EBU6609 Logistics
and Supply Chain
Management
TOPIC 7: CORE COMPETENCIES AND OUTSOURCING
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MS. BING HAN
Learning Objectives
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
1. Describethenotionofcore competency. Identify an organisation’s competencies and determine whether they pass the three-fold test of a core competency.
Defineoutsourcingand discuss reasons why companies outsource.
Describe the three phases to developing and executing an outsourcing strategy.
Learning Objectives
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
4. Identifyandassesssome of the potential risks associated with outsourcing.
5. Conduct a make-or-buy analysis to support an outsourcing decision.
What is a Core Competency?
Core competency is the set of activities, skills, or advantages that distinguishes a company from its competitors.
“… the collective learning in the organisation, especially how to coordinate diverse production skills and integrate multiple streams of technologies.”
– Prahalad & BU6609
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Core Competency
To compete and win in the global marketplace a company must be uniquely good at at least one thing that the customer values.
Most industry leaders build their core competencies around a handful of essential skills.
Identifying Core Competencies
Does the identified skill set contribute significantly to what customers perceive as our organisation’s value- added?
Is the skill set difficult for others to replicate or imitate?
Are we particularly good at the skill set, or willing to invest the resources to become excellent?
Is the skill set broad enough that it allows us to the opportunity to enter many diverse markets or businesses?
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Complementary Core Competencies
Once a company finds its core competency, it can design a supply chain to support its competitive strategy, value proposition, and competency development.
Outsourcing non-critical activities to supply chain partners allows companies to leverage complementary core competencies.
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Outsourcing Flowchart
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
The Outsourcing Challenge
Outsourcing is the process of moving an aspect of production, service, or business function from within an organisation to an outside supplier.
Government public agency outsourcing is called privatisation.
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Outsourcing Trends
Contract Manufacturing (CM) – a third-party makes an end product or major component under another company’s brand.
Third-Party Logistics (3PL) – using a supplier to provide some combination of logistics activities.
Off-shoring – outsourcing to a different country.
Business Process Outsourcing (BPO) – outsourcing support functions such as: HR, payroll, logistics, etc.
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
OEM, ODM, EMS
OEM: Original Equipment Manufacturer, A company that purchases computers or other complex components from manufacturers, adds other hardware or software, and sells the systems, often for specific applications.
OEMs rely on their ability to drive down the cost of production through economies of scale. Also, using an OEM allows the purchasing company to obtain needed components or products without owning and operating a factory.
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Electronic manufacturing services (EMS) is a term used for companies that test, manufacture, distribute, and provide return/repair services for electronic components and assemblies for original equipment manufacturers (OEMs). The concept is also referred to as electronic contract manufacturing (ECM).[1]
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
An Original Design Manufacturer (ODM) is a company that designs and manufactures a product as specified and eventually rebranded by another firm for sale. Such companies allow the brand firm to produce (either as a supplement or solely) without having to engage in the organization or running of a factory.
A primary attribute of this business model is that the ODM owns and/or designs in-house the products that are branded by the buying firm.
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Benefits of Outsourcing
By outsourcing non-strategic processes, an organisation can focus its attention on those things it does best to satisfy the customer.
Other benefits include:
◦ Cost savings
◦ Capital conservation
◦ Performance improvement
◦ Access to low-cost labor and/or resources ◦ Benefit from outside expertise
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Top Reasons for Outsourcing
Reduce Operating Costs, 48%
Conserve Capital, 3%
Grow Revenue, 4%
Increase Innovation, 3%
Improve Quality, 3% Improve Skills, 9%
Focus on the Core Business, 17%
Create a Variable Cost Structure, 13%
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Outsourcing Risks
Outsourcing is not without risk:
◦ Outsourcing strategic activities may cause a loss of competitive position.
Strategic risk – long-term, perhaps irreversible, risk based on a loss of knowledge related to core activities.
Tactical risk – short-term risk based on use of supplier for capacity, not knowledge.
Increased dependence on suppliers for knowledge weakens the buyers relative bargaining power.
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Outsourcing Risks
Strategic Risks
Firm loses knowledge and/or technology to perform activity internally
Supplier develops unique, hard to replicate expertise
Supplied activities add unique value recognised by customer
Customer identifies more with the supplier than the original firm
Firm loses sight of market trends
Supplier shares knowledge with firm’s competitors
Firm experiences:
Short-term supply shortages
Hidden transaction or management costs Loss of schedule control
Short term price fluctuations
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Tactical Risks
Outsourcing Process Phases
Key Participants
Establish mission, generate and screen ideas
Top management , business unit and functional leaders
Conduct an outsourcing feasibility study
Multi-disciplinary team of key stakeholders in the current process
Establish and manage the relationship with the supplier
Purchasing or relationship manager
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Established the Outsourcing Mission
A multidisciplinary team of high-level managers should:
◦ State the benefits it hopes to achieve by outsourcing
◦ Nominate processes for outsourcing
◦ Screen those processes against key success factors to determine which are best suited for outsourcing
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Outsourcing Projects – Screening
Forms Management
Information Technology
Supply Management
Food Service
Decision/Rationale
Outsource – internal support function Outsource – internal support function
Outsource – important area, but do not excel in this area; could not invest to achieve excellence
Do not outsource – critical to internal analysis, maintaining key supplier relationships, and cost competitiveness
Outsource – although excellent cafeteria, does not add-value to the customers, nor would is it be difficult to replicate
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Conduct an Outsourcing Analysis
Multi-disciplinary team of key stakeholders in the current process evaluate each potential process to outsource as determined by the screening process.
Evaluation includes:
◦ Developing a better understanding of the organisation’s needs
◦ Gathering detailed cost, performance, and risk information ◦ Total cost of ownership analysis
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Outsourcing Analysis – Suppliers
Assessment of the supply market capabilities, considering:
Are supply sources available?
Do potential supply sources meet capacity, quality, and other organisational needs?
Are the suppliers interested?
What risks are present in outsourcing?
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Outsourcing Analysis –
Reverse Marketing is the process of recruiting a supplier to provide an item or service that the supplier not currently providing, or unable to provide.
Restating Need and Expected Benefit considers the scope and scale of outsourcing required providing new insight on ways to achieve the desired benefit.
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Identifying & Mitigate Potential Risks
Most organisations are good at recognising tactical risk.
A larger issue is strategic risk; by ceding power through outsourcing, a supplier might be able to capture a larger share of the overall chain’s margin.
Contingency plans should be developed to deal with identified risks associated with outsourcing.
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Outsource Risk & Mitigation Strategy
Risk Issue
Capacity or shortages
Loss of competitive pricing information
Hidden transaction or management fees
Identified alternative sources for key parts, keeping in mind that all distributors use the same manufacturers, so shortage is difficult to avoid in an industry-wide shortage
• Right to audit manufacturers’ bills built into contract
• Right to “test market and go out to receive competitive bids for
comparable services
• Most favored customer clause in contract to ensure that
Image’s price meets or beats the price offered to other customers receiving the same service
• Cap fees in contract
• Right to audit distributor’s cost allocations built into contract • Contractual clause requiring distributor’s bills itemised into
major cost categories for management fees, rather than one lump sum
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
IT Outsourcing – Risk Mitigation Plans
Risk Issue Safeguard
Poor service to internal customers
Poor communication or management of service provider
Difficulty in controlling costs Loss of internal expertise
Short contract duration/high turnover would be expensive for supplier and frustrating for internal users
Transitioning own employees out of IT and training new employees by service provider
• Establish internal user survey that links service provider’s pay to performance
• Dedicated relationship managers at Image
• Advisory Board to meet with relationship manager,
service provider, key users to provide feedback, discuss technology needs and trends
• Hire a third party to audit service provider, compare rates with other like companies
• Loss in support level expertise could not be avoided. However, relationship manager, CIO and others would retain enough strategic knowledge to replace the service provider effectively if needed
• Established a five-year contract with annual reviews and contract extension clauses
• Virtually all current Image IT employees were offered and accepted jobs with service provider to remain at Image
Outsourcing Analysis – TCO
A cross functional team should analyse all direct and hidden costs associated with the current and perspective outsourced activity.
Cost included: materials, labour, energy, overhead, transportation, inventory, quality, obsolescence, and capital.
Sensitivity analysis should be performed to determine on a total cost of ownership basis whether there is a cost incentive for outsourcing.
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Manage the Outsourcing Relationship
Outsourcing arrangements exist on a continuum from minimum service to full service turn-key operations.
Limited-scope suppliers are less unique and therefore easy to replace.
Full-service suppliers provide unique value and are therefore more closely integrated.
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Supplier Relationships: Arm’s-Length
Best suited for “routine” purchases of goods or services.
No long-term commitment or special value-added by this supplier.
Non-recurring purchases of items that aren’t critical
Supply market is very competitive Switching costs are low
Suppliers are not differentiated.
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Supplier Relationships: Niche Providers are generally specialised, providing a
very specific, limited good or service.
May be more difficult to replace than arms- length suppliers due to their specialised nature.
In general, these are specialised, non-recurring purchases.
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Supplier Relationships: Hybrid Provide an intermediate level of service.
Provide items of moderate importance that are somewhat integrated into the organisation’s operations.
May be responsible for a whole subsystem or process rather than one clearly defined piece, as do limited scope providers.
Standard “turnkey” solutions, and may even run some of the company’s internal processes with their own people.
Boundaries between the provider and the firm may begin to blur. Ongoing communication is critical
Higher degree of reliance and switching costs
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Supplier Relationships: Full-Service Provide strategic items and processes that are entrenched
in the firm’s own processes. Custom solutions
Often engaged in Business Process Outsourcing of critical functions.
These providers have a very high level of responsibility and accountability.
Have a significant presence in the organisation, working side-by-side with the organisation’s employees.
Difficult to evaluate and manage.
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Outsourcing Relationships
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Outsource Relationship:
Routine relationships are named for traditional contract management. The contract terms are clear and the deliverables are simple to use and measure. Routine relationships are best suited to arms-length and niche arrangements.
Cooperative relationships are suited to hybrid outsourcing arrangements. The contract defines the relationship, but the suppliers also cooperate on an on-going basis to redefine expectations and goals based on changing business needs.
Committed relationships are common between buyers and solutions integrators. The two parties have committed a great deal of resources and efforts to the relationship, and their management style should reflect this.
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Outsourcing Relationship: Oversight
Type of Relationship
Cooperative
Arms-Length Niche Provider Hybrid
Solutions Integrator
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Oversight Characteristics
Level of management oversight after relationship is established
Strategic importance of item/process outsourced
Need to interface with supplier closely to understand processes
Anticipated change/improvement over lifecycle of relationship
Interdependence of our process with supplier Our need to be a “preferred customer” to this
Level of ambiguity and change in expectations
Low Low Low Low Low Low Low
Cooperative
Low to medium
Medium to high
Medium to high
Low to medium
Low to medium
Medium to high
Medium to high
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Ongoing and Post-Audit
Evaluation
Routine relationships – feedback often is complaining to the supplier when it performs poorly. If a significant supplier, may receive a standard “report card” of key performance indicators (KPIs). The report compares actual to expected performance on key KPIs.
Cooperative relationships – supplier likely receive a semi- customised report card capturing data regarding the value the supplier adds.
Committed relationships – supplier likely to receive a customised report card based on establishing performance indicators for key issues. In addition, much of the performance feedback would be verbal, as this is a close day-to-day interaction.
Typical Outsourcing Report Card
Performance Indicator Rating Goal Comments
unless prior approval given
95% same day response
88% meets/exceeds quality expectations
95% meets/exceeds Technology leadership expectations
92% same day response
90% meets/exceeds quality expectations
90% meets/exceeds Technology leadership expectations
Completes Key Tasks on Time
Meets Service levels to internal customers
Follows up on missed service levels within a week
Client perception survey- Quality
Client perception survey- Technology leadership
Within budgeted costs
Was late on transitioning to new inventory system
Excellent; keep up the good work!
Thanks for your good work!
Need to perform a root cause analysis and identify weak area(s) to target improvement
Good work!
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Buyer Skills
“Traditional” buyers manage contractual relationships that are clearly defined, with clear expectations and performance measures.
Outsourcing requires that supply professionals master creating and managing complex relationships due to the more fluid and less clearly defined supply environment.
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Insourcing
The outsourcing decision is not permanent or irreversible; the structure of the firm must adapt to changing business environment.
Companies may bring outsourced activities back in-house due to a number of reasons:
◦ Failure to achieve expected benefits
◦ Increase control over key processes
◦ Changing business priorities and core Competency
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
1. Leenders, et al. Ch18
2. Gottfredson, M. et al. ‘Strategic Outsourcing – from Periphery to the Core’, Harvard Business Review, Feb. 2005, pp132-139.
3. For Tutorial 3: ‘How Intel Chips Are Made’,
4. Christopher, Ch12 Managing SC Risks
EBU6609 LOGISTICS AND SUPPLY CHAIN MANAGEMENT
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