Académique Documents
Professionnel Documents
Culture Documents
Abstract
The outsourcing discussion covers a well known area. The relevant literature refers to a situation which is traditionally well known
in theory and practice as `make or buya decision. But it is necessary to concentrate on the economic factors of outsourcing decision.
This paper contains a real and detailed analysis of the outsourcing problem. Besides its generic base, we develop an outsourcing model
with design alternatives based on institutional economic theory and work out an explanatory approach and concrete recommenda-
tions for outsourcing arrangements. Therefore, we combine transaction cost economics and core competencies approach. As a result,
the managerial applications of both approaches are compatible. ( 2000 Elsevier Science Ltd. All rights reserved.
0969-7012/00/$ - see front matter ( 2000 Elsevier Science Ltd. All rights reserved.
PII: S 0 9 6 9 - 7 0 1 2 ( 9 9 ) 0 0 0 2 8 - 3
24 U. Arnold / European Journal of Purchasing & Supply Management 6 (2000) 23}29
orientation, purchasing played an inferior role. Its job sidered for outsourcing. In this case, supplier is a term in
was to help manufacturing and sales based on their a wider sense. This supplier could also be an inhouse
detailed demands. supplier, e.g. an independent business unit within a group
f Beginning with the 1980s, purchasing became more of "rms. Outsourcing design is discussed below.
strategic in the phase of a general market orientation
(Arnold, 1982; Lindner, 1983). Very strong competi-
tion forced companies to look for new sources of 2. Economic institutions as design alternatives
competitive advantages. Marketing was no longer
dominating all other functions. Instead, purchasing Basic design alternatives for the outsourcing decision
acquired more and more importance for realizing can be based theoretically on Williamson's institutional
quality improvements and cost reduction together economics. Developed on the ideas of Coase (1937) and
with suppliers. Purchasing, procurement, inventory Commons (1931), he sees three major `governance struc-
and materials handling, and logistics are optimized turesa for economic activities (Williamson, 1985; Arnold,
simultaneously in the supply chain management ap- 1998):
proach. f Markets steer transactions by the price mechanism.
There are direct incentives for all transaction partners.
1.2. A general outsourcing model If a supplier cannot meet customers' requirements, he
will not be able to participate in economic exchanges
The outsourcing model consists of four major elements any longer.
(see Fig. 1): Outsourcing subject, outsourcing object, out- f Hierarchies are based on the centralization of property
sourcing partner, and outsourcing design. rights by management. Administrative control mecha-
Outsourcing subject is the economic institution which nisms within a company facilitate the orientation on
plans to outsource (or not). The subject has to make the one target (e.g. the production of automobiles).
strategic outsourcing decision. Outsourcing objects are f There are many governance structures which are nei-
processes or process results which might be outsourced ther clear markets nor clear hierarchies. Examples are
(Reichmann and Palloks, 1995). With regard to the activ- long-term contracts or strategic alliances between in-
ities of a company we distinguish between (1) the com- dependent companies. All these in-between gover-
pany core (all activities which are necessarily connected nance structures combine hierarchical and market
with a company's existence), (2) core-close activities (dir- elements (TroK ndle, 1987). Therefore they are called
ectly linked with core activities), (3) core-distinct activ- hybrids (Williamson, 1991).
ities (supporting activities), and (4) disposable activities Hierarchy is directly linked with insourcing. All gover-
(activities with general availability). From an industrial nance structures with market elements are relevant for
perspective, the outsourcing object is closely linked with the outsourcing design (see Fig. 2). We distinguish be-
the degree of manufacturing penetration. Outsourcing tween internal and external outsourcing. External out-
partners are all possible suppliers for the activities con- sourcing means spot transactions or long-term
U. Arnold / European Journal of Purchasing & Supply Management 6 (2000) 23}29 25
relationships with suppliers. Internal outsourcing refers a Mercedes only if it is redesigned and relocated. In such
to a higher degree of hierarchical steering (Zahn et al., cases quite often a total loss must be accepted if the
1998): by forming independent pro"t centers instead original use is "nished.
of hierarchical departments, the market element becomes Objects with low specixcity can be governed with an
relevant within a company (KruK ger and Homp, 1997). external outsourcing design. Low speci"city means that
If for example procurement operates as a pro"t center, little information has to be exchanged with the transac-
all sourcing activities can be outsourced internally tion partner. External outsourcing partners are able to
to an independent business unit. Internal outsourcing bundle demand and to exploit economies of scale. Much
can also be organized as a horizontal cooperation information has to be exchanged before, during and after
of independent companies, sometimes by a general the exchange of goods and services with high specixcity.
service company (joint venture) even with capital The results are extremely high market transaction costs.
investment. It is not possible to realize large scale e!ects because only
a few customers exist (or perhaps only one). It makes
sense to establish an internal outsourcing design for these
3. Strategic decisions on outsourcing and the degree of transactions. Goods and services with highest speci"city
manufacturing penetration are based on the company's core competencies. They
should be kept under the full responsibility and control of
3.1. Outsourcing objects from a transaction a company (insourcing).
cost perspective
3.2. Outsourcing objects from a core competence
Coase (1937) was the "rst to discuss transaction costs. perspective
These `costs of making each contracta appear because of
information asymmetry, bounded rationality and oppor- Speci"city is closely related to the strategic importance
tunism. Such costs arise from activities which include: of a transaction. Which transactions are really of `stra-
evaluating suppliers, negotiation, control function, etc. tegic importancea for a company? Is the engine produc-
(Picot, 1991). They appear not only in markets but also in tion strategically important for a car manufacturer?
hierarchy. If a company has to invent and to run a system Micro Compact Car (MCC) does not build the engine for
to control the productivity of its workers, hierarchy costs their Smart car by themselves but has outsourced engin-
are inevitable. The basic idea is now to "nd a governance eering and manufacturing totally to DaimlerChrysler.
structure with the lowest costs for each transaction. The core competencies approach tries to answer these
Therefore, we need deeper insights into the character- questions (Prahalad and Hamel, 1990). Its main idea is
istics of transactions. According to Williamson (1989, that only goods and services which are considered to be
1991), specixcity is the most important aspect of a trans- core competencies should be produced internally (in-
action. Speci"city refers to asset speci"city as well as sourcing). In fact core competencies combine three ele-
human capital speci"city. Goods and services with high ments (KruK ger and Homp, 1997):
speci"city cannot be used in other transactions without f In the eyes of the customers their characteristics must
huge additional costs. For example, paintshop equip- be relevant. They di!erentiate between the company
ment designed for the Volkswagen Golf can be used for and its competitors.
26 U. Arnold / European Journal of Purchasing & Supply Management 6 (2000) 23}29
f To gain competitive advantage, resources and know- 3.3. The integrated model
how for the product must be unique over time. It must
be possible to protect it against imitation by competi- Together, transaction cost economics and the core
tors over time. So a competitive advantage must be competence approach help to develop a general model
sustainable. for outsourcing decisions (see Fig. 3). They help to decide
f Only if these resources are usable for multiple which of the institutional economics' based design alter-
purpose, they are core competencies and should natives is optimal.
remain within a company and should not be out- Therefore, management has to answer three questions
sourced. on the outsourcing object:
For example, Mercedes-Benz is able to produce f Is the activity highly speci"c? If so, normally very high
high quality with high safety standards. This charac- market transaction costs for communication and
teristic must be recognized by customers. They expect agreement exist. Economically, it makes no sense to
to be better protected in case of a crash. But engineer- outsource such an activity.
ing and manufacturing of `safetya is a core f Is the activity strategically important? Sometimes it is
competence only because Mercedes-Benz is able to not helpful to outsource activities with low speci"city
transform this know-how into new products like the because they are extremely important for a company's
A-class. ability to survive. To get a concrete idea of this
U. Arnold / European Journal of Purchasing & Supply Management 6 (2000) 23}29 27
activities. For example, the customers of a car identify Smart car. MCC built a new plant in Hambach, France,
a speci"c model more often by image factors based on where they own only the "nal assembly line. Press and
marketing e!orts meeting lifestyle clusters than by tech- paintshop, engine production, seats, body parts, front
nical details like the type of door handle. Together with module, doors, and cockpit are de"ned modules produc-
the availability of general technology on the supply mar- ed on the same site in small `pre-plantsa owned by the
ket, the new approach for the lean company is a nearly particular supplier. The supplier is responsible for engin-
total reduction of manufacturing activities. Instead, these eering and manufacturing the parts. Therefore he is
activities are handled by suppliers. Manufacturing activ- strongly connected with the production planning system
ities are no longer core competencies of the car company; of MCC. He produces just-in-time and delivers directly
for them, manufacturing is an activity with low spe- to the "nal assembly line where MCC workers assemble
ci"city. There exist suppliers who are specialized in these few modules.
manufacturing only. For example, Porsche decided to The de-materialized company is not even responsible
outsource production of their US Boxer models com- for the "nal assembly line. All assembling activities are
pletely to a company called Velmet in Finland. Porsche done by the suppliers themselves. For example, Vol-
themselves concentrate on engineering, marketing, and kswagen's truck plant in Resende, Brazil, is such a de-
supplier steering. Of course, the end-product (car) always materialized company (Woodru! et al., 1996). Vol-
has to be produced physically. The idea of a free network kswagen's employees are not involved in any physical
of suppliers without any physical consequences makes it production. All manufacturing work is done by the sup-
impossible to produce goods in reality. Therefore, factory pliers. These seven suppliers, as shown in Table 2, own all
within a factory is the solution. physical assets including the "nal assembly line. Only 200
The basis for factory within a factory is the de"nition out of 1500 employees in the plant work for VW. VW is
of a small number of speci"c modules. Every module is responsible for quality assurance, marketing, and sales
a de"ned part of the end product with de"ned interfaces. only.
For producing these modules, the supplier installs its The de-materialized company is a company working
own manufacturing plants on the buyer's site or even in as a supplier management and customer management
the buyer's plant. He might also be responsible for the company. Its only job is to identify customer needs and
installation of his module on the "nal assembly line. The to "nd suppliers delivering parts for a product which
responsibility for the "nal assembly line is also the main satis"es these needs. There are only two primary value
distinction between the two models of the factory within chain activities left: purchasing and marketing. The de-
a factory-concept (see Fig. 4). In-plants means realizing materialized company delegates all manufacturing activ-
the shop in the shop idea by bringing suppliers' produc- ities to suppliers. It links its supply markets with the
tion lines into the buyer's plant (Arnold, 1997). The buyer needs of its end customer markets. Purchasing becomes
himself is responsible for the "nal assembly line. He owns the most important activity for the ability to produce
the physical assets of this line and he pays the assembling physical goods. It is the &linking pin' between marketing
employees. An example for the in-plant model is the and manufacturing because the suppliers are now manu-
Micro Compact Car (MCC) company, now a full subsidi- facturing agents for a company which does not have any
ary of DaimlerChrysler, which produces the so-called physical assets at all.
U. Arnold / European Journal of Purchasing & Supply Management 6 (2000) 23}29 29