Supply Chain Management:

From Vision to Implementation

Chapter 9: Core Competencies and
Outsourcing

Chapter 9: Learning Objectives

1. Describe the notion of core competency.
Identify an organizations competencies and
determine whether they pass the three-fold
test of a core competency.
2. Define outsourcing and discuss reasons why
companies outsource.
3. Describe the three phases to developing and
executing an outsourcing strategy.
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Chapter 9: Learning Objectives

4. Identify and assess some of the potential
risks associated with outsourcing.
5. Conduct a make-or-buy analysis to support
an outsourcing decision.

What is a Core Competence?

Core competency is the set of activities, skills,
or advantages that distinguishes a company
for its competitors.
the collective learning in the organization,
especially how to coordinate diverse
production skills and integrate multiple
streams of technologies.
- Prahalad & Hamel
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Core Competence
To compete and win in the global marketplace
a company must be uniquely good at at least
one thing that the customer values.
Most industry leaders build their core
competencies around a handful of essential
skills.

Identifying Core Competencies

Does the identified skill set contribute significantly
to what customers perceive as our organizations
value-added?
Is the skill set difficult for others to replicate or
imitate?
Are we particularly good at the skill set, or willing
to invest the resources to become excellent?
Is the skill set broad enough that it allows us to the
opportunity to enter many diverse markets or
businesses?
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Complementary Core Competencies

Once a company finds its core competency, it
can design a supply chain to support its
competitive strategy, value proposition, and
competency development.
Outsourcing non-critical activities to supply
chain partners allows companies to leverage
complementary core competencies.

Outsourcing Flowchart

The Outsourcing Challenge

Outsourcing is the process of moving an
aspect of production, service, or business
function from within an organization to an
outside supplier.
Government public agency outsourcing is
called privatization.

Outsourcing Trends
Contract Manufacturing (CM) a third-party makes
an end product or major component under another
companys brand.
Third-Party Logistics (3PL) using a supplier to
provide some combination of logistics activities.
Offshoring outsourcing to a different country.
Business Process Outsourcing (BPO) outsourcing
support functions such as: HR, payroll, logistics, etc.

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Benefits of Outsourcing
By outsourcing non-strategic processes, an
organization can focus its attention on those
things it does best to satisfy the customer.
Other benefits include:

Cost savings
Capital conservation
Performance improvement
Access to low-cost labor and/or resources
Benefit from outside expertise
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Top Reasons for Outsourcing

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Outsourcing Risks
Outsourcing is not without risk:
Outsourcing strategic activities may cause a loss of
competitive position.

Strategic risk long-term, perhaps irreversible, risk

based on a loss of knowledge related to core
activities.
Tactical risk short-term risk based on use of
supplier for capacity, not knowledge.
Increased dependence on suppliers for knowledge
weakens the buyers relative bargaining power.
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Outsourcing Risks
Strategic Risks

Tactical Risks

Firm loses knowledge and/or

technology to perform activity
internally

Firm experiences:

Supplier develops unique, hard to

replicate expertise

Short-term supply shortages

Supplied activities add unique

value recognized by customer

Hidden transaction or
management
costs

Customer identifies more with the

supplier than the original firm

Loss of schedule control

Firm loses sight of market trends

Short term price fluctuations

Supplier shares knowledge with

firms competitors
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Outsourcing Process Phases

Phases

Key Participants

Establish mission, generate and

screen ideas

Top management , business unit and

functional leaders

Conduct an outsourcing feasibility

study

Multi-disciplinary team of key

stakeholders in the current process

Establish and manage the

relationship with the supplier

Purchasing or relationship manager

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Established the Outsourcing Mission

A multidisciplinary team of high-level managers
should:
State the benefits it hopes to achieve by
outsourcing
Nominate processes for outsourcing
Screen those processes against key success
factors to determine which are best suited for
outsourcing

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Outsourcing Projects - Screening

Project

Decision/Rationale

Laundry

Outsource internal support function

Forms
Management

Outsource internal support function

Information
Technology

Outsource important area, but do not excel in this area; could

not invest to achieve excellence

Supply
Management

Do not outsource critical to internal analysis, maintaining key

supplier relationships, and cost competitiveness

Food Service

Outsource although excellent cafeteria, does not add-value to

the customers, nor would is it be difficult to replicate

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Conduct an Outsourcing Analysis

Multi-disciplinary team of key stakeholders in
the current process evaluate each potential
process to outsource as determined by the
screening process.
Evaluation includes:
Developing a better understanding of the
organizations needs
Gathering detailed cost, performance, and risk
information
Total cost of ownership analysis
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Outsourcing Analysis - Suppliers

Assessment of the supply market capabilities,
considering:
Are supply sources available?
Do potential supply sources meet capacity,
quality, and other organizational needs?
Are the suppliers interested?
What risks are present in outsourcing?

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Outsourcing Analysis - Suppliers

Reverse Marketing is the process of
recruiting a supplier to provide an item or
service that the supplier not currently
providing, or unable to provide.
Restating Need and Expected Benefit
considers the scope and scale of outsourcing
required providing new insight on ways to
achieve the desired benefit.
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Identifying & Mitigate Potential Risks

Most organizations are good at recognizing tactical
risk.
A larger issue is strategic risk; by ceding power
through outsourcing, a supplier might be able to
capture a larger share of the overall chains margin.
Contingency plans should be developed to deal with
identified risks associated with outsourcing.
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Outsource Risk & Mitigation Strategy

Risk Issue

Safeguard

Capacity or shortages

Identified alternative sources for key parts, keeping in mind that

all distributors use the same manufacturers, so shortage is
difficult to avoid in an industry-wide shortage

Loss of competitive pricing

information

Right to audit manufacturers bills built into contract

Right to test market and go out to receive competitive bids for
comparable services
Most favored customer clause in contract to ensure that
Images price meets or beats the price offered to other
customers receiving the same service

Hidden transaction or
management fees

Cap fees in contract

Right to audit distributors cost allocations built into contract
Contractual clause requiring distributors bills itemized into
major cost categories for management fees, rather than one
lump sum

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IT Outsourcing - Risk Mitigation Plans

Risk Issue

Safeguard

Poor service to internal customers

Establish internal user survey that links service

providers pay to performance

Poor communication or management

of service provider

Dedicated relationship managers at Image

Advisory Board to meet with relationship manager,
service provider, key users to provide feedback,
discuss technology needs and trends

Difficulty in controlling costs

Hire a third party to audit service provider, compare

rates with other like companies

Loss of internal expertise

Loss in support level expertise could not be

avoided. However, relationship manager, CIO and
others would retain enough strategic knowledge to
replace the service provider effectively if needed

Short contract duration/high turnover

would be expensive for supplier and
frustrating for internal users

Established a five year contract with annual reviews

and contract extension clauses

Transitioning own employees out of

IT and training new employees by
service provider

Virtually all current Image IT employees were

offered and accepted jobs with service provider to
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remain at Image

Outsourcing Analysis - TCO

A cross functional team should analyze all
direct and hidden costs associated with the
current and perspective outsourced activity.
Cost included: materials, labor, energy,
overhead, transportation, inventory, quality,
obsolescence, and capital.
Sensitivity analysis should be performed to
determine on a total cost of ownership basis
whether there is a cost incentive for
outsourcing.
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Manage the Outsourcing Relationship

Outsourcing arrangements exist on a continuum
from minimum service to full service turnkey
operations.
Limited-scope suppliers are less unique and
therefore easy to replace.
Full-service suppliers provide unique value and are
therefore more closely integrated.

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Supplier Relationships: Arms-Length

Best suited for routine purchases of goods or
services.
No long-term commitment or special valueadded by this supplier.
Non-recurring purchases of items that arent
critical
Supply market is very competitive
Switching costs are low
Suppliers are not differentiated.
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Supplier Relationships: Niche

Providers are generally specialized, providing
a very specific, limited good or service.
May be more difficult to replace than armslength suppliers due to their specialized
nature.
In general, these are specialized, nonrecurring purchases.

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Supplier Relationships: Hybrid

Provide an intermediate level of service.
Provide items of moderate importance that are somewhat
integrated into the organizations operations.
May be responsible for a whole subsystem or process rather
than one clearly defined piece, as do limited scope providers.
Standard turnkey solutions, and may even run some of the
companys internal processes with their own people.
Boundaries between the provider and the firm may begin to
blur.
Ongoing communication is critical
Higher degree of reliance and switching costs
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Supplier Relationships: Full-Service

Provide strategic items and processes that are
entrenched in the firms own processes.
Custom solutions
Often engaged in Business Process Outsourcing of
critical functions.
These providers have a very high level of
responsibility and accountability.
Have a significant presence in the organization,
working side-by-side with the organizations
employees.
Difficult to evaluate and manage.
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Outsourcing Relationships

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Outsource Relationship: Oversight

Routine relationships are named for traditional contract
management. The contract terms are clear and the deliverables
are simple to use and measure. Routine relationships are best
suited to arms-length and niche arrangements.
Cooperative relationships are suited to hybrid outsourcing
arrangements. The contract defines the relationship, but the
suppliers also cooperate on an on-going basis to redefine
expectations and goals based on changing business needs.
Committed relationships are common between buyers and
solutions integrators. The two parties have committed a great
deal of resources and efforts to the relationship, and their
management style should reflect this.
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Outsourcing Relationship: Oversight

Type of Relationship

Routine

Arms-Length

Niche Provider

Cooperative

Hybrid

Solutions Integrator

Committed

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Oversight Characteristics
Issue

Routine

Cooperative

Committed

Level of management oversight after

relationship is established

Low

Low to
medium

High

Strategic importance of item/process outsourced Low

Medium

High

Need to interface with supplier closely to

understand processes

Low

Medium to
high

High

Anticipated change/improvement over lifecycle

of relationship

Low

Medium to
high

High

Interdependence of our process with supplier

Low

Medium

Medium to
high

Our need to be a preferred customer to this

supplier

Low

Low to
medium

High

Level of ambiguity and change in expectations

Low

Low to
medium

Medium to
high
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Ongoing and Post-Audit Evaluation

Routine relationships - feedback often is complaining to the
supplier when it performs poorly. If a significant supplier, may
receive a standard report card of key performance indicators
(KPIs). The report compares actual to expected performance
on key KPIs.
Cooperative relationships - supplier likely receive a semicustomized report card capturing data regarding the value the
supplier adds.
Committed relationships supplier likely to receive a
customized report card based on establishing performance
indicators for key issues. In addition, much of the performance
feedback would be verbal, as this is a close day-to-day
interaction.
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Typical Outsourcing Report Card

Performance Indicator

Rating

Goal

Comments

Completes Key Tasks on

Time

90%

98%

Was late on transitioning

to new inventory system

Meets Service levels to

internal customers

95% same day response

92% same day

response

Excellent; keep up the

good work!

Follows up on missed
service levels within a
week

99%

95%

Thanks for your good

work!

Client perception surveyQuality

88% meets/exceeds
quality expectations

90% meets/exceeds
quality expectations

Need to perform a root

cause analysis and
identify weak area(s) to
target improvement

Client perception surveyTechnology leadership

95% meets/exceeds
Technology leadership
expectations

90% meets/exceeds
Technology
leadership
expectations

Good work!

Within budgeted costs

unless prior approval
given

100%

100%

Good work
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Buyer Skills
Traditional buyers manage contractual
relationships that are clearly defined, with
clear expectations and performance measures.
Outsourcing requires that supply
professionals master creating and managing
complex relationships due to the more fluid
and less clearly defined supply environment.
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Insourcing
The outsourcing decision is not permanent or
irreversible; the structure of the firm must
adapt to changing business environment.
Companies may bring outsourced activities
back in-house due to a number of reasons:
Failure to achieve expected benefits
Increase control over key processes
Changing business priorities and core competence
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A Return to the Opening Story

Based on what you have now read and discussed:
1. Do you think that the task force members concerns
are warranted? Why or why not
2. How do you suggest that Doug keep the task force
members focused on the topic of outsourcing as a
legitimate SC decision, rather than their fears related
to their own functional areas?
3. Is this a strategic issue, tactical issue or both? Explain
your answer, and how the task force should address
this?
4. What activities and analysis should the task force
undertake to address the Executive Committees
questions?
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