Transcript Slide 1

Strategic Outsourcing and
Business Model Definition
Andrea Tracogna
The next business model?
Different reasons for not “making”: the
economics of outsourcing (1)
1. The search for flexibility. Manufacturers of “original
equipment” (OEM) outsource production when
demand is high and cancel it when orders are
cancelled or demand falls. Thanks to the
substitution effect between fixed and variable costs
they obtain higher cost elasticity.
2. Lower costs, especially when the firm can benefit
from suppliers’ economies of scale (a supplier can
integrate demand from a large number of clients,
as against the purchasing firm) and economies of
specialisation (a supplier can specialise in single
activities and reach world-class levels of
excellence).
Different reasons for not “making”: the
economics of outsourcing (2)
3. Less investments in fixed (machinery, equipment,
production lines, transport systems) and working
capital (input and output stocks), which are
undertaken by suppliers. Less investments in R&D as
firms can take advantage of the numerous innovations
available on the outside supply market.
4. A greater focus on client needs and services and
product development activities, i.e. on key activities
for value creation;
The Nike model
Nike employs approximately 30,000 people worldwide.
Nike brand has some 1,000 contract factories in the Americas, EMEA,
North Asia and South Asia, providing more than 800,000 jobs to local
communities.
From its headquarters in Beaverton, Oregon, Nike manages a worldwide
virtual company combining internal R&D functions with a low cost
manufacturing strategy.
Its “Air Max” model is designed in sites in Oregon and Tennessee and
developed jointly by American and Asian technicians in the USA, Taiwan
and South Korea. Shoes are then assembled in South Korea (man’s size)
and Indonesia (boys’ size) from dozens of components supplied by firms
in Japan, South Korea, Taiwan, Indonesia and the United States.
Nike’s value chain?
INFRASTRUCTURAL ACTIVITIES
HRM
SUPPORT
ACTIVITIES
NPD AND TECHNOLOGY
PROCUREMENT
INBOUND
LOGISTICS
OPERATIONS
OUTBOUND
LOGISTICS
MARKETING
AND SALES
PRIMARY ACTIVITIES
SERVICES
Nike as a supply chain orchestrators
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Focus on a portion of the value chain
Emphasize partnering
Invest in brands
Minimize tangible investments
Arbitrage international factor price
differencies
Managing the supply chain
Research
Suppliers’
suppliers
Technology
Suppliers
Design
Communities
Manufacturers
Other Services
Logistics
Distributors
Market research
End users
Consultants
Outsourcing trends in car manufacturing
The car industry is undergoing dramatic changes as manufacturing is
today increasingly moving to supply markets, while OEMs or vehicle
brand holders are focusing on design, engineering and marketing.
For instance, Porsche Boxter and the Porsche Cayman are
completely assembled by Valmet, a Finnish engineering company.
Canadian company Magna assembles cars for all major carmakers
and has bought from them various plants including the site in Styria
(Austria) where Mercedes-Benz E-Class, Jeep Grand Cherokee,
Chrysler Voyager, Saab 93 Convertible, BMW X3 are assembled.
What is Business Process Outsourcing (BPO)?
Pre-manufacturing activities
• Design and engineering
• Consulting in packaging
• Concurrent engineering
• Production tests
• Prototyping
Manufacturing and accessory
activities
• Logistics management of
supplies
• Assembly
• Packaging
• Quality controls
Post-manufacturing activities
• Distribution logistics
• Technical assistance
services
• Management of spare
parts
Contract electronics manufacturing
Foxconn is the world leader for joint-design, jointdevelopment, manufacturing, assembly and after-sales
services to global Computer, Communication and
Consumer-electronics ("3C") leaders.
IT-enabled outsourcing
Thanks to digitalisation and information
technologies, outsourced activities can now be
carried out remotely at locations that are very
far from the company that outsourced them.
These activities include:
•Data centre management,
•Web hosting and website management,
•Data entry services,
•Accounting services,
•Customer services, such as direct marketing,
call centres and help desk services,
•Text and graphic editing services,
•Management of distance learning platforms
Key principles of strategic outsourcing
1.
Carry out in-house only activities that are critical to the
value chain and in which the firm has a competitive
edge.
2.
Outsource activities in which suppliers have a
competitive edge in terms of volumes, efficiency and
quality.
3.
Use outsourcing as a means of generating the incentives
necessary to improve internal performance.
4.
Limit your vulnerability in the event of a break-up of
relationships with suppliers or overall “market failure”.
ZARA: the exception to the rule?
The Zara paradox
• Localization of operations
• Commitment to fixed assets
• Downwards vertical integration
• Premium image and stores without
advertising
• (Fast) followership
Zara’s value chain?
INFRASTRUCTURAL ACTIVITIES
HRM
SUPPORT
ACTIVITIES
NPD AND TECHNOLOGY
PROCUREMENT
INBOUND
LOGISTICS
OPERATIONS
OUTBOUND
LOGISTICS
MARKETING
AND SALES
PRIMARY ACTIVITIES
SERVICES