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Y Y 


 Purchasing an item, process, or service

externally when the organization has
the capability to produce it internally is
equivalent to "selling jobs"
 Overriding factor in considering internal
versus external products/processes /
services is TOTAL COST


 èew product development,

 Unsatisfactory supplier / distributor
 Periods of changing sales patterns
(increasing or decreasing)
 Expansion of geographic sales




   ! "# 


 åhat is my relative position?

 Delivery / Responsiveness
 Cycle times
 Is this considered a core/critical current or
future competency?
 If behind, can we catch-up / surpass?


    $ % 





† %

† ! Y 
† &'  
† % 


 åork Force - Security,  HMO¶s

Janitorial, Food Service,  MRO Inventory
etc.  Utilities
 Information Services  Travel Services
 Programming  Temporary Labor
 Human Resource  Outplacement
 Copiers / Fax
 Customer Satisfaction
 Payroll services
 3rd Party åarehouse  Fleet services

 Supplier has specialized know-how
 Cost considerations favor supplier
 Firm lacks ability to build item
 Small volume requirements
 Firm's capacity constraints

 Desire not to add workforce
 Uncertain volume requirements
 Routine item available from many
 Building requires high capital startup


 Greater flexibility
 Lower investment risk
 Improved cash flow
 Lower potential labor costs


 Greater possibility of choosing wrong
 Loss of control over processes
 Potential for losing ³core supportive´
 Long lead-times
 ³Hollowing out´


 Higher degree of control over inputs
 Increases visibility over the process
 Economies of scale and scope
 Requires high volumes
 High investment
 Dedicated equipment has limited uses
 Problems with supply chain integration


 A firm's long run, strategic ability to

build a dominant set of technologies
and/or skills which enable the firm to
adapt to quickly changing marketplace
 A skill, process, or resource that
distinguishes a company and makes
them "stand out from the rest".

 ³...the collective learning in the

organization, especially how to
coordinate diverse production skills and
integrate multiple streams of
technologies.´ (Prahalad and Hamel 1994)


 Favorable cost considerations

 Desire to integrate operations
 Use available capacity to absorb fixed
 Control over production and quality
 Design secrecy required


 Lack of reliable suppliers

 Stable workforce w/ declining volumes
 Technical items related to core
 Strategic item or technology behind


 Incremental fixed costs

 Equipment investment
 Factory overhead
 Managerial costs
 Purchasing costs
 Inventory carrying costs
 Costs of capital & taxes
 Special personnel

 Finding True In-house
Costs is not Easy!
 Costs of Overhead
 Costs of Quality
 Operational Costs
 Capital Costs


 Be Careful - In-house managers can

easily hide costs!
 Traditional analysis only considers
variable costs


Variable Cost $ 5.00 ----------

Variable +
Manufacturing Overhead $8.00 ----------

Variable +
Manufacturing Overhead +
Corporate Overhead $10.00 $7.50


 åhat costs stay and which go - validity?

 Opportunity for actual improvement

 Impact of ³other´ considerations (Quality,

Delivery Reliability, Technology, etc.)

 åhat are the longer-term strategic



 Variable costs:
 Delivered material cost
 Direct labor costs + fringe benefits


 Purchase price of part

 Transportation costs
 Receiving and inspection
 Incremental purchasing cost


 Availability of current capacity and

projected workload during life cycle of
 Extremely tight quality specifications
may favor in-house operations

 Stable and trained workforce
 èeed for expansion may make them unavailable
 Recruitment and training of an additional work
force may result in an unstable condition
 Tight labor markets
 Union contracts may present inflexible situations
 Conservative forecasts will benefit suppliers or
result in excessive idle time

 For specialized equipment, what is the
projected future need for such an
 Forecasted product demand - time and
 Technological considerations
 Complex technical products
 Suppliers with specialized knowledge or patents
 Factory "focus" - what business are we in?


 Supplier goodwill considerations

 Using suppliers only occasionally as
buffers may result in loss of goodwill and
long term damage
 Avoiding proprietary data leaks
 Capital outlay and associated risks

 åhat effect will insourcing a purchased
product/process/service have on the
cost structure of this and other
processes carried out in-house?

 Manufacturer is considering performing
warehouse function internally
 Has recently reduced its manufacturing
workforce by thirty full-time hourly
employees and three managers

 åarehouse sales reps contact a public
warehouse electronically, where
warehouse personnel pick and pack the
order and arrange the shipment
 Initial benefit = decrease in per unit
warehouse charges from $2.90 to $2.36
in a private warehouse


 Reduced labor force (jobs for laid-off

workers, with additional cost training)
 Sales personnel could have offices in
the warehouse
 Greater control over operations
 Assume warehouse operates for ten

 #   "
Annual charges
Building and equipment $25,000
(depreciation of initial investment)
Employee training 10,000
Overhead expenses 50,000
Management expenses 70,000
Annual capacity 180,000 units

Cost per unit Annual charges $ .86

($155,000 / 180,000 units)
Variable costs $1.00
Direct labor costs $ .50
$2.36 / unit


 List all of the advantages of insourcing

the warehouse
 List all of the advantages of outsourcing
the warehouse
 åhat would be your final decision,
taking into consideration of these


 The insourcing/outsourcing decision requires

a careful understanding of internal core
competencies, both currently and in the future
 The decision involves considering total cost,
as well as quality, technology, and customer
 Insourcing/outsourcing decisions must be
aligned with other functional strategies