Sunday, February 29, 2004
KAW on outsourcing
If you aren't bored to death by my going on about outsourcing, here's an interesting article on the subject that appeared in Knowledge @ Wharton.
Politics apart, the reality is that outsourcing is as old as the corporation. One business arranges with another to make a widget or provide a certain service that it cannot do itself, or does not wish to do, so that it can focus on the parts of the business it does best. The sourcing arrangement is normally seamless, and it matters little to end-use customers who have been paid to perform the outsourced work.
“It’s the classic ‘makes vs. buy’ question,” says Morris Cohen, professor of manufacturing and logistics at Wharton. “Do I make something internally or buy it in the marketplace, and how do I add value most effectively? This is a problem that’s been studied in economics and management for decades. This is not a new issue, and it’s not one that will ever go away.” What has changed, Cohen says, is that more companies are engaged in more outsourcing than before -- and they are doing it in novel ways. “The idea of moving things offshore and outside the boundary of the firm -- more of that has been happening around processes you would never have thought possible.
Furthest along the sourcing spectrum, BCG says, are those companies – thus far few in number – that recognize they must capture global advantage. These firms recognize that if they manage their business across multiple low-cost countries, they can achieve more growth at all levels -- local, regional and global. For example, Toyota outsources vehicle sub-assemblies from many Asian countries, allowing it to keep costs low and achieve just-in-time delivery. Capturing global advantage --achieving the lowest costs while making use of the best people and practices -- is the holy grail of leveraging low-cost countries. It is hard to achieve but it is also difficult for competitors to replicate.
Politics apart, the reality is that outsourcing is as old as the corporation. One business arranges with another to make a widget or provide a certain service that it cannot do itself, or does not wish to do, so that it can focus on the parts of the business it does best. The sourcing arrangement is normally seamless, and it matters little to end-use customers who have been paid to perform the outsourced work.
“It’s the classic ‘makes vs. buy’ question,” says Morris Cohen, professor of manufacturing and logistics at Wharton. “Do I make something internally or buy it in the marketplace, and how do I add value most effectively? This is a problem that’s been studied in economics and management for decades. This is not a new issue, and it’s not one that will ever go away.” What has changed, Cohen says, is that more companies are engaged in more outsourcing than before -- and they are doing it in novel ways. “The idea of moving things offshore and outside the boundary of the firm -- more of that has been happening around processes you would never have thought possible.
Furthest along the sourcing spectrum, BCG says, are those companies – thus far few in number – that recognize they must capture global advantage. These firms recognize that if they manage their business across multiple low-cost countries, they can achieve more growth at all levels -- local, regional and global. For example, Toyota outsources vehicle sub-assemblies from many Asian countries, allowing it to keep costs low and achieve just-in-time delivery. Capturing global advantage --achieving the lowest costs while making use of the best people and practices -- is the holy grail of leveraging low-cost countries. It is hard to achieve but it is also difficult for competitors to replicate.
