Strategic Outsourcing and Business Model Definition

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Strategic Outsourcing and Business Model
Definition

• Andrea Tracogna

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The next business model?
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Different reasons for not making the economics
of outsourcing (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).

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Different reasons for not making the economics
of outsourcing (2)

• 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 RD
  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

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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 RD 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 (mans size) and Indonesia (boys
  size) from dozens of components supplied by firms
  in Japan, South Korea, Taiwan, Indonesia and the
  United States.

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Nikes value chain?
INFRASTRUCTURAL ACTIVITIES
HRM
SUPPORT ACTIVITIES
MARGINS
NPD AND TECHNOLOGY
PROCUREMENT
INBOUND LOGISTICS
OPERATIONS
OUTBOUND LOGISTICS
MARKETING AND SALES
SERVICES
MARGINS
PRIMARY ACTIVITIES
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Nike as a supply chain orchestrators

• Focus on a portion of the value chain
• Emphasize partnering
• Invest in brands
• Minimize tangible investments
• Arbitrage international factor price differencies

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Managing the supply chain
Technology
Communities
Market research
Research
Manufacturers
Suppliers
Distributors
End users
Suppliers suppliers
Consultants
Other Services
Logistics
Design
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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.
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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

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Contract electronics manufacturing
Foxconn is the world leader for joint-design,
joint-development, manufacturing, assembly and
after-sales services to global Computer,
Communication and Consumer-electronics ("3C")
leaders. 
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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

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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.

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ZARA the exception to the rule?
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The Zara paradox

• Localization of operations
• Commitment to fixed assets
• Downwards vertical integration
• Premium image and stores without advertising
• (Fast) followership

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Zaras value chain?
INFRASTRUCTURAL ACTIVITIES
HRM
SUPPORT ACTIVITIES
MARGINS
NPD AND TECHNOLOGY
PROCUREMENT
INBOUND LOGISTICS
OPERATIONS
OUTBOUND LOGISTICS
MARKETING AND SALES
SERVICES
MARGINS
PRIMARY ACTIVITIES