Procurement and Outsourcing Xiaohong Pang Automation Department Shanghai Jiaotong University
Procurement and Outsourcing Xiaohong Pang Automation Department Shanghai Jiaotong University
Lecture Outline Introduction Outsourcing Benefits and Risks A Framework for Buy/Make Decisions ■e-Procurement A Framework for e-Procurement Case Study:FreeMarkets Online
Introduction Outsourcing Benefits and Risks A Framework for Buy/Make Decisions e-Procurement A Framework for e-Procurement Case Study: FreeMarkets Online Lecture Outline
Topics Outsourcing Benefits A Framework for and Risk Buy/MMake Decisions
Topics
Outsourcing In the 1990s,outsourcing was the focus of many industrial manufacturers;firms considered outsourcing everything from the procurement function to production and manufacturing. Executives were focused on stock value, and huge pressure was placed on the organization to increase profits. Consider three examples(p.260): Nike,Cisco,Apple Computers
Outsourcing In the 1990s, outsourcing was the focus of many industrial manufacturers; firms considered outsourcing everything from the procurement function to production and manufacturing. Executives were focused on stock value, and huge pressure was placed on the organization to increase profits. Consider three examples (p.260): Nike, Cisco, Apple Computers
Why Outsourcing? nAn“easy way”to increase profits Nike,Cisco,Apple outsource most of their manufacturing, Each could focus on research,marketing
Why Outsourcing? An “easy way” to increase profits Nike, Cisco, Apple outsource most of their manufacturing, Each could focus on research, marketing
What are the risks? Each has gotten into trouble 2001-Nike reported unexpected profit shortfalls due to inventory problems 2000-Cisco had to write down billions in obsolete inventory 1999-Apple was unable to meet customer demand for new products
What are the risks? Each has gotten into trouble 2001 – Nike reported unexpected profit shortfalls due to inventory problems 2000 – Cisco had to write down billions in obsolete inventory 1999 – Apple was unable to meet customer demand for new products
What Went Wrong? These problems uncover fundamental difficulties with outsourcing. Nike,Apple and Cisco represent industries: With short-life-cycle products -Where technologies change rapidly Uncertainty in customer demand is enormous Can these characteristics explain the problems that these companies are facing? Are there more fundamental principles that we should consider to determine whether or not to outsource?
What Went Wrong? These problems uncover fundamental difficulties with outsourcing. Nike, Apple and Cisco represent industries: With short-life-cycle products Where technologies change rapidly Uncertainty in customer demand is enormous Can these characteristics explain the problems that these companies are facing? Are there more fundamental principles that we should consider to determine whether or not to outsource?
Why Outsourcing? Throughout the 1990s,strategic outsourcing, that is,outsourcing the manufacturing of key components,was used as a tool to rapidly cut costs. Some of the motivations for outsourcing are: ■Economics of scale ■Risk pooling Reduce capital investment Focus on core competency Increased flexibility
Why Outsourcing? Throughout the 1990s, strategic outsourcing, that is, outsourcing the manufacturing of key components, was used as a tool to rapidly cut costs. Some of the motivations for outsourcing are: Economics of scale Risk pooling Reduce capital investment Focus on core competency Increased flexibility
Outsourcing Benefits and Risks Benefits Economies of scale-reduce manufacturing costs Risk pooling -demand uncertainties are transferred Reduced capital investment Focus on core competencies Nike focus on innovation,marketing,distribution,and sales,not on manufacturing Increased flexibility Better react to changes in customer demand Use the supplier's technical knowledge to accelerate product development cycle time Gain access to new technologies and innovation These three issues are critical issues in industries where technologies change rapidly
Outsourcing Benefits and Risks Benefits Economies of scale - reduce manufacturing costs Risk pooling - demand uncertainties are transferred Reduced capital investment Focus on core competencies Nike focus on innovation, marketing, distribution, and sales, not on manufacturing Increased flexibility Better react to changes in customer demand Use the supplier’s technical knowledge to accelerate product development cycle time Gain access to new technologies and innovation These three issues are critical issues in industries where technologies change rapidly
Think-Pair-Share Take 2 min.to read Example 9-1 (IBM),consider how IBM benefited and was hurt by outsourcing, then discuss with neighbors. These benefits come with new considerable risks
Outsourcing Benefits and Risks These benefits come with new considerable risks. Think – Pair – Share Take 2 min. to read Example 9-1 (IBM), consider how IBM benefited and was hurt by outsourcing, then discuss with neighbors
