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We live in an era in which business disaggregation is the norm. In industry after industry, managers have taken deliberate steps to separate their value chains and shift important activities and functions to outside suppliers. The outsourcing trend became increasingly visible during the 1990s, when companies such as IBM began to outsource not just manufacturing but also design activities. The trend reached its peak within the past decade, when even companies such as Boeing started outsourcing innovation activities. But what happens when companies become too dependent on outside suppliers and cede them too much control if they lack the same degree of understanding and awareness about how important product or service elements fit together and what’s necessary? Once management lets go of critical internal levers, how does it go about reestablishing them?
These questions arose during a multiyear research project examining supply strategy relating to new product development at a major European automotive company (see “About the Research”). In the late 1980s, the company — which we call Alpha — had direct supply relationships with more than 3,000 suppliers, most of them small companies. The suppliers were mostly involved in the production of components, and only to a limited extent in the design of components. In the early 1990s, however, management began shifting increasing amounts of design and engineering work to suppliers. That trend was hastened by the proliferation of electronics in cars, which was beyond the traditional competence base of automotive manufacturers. Although all companies shift activities to outside suppliers, Alpha pushed outsourcing even further. By the mid-1990s, Alpha began to outsource the design of complete systems, such as dashboards, seats and safety systems, to suppliers that had the ability to provide entire systems. (See “The Anatomy of an Auto.”)
The Leading Question
How can companies make the right decisions about outsourcing?
Findings
- Keep activities in-house that have direct impacts on product performance.
- Maintain control over activities that are highly interdependent with the technologies that impact on the performance of the overall product.
To senior management, outsourcing entire systems — including the design of
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Article has indicated the weaknesses of the outsourcing paradigm. Although outsourcing is still the right thing to do outside the core competences of the company, people need to realise very well why they are outsourcing. In short there are only 3 reason why you would outsource and depending on these reasons you need to have a different management structure. At least my own research has shown this. When will we read more about similar topics?
Regards,
I run workshops on using third party suppliers and one of the real examples I use is an energy distributor that outsourced engineering activities but found that it needed to pull back the technology to deal with high-tension cables and transformers. It was made aware of the problem only through the level of spend in this area. But the concern about rising costs went from tactical to strategic when they recognised the implications on investment planning, of not understanding the technology implications well enough.
Above mentioned published paper is very helpful to understand what concenquences can be happened because of too much outsourse.But now a days many companies are doing outsourse and they are at competating position in their field.so I am curious about how can we decide that how much outsourse should be required? Instead of outsourse if company choose way to acquire those firms then is it good idea?