Insourcing/Outsoucing—The FlexCon Piston Decision
This case addresses many issues that affect insourcing/outsourcing decisions. A complex and important topic facing businesses today is whether to produce a component, assembly, or service internally (insourcing), or whether to purchase that same component, assembly, or service from an external supplier (outsourcing).
Because of the important relationship between insourcing/outsourcing and competitiveness, organizations must consider many variables when considering an insourcing/outsourcing decision. This may include a detailed examination of a firm’s competency and costs, along with quality, delivery, technology, responsiveness, and ...view middle of the document...
Part of FlexCon's effort at redefining itself involves creating an understanding of insourcing/outsourcing among managers and employees. The company has sponsored workshops and presentations to convey executive management's vision and goals, including educating those who are directly involved in making detailed insourcing/outsourcing recommendations.
One presentation given by an expert in strategic sourcing focused on the changes in the marketplace that are encouraging outsourcing. The expert noted six key trends and changes that influence insourcing/outsourcing decisions:
▪ The pressure for cost reduction is severe and will continue to increase. Cost reduction pressures are forcing organizations to use their productive resources more efficiently. A recent study found that over 70% of firms surveyed expect no change or a decrease in purchased material costs through 2005. As a result, executive management will increasingly rely on insourcing/outsourcing decisions as a way to manage costs.
▪ Firms are continuing to become more highly specialized in product and process technology. Increased specialization implies focused investment in a process or technology, which contributes to greater cost differentials between firms.
▪ Firms will increasingly focus on what they excel at while outsourcing areas of non-expertise. Some organizations are formally defining their core competencies to help guide the insourcing/outsourcing effort. This has affected decisions concerning what businesses a firm should engage.
▪ The need for responsiveness in the marketplace is increasingly affecting insourcing/outsourcing decisions. Shorter cycle times, for example, encourage greater outsourcing with less vertical integration. The time to develop a production capability or capacity may exceed the window available to enter a new market.
▪ Wall Street recognizes and rewards firms with higher ROI/ROA. Since insourcing usually requires an assumption of fixed assets (and increased human capital), financial pressures are causing managers to closely exam sourcing decisions. Avoidance of fixed costs and asset is motivating many firms to rely on supplier assets.
▪ Improved computer simulation tools and forecasting software enable firms to perform insourcing/outsourcing comparisons with greater precision. These tools allow the user to perform sensitivity analysis (what-if analysis) that permits comparison of different sourcing possibilities.
One topic that interested FlexCon managers was a discussion of how core competencies relate to outsourcing decisions. FlexCon management commonly accepted that a core competency was something the company "was good at." This view, however, is not correct. A core competence refers to skills, processes, or resources that distinguish a company, are hard to duplicate, and make that firm unique compared to other firms. Core competencies begin to define a firm's long run,...