path sensible products and processes are kept in-house – also if production in other countries look cheaper. That is important because critical products of the company could be imitated.

It is necessary to protect patents and intellectual property, if possible.

If the foreign partner has been decided upon, permanent controls and a full inspection should be carried out.

It is helpful to organize personnel education and training programs together with the outsourcing partner.

An emergency plan is necessary for problems of quality, service, delivery, investments, cost and price developments and other unexpected events.

The 5 currents of globalization:

1. the rapid growth of Rapid Development Economy (RDE) markets
2. the continuing cost and capital advantages of RDEs
3. the development of talent and capabilities in RDEs
4. the migration of customers to RDEs
5. the emergence of RDE-based competitors

Summary
Companies can find different advantages by using the globalization: different countries, products and branches. But the successful introduction and performance is not an easy process.

Das ERPS (European Center for Research in Purchasing and Supply, Wien) ist ein nicht gewinnorientierter Verein, der es sich zur Aufgabe gemacht hat, Studien auf dem Gebiet des Einkaufes und Beschaffungswesens zu verfassen und zu publizieren um damit Einkaufsmanagern in ihren beruflichen Tätigkeiten und Unternehmen eine Unterstützung anzubieten.