Sourcing (in & out-Sourcing)

Sourcing
Outsourcing allows a firm to focus an activities that represent its core competencies. Thus the company can create a competitive advantage while reducing cost (Richard B.Chase, F Robert jacobs and Nicholas J Aquilano) I. Sourcing in general divide into 2 sources as follows : 1. In Sourcing (Make, Do, In-House, Self Management) -> procurement of goods/services, which is full-filled from companys sources itself, ex : by make itself , creating by self. 2. Out-Sourcing (Buy, hand over) -> Procurement of goods & services which is fullfilled from outside company , by buying, renting, leasing etc.
Factors that must be considered in the selection of both alternatives sources, i.e by seeing : the supply continuity, selling volume determination, dependable level to out party , Costing flexibility of Fix cost, quality assurance, company confidentiality, government policy , etc. By more growing of specialization , the advance of technology, Change of business environment, tend to do strategic alliances / parnetrship, etc -> intensity for outsourcing getting increase . Factors that must be considered in selecting the sourcing , i.e is :
Make Assets Independence Skill enhancement Better quality control Liabilities Inflexibility Higher fixed cost One source High Volume Buy Assets Flexibility Lower Fixed cost Multiple source Liabilities Dependence No capability development Less Quality control * Less scheduling control Low Volume

Sourcing
strategic function Critical Core competence Independence
Insourcing = Make, Do = In-House =Self management Made internally (Goods) Provided internally (services) Substitute, interchangeability, Salvage, reconditioned goods

Sourcing
Not strategic function Not critical Non core competence dependence
Outsourcing = Buy = Hand over management/ outsourced

Purchasing Hiring Leasing contracting

Understanding of Outsourcing
a. Outsourcing ref to the strategic decision to contract out one or more activities required by the organization to a 3rd party specialist. b. Outsourcing ( a type of make or buy decision) is basically a reversal of a previous make decision. Organizations outsource when they decide to buy something they had been making in-house c. Outsourcing in large meaning is the step of company to use other company service in acting one of its activity such as debt the loan, accounting, information technology development, office cleaning, catering and contract employee provider. d. Partnership sourcing is a commitment between the customer and supplier, in form of long term cooperation, based on trust and transparence in achieving goals together. The Important thing in this concept is there is a risk & result share , create the capability and world class competitiveness, reduction or efficiency, acceleration of motivation , and expand market . Outsourcing possibly the company focus in core competence activity, create the superior competitiveness while effort the cost efficiency. Thus when an activity not become the core competence , not a strategic factor and not critical, and there is no sufficient capability, better to be outsourced

The reasons or background of having Insourcing

a. The number of activity that will be outsourced too small and/or supplier not willing to do the activity b. The Product quality need is very high/specific, so that why need special methode to create/do, where supplier not interest to make the specific product. c. To Protect the certain confidential technology. d. To get the lower price. e. To take opportunity in using the excess capacity which exist in the company itself. f. To guarantee the smooth operational facility itself and offer the load need which fluctuative to supplier. g. To avoid dependence to one source h. Govt policy related to the political reasons, social or live environment where the company is mandatory to do their own activities i. The willingness to have supply guarantee which definitely related to the process scheduling , product quality , etc j. The emotional reasons, such as the pride/image to the product that is created by the company itself, in the eyes of people & competitors

The reasons or background of Outsourcing

The important meaning of outsourcing : The Harvard Business review identify outsourcing as an the most important idea and management practice in the latest of 75 year. The range of outsourcing in the world in 1999 around US$ 235 billions, the outsourcing contribution in USA (from 300 companies , 1997): the competitive advantage (75%), increase customer satisfaction (40%) , cost efficiency (21.3% in 1 st year, 1,51% in 2nd & 3rd year ) the other benefit : speed the lead time, cost efficiency, and employees matter, reduce investment risk, etc. The basic reasons of outsourcing as follows : 1. Increase company focus, company can focus attention to main strategy & get comparative advantage, while the regular support activity can be outsourced to 3rd party. 2. Use the world class ability, outsource to 3rd party which has world class ability, will possibly to get the experienced service and specialized by high & up to date technology, quick process, cheaper cost, and ready to solve the problem together. 3. Risk share, the exist risk not only financially, but also operationally like market, competition & technology, etc. 4. Own source can be used for more important priority, capital fund, fresh fund also will be got by outsourcing, because cost of outsourcing almost all operational cost character. 5. Get the source that not own by self, if company not capable to do an activity due to no source available (such is IT expert in having on line/real time, so that can be solved by outsourcing 6. Solving the difficult problem is controlled or managed . If a company has trouble to face the bureacration matter, then it is outsourced to the private 3rd party to be more easy to handle. 7. To speed the advantage of engineering process, by the outsourcing , company has focusing that better to improve its business process, by the measurement of critical succeed, such as cost, quality, service, speed , etc

Type of Outsourcing (1)

Type and option in outsourcing 1. Related to the information technology, there are 3 types of outsourcing a. Bodyshop outsourcing. Here is the management use outsource as tool to fullfill the short term need, such as lack of expert that has no company , and only temporarily. b. Project Management outsourcing, which is implemented to all past of certain project, such as the information technology development, the new skill training. c. Total Outsourcing, where the supplier of outsourcing is given the full responsibility in certain part / activity which has been selected , such as catering, security, office service , etc. 2. From number of source./supplier a. Sole Source/the only one source, due to only sole source for certain goods/services . The buyer in not advantage position, due to there will be very big dependence b. Single source/ One source. Here is the selection of one source is based on the company policy (by choice), not based on needs (by necessity) .the reason a.o.t getting the discount when buying in big amount, therefore getting the cheaper price , if arrange from one source. c. Multiple sourcing (many source), to avoid dependence to one of suppleier, company do the breaking of procurement, examaple 60% of needs to company A, 30% to company B and 10% to company C

Type of Outsourcing (2)

3. Based on size of supplier a. Small suppllier. The placing order to small supplier will become significant business to the supplier itself, so that giving attention and full business to fullfill the order, the obstacle is capacity limitation, the delay of order, quality fluctuation , etc. b. Big supplier, has experience in ordering, economic scale, and quality assurance. But if order number from company relatively small compare with other companys order, there is possibility the order will be ignored. 4. Based on Supplier location a. Local purchasing, the benefit of outsourcing from local source; better communication and coordination, supply assurance, shorter lead time, can fullfill the immediate order, the stock reduction. Low cost for small order, low transport cost, the problem can be solved easily, increase company image to people around, local vacancy. Etc. b. National purchasing, benefit that can be drawn from national source ; big source and technology expert, better service and technical support , reduce the possibility for out of stock, bigger capacity & economic scale, and guarantee of product availibiility that uniform and can be exchanged (interchangeability), possible of blanket order, etc. c. International Buying/Overseas source. There is trend growth that rapidly from number of companies that got product/services supply from overseas source, due to a lot of benefit like price, quality, technical services. etc

International Buying Reasons

1. Price. A lot of international buying is done due to there is cost different of man power, exchange value, efficiency in equipment and process which is used to make the product. 2.Quality , Newer capital tool , Better Quality control system, and application of zero defect s concept, increase the product quality from overseas supplier. 3. Unavailability of (items) particular goods domestically, few kinds of particular items , such as chrome ore, most of this only available from international source, as well as particular office equipment such as desktop computer printer. 4. Faster delivery & continuity of overseas suppliers supply due to capability bottleneck which is occurred on the domestic supplier. 5. Better technical service . International supplier has distribution network that properly organized. Therefore able to do delivery faster, service assurance, technical advise compare with domestic supplier. 6. Marketing tool. To sell the particular product. To sell certain product in a country . International supplier needs to agree purchasing of part component from domestic supplier. One of the method is countertrade. 7. Competitive cloud, competition tend to stress domestic supplier become more efficient, in long term and benefit either buyer and seller. Buyer use import threat as stressing tool to get the concession from domestic supplier.

Few Obstacle of International purchasing

a. Contact with suppliers, due to different time zone; different office hours; different of physical communication methode such as email, faxes, mobile telecommunication, etc. b. Time required for negotiation, will be take more time than time which is needed to do negotiation with domestic supplier. c. Currency difficulties ; a.o.t ; currency in which country is used in price quotation and payment.; cause of currency exchange fluctuation; the way of payment. Etc. d. Legal difficulties; such Country law which will be implemented, litigation or arbitration arrangement. e. Requirement & conditions which possibly of cancellation, delivery, delaying and acquisition , and protection for buyer from patent rights violation. f. Other difficulties, such as returning goods which is rejected and damaged, late delivery due to weather, cargo transfer, Port strike, price increase due to production cost increase from supplier. g. Politic & Worker problem, especially from the suppliers country, such as the orientation political replacement or there is demonstration of labor, can affect the schedule, time of goods delivery. h. Culture problem , social customs & language, eventhough buying country and selling country use same english languages, but it is not suggested to use slank, jargon, regional expression. To be avoided when doing business in public holiday ijn country . Use formal wear (clothes) in maintaining appearance. dont use first name, except permitted.

1. a. b. c.

d. e. f. g. h. i.

The advantage of Outsourcing ( Disadvantage of Insourcing) Reduce lead time, increase company flexibility response, customer satisfaction Cost efficiency related to the stock availability, and cash flow increase . Assist to increase long term plan and increase innovation & advance technology. Through better plan of need . Technical input & information flow design between buyer supplier, and use of source for both party. Increase ability to bring faster the new product into market than the competitor. Managements time can be used to focus to the core competence matter & critical. Reduce the employees cost and personnel managements problem. Increase flexibility and cost firm, and services consistency . Reduce needs and investment risk Get capability world class access .

Advantage & disadvantage of Outsourcing

2. Disadvantage of Outsourcing ( Advantage of Insourcing) a. Loss control for function/activity which is outsourced b. Enlarge risk which is originated from supplier, like finance ability, loss commitment to outsourcing, late of implementation, less responsive, Lack of quality. c. The possibility of wage and extra load that is not expected, d. Difficulty in economics calculation e. Supply limitation, and possibility dependence of traditional technology f. Lack of suppliers skill, such as project management skill g. Lack of documentation. h. Lack of employee training and high turnover employee.

1. Delivery Just in time, goods & services must be available when is needed 2. Quality & Realibility, goods & service which is accepted must be specifically correct, the amount, and convince that the supplier can be counted and trusted 3. Price must be proper in the meaning the supplier still possible to get profit, while from buyer side the price still proper. 4. Responsiveness, supplier always response every problem immediately. Based on cooperation in one team with buyer. 5. Lead time, both side must be understand the obstacle each other, and together fast the lead time by mutualism principle. 6. Location, as open door policy from supplier, in order to the buyer able to know the location, fabric abililty, product quality, efficiency level, technology used, etc. 7. Technical capabilities,.Supplier has superior technology, always find the way to create the best product/services,has continuous improvement product programme. 8. R&D Investment plans ,supplier always have budget to increase pld product quality, prepare new product, participate in design programe together 9. Financial & Business stability, Supplier can full fill financial stability criteria which is used by buyer, like profitability level. Receivables ratio, etc. 10. Purchasing expertise, Supplier must have skill in procurement part, and has capability for question, Doest the raw material & component sufficient ?whether the result is comptetitive / efective enough? Is ther any special relationship with certain company, affiliation, whether has up to date practical procurement, modern purcahsing practice, and has qualifies purcahsing persoonnel

Criteria in selecting outsourcing partner

Step in Outsourcing Process

1. Making decision of Outsourcing (evaluated to all factors /internal & eksternal activity, reasons & benefit/loss which can be drawn, till to the decision for insourcing or outsourcing. 2. The strategy development & outsourcing approach (Evaluated whether outsourcing is done step by step or at once, what activity and activity priority sequence that will be outsourced. 3. Selection of service Provider, selection is done based on supplier, a.o.t by seeing result of survey, business journal, businessassociation, business consultant, direct assestment, previous experience, etc. 4. Contract setting with service provider, in contract is listed condition of outsourcing, ex : service cost, obligation for party, target & perfomance measurement, time range of contract, guarantee and responsibility, the payment methode, intelectual right, employment & problem solving. 5. Monitoring & Perfomance measurement, determine who will control and the what methode will be used. 6. The relationship maintainance productively, the continous maintaining is done in order to outsource more productive and all problem can be done properly. 7. Business profit Evaluation from outsourcing, by doing the performance measurement (qualitative & quantitative), will be able to be evaluated & concluded f business advantage which is got from outsourcing

Advantage & disdavantage of outsourcing in transportation section

1. a. b. c. d. e. f. Advantage of outsourcing/disadvantage of insourcing High Initial cost to buy transportation mode and fleet creation High Depreciation cost to transportation mode, workshop & fleet replacement High Fix & variable cost from transportation management, maintenance & service. Transportation permit only for own transport. Legal aspect for all operated transportation mode become companys responsibility. Not economize cost from idle capacity such as load return way not much as load capacity. g. Hidden cost, such as recruitment cost, medical and incentive for religious days for driver. Etc. 2. Advantage / disadvantage of outsourcing a. Has full control in operation aspect, including characteristic of transportation mode which is suit to the needs. Ex : tankers, truck, or buses; the availibility of transportation mode , scheduling and selection route, driver recruitment, training, salary, incentive, discipline and performance, work shop & maintenance. b. Flexibility in using transportation mode c. Can be use to promote company with the way determine specific characteristic of vehicles, advertisement, drivers uniform, etc.

Activities that will be unable to be outsourced

One of the technique by using the methode of 3 steps as follows : 1. Is the activity , resource, or capability responsible for competitive advantage ? -> Yes -> Keep in House and develop -> No -> Consider for outsourcing 2. Is there a competitive Market ? - > No -> Consider carefully the balance between the potential benefits and the risk of sourcing from this type of market. Only out-source if the in house solution is impractical. -> Yes -> Consider for out sourcing 3. To What extend is the activity , resource or capability asset-specific ? -> High -> Keep In-House -> Medium -> Out source and develop a bilateral contract - > Low -> Out Source and use a short-term contract. Activity sample which is able / or not able to be outsourced a. Able to be outsourced : Parking management, cleaning, repairing and building maintenance , catering, security , transportation management; wastage cleaning, guest assistance, library, health & welfare, travel administration, Pes control, training center, information technology & computer. b. Not able to outsourced : Strategic planning management, financial management, consultant management, supply control, quality & environment management, control of obtaining regulation, health & safety of employee, mass health, etc.