7.2 What to Buy? (Outsourcing Decisions)

In the realm of strategic sourcing, one of the critical decisions a business faces is determining what tasks to perform in-house and what to outsource to suppliers. This decision, often referred to as the make-or-buy decision, hinges on assessing core competencies and managing dependence risks. For instance, most automobile companies today act primarily as assemblers, outsourcing the manufacturing of components to suppliers. Similarly, many consumer product companies focus on product design and marketing, entrusting distribution and transportation to logistics partners.

In the automotive industry, companies like Ford and Honda exemplify this strategic approach. Ford, for example, outsources the production of many components such as electronic modules, transmissions, and even complete engines to specialized suppliers, while focusing its in-house efforts on assembly, design, and innovation. Honda, similarly, outsources the manufacturing of various parts but retains core processes like engine assembly and key research and development activities in-house. In the realm of consumer electronics, Apple stands out for its strategic outsourcing decisions. While Apple outsources the manufacturing of hardware components to companies like Foxconn and Pegatron, it retains tight control over product design, software development, and the overall user experience. This allows Apple to maintain its brand identity and innovation edge while leveraging the cost and scale efficiencies of its suppliers. In the fashion industry, brands like Zara and H&M outsource most of their manufacturing to a network of suppliers globally, focusing their internal resources on design, marketing, and fast supply chain management to stay ahead in the fast fashion market. These examples demonstrate the nuanced decision-making involved in the make-or-buy dilemma, balancing the need for control and innovation with the efficiencies and specializations offered by suppliers.

Advantages of Outsourcing:

1. Focus and Scale: Concentrating on a few select tasks allows businesses to excel in those areas, benefiting from the economies of scale due to large-scale operations.
2. Lower Costs: Outsourcing can be more cost-effective, especially when suppliers operate in different geographies and can leverage larger scales of operation.
3. Access to Expertise: Suppliers, focusing solely on specific tasks, often develop greater expertise and advanced technology in those areas compared to the buying company.

Risks of Outsourcing:

1. Supplier Dependence: Over-reliance on a particular supplier can lead to increased vulnerability, where the supplier might exploit its dominant position to demand higher prices.
2. Loss of Skill: Outsourcing certain tasks can lead to a permanent erosion of specific skills and knowledge within the company, making it challenging to bring those tasks back in-house in the future.
3. Knowledge Leakage: There’s a risk that suppliers might misuse the company’s intellectual property, potentially becoming direct competitors.
4. Loss of Control: Managing and controlling external processes is more challenging than overseeing internal ones.
5. Reputational Risks: Unethical practices by suppliers can tarnish the company’s image and lead to legal and public relations issues.

7.2.1 Making the Outsourcing Decision:

The decision to outsource hinges on two pivotal factors:

1. Core Competence: Core competencies are unique skills that give a business its competitive edge. Tasks linked to these competencies should ideally be kept in-house to maintain control and superiority in those areas. Conversely, non-core tasks might be better managed through outsourcing, allowing the company to concentrate on its strengths.
   • Apple Inc. is a classic example of a company leveraging its core competencies. Apple’s strengths lie in product design, software development, and creating an integrated ecosystem of products and services. These are the areas they focus on in-house. On the other hand, Apple outsources the manufacturing of hardware components to suppliers like Foxconn, as this manufacturing process is not considered their core competency. This strategy allows Apple to focus on innovation and design, which are key drivers of their competitive advantage.
2. Dependence Risk: Outsourcing should be approached cautiously to avoid over-dependence on suppliers, which can lead to increased costs and reduced bargaining power.
   • Apple’s relationship with Foxconn illustrates the concept of dependence risk in outsourcing. While Apple benefits from Foxconn’s manufacturing capabilities, about 80% of Apple products are currently manufactured by Foxconn. This heavy reliance presents a significant dependence risk. Recognizing this, Apple has started diversifying its manufacturing base. One major step in this direction is setting up manufacturing units in India and developing relationships with new partners. This strategic move is aimed at mitigating the risk associated with over-reliance on a single supplier. By diversifying its supplier base, Apple aims to reduce potential vulnerabilities, such as supply chain disruptions or increased bargaining power by Foxconn, ensuring greater stability and resilience in its operations.

It’s crucial to note that what constitutes a core competence, or a significant dependence risk varies from one business to another, even within the same industry. Thus, while one company might outsource a particular task, another might keep it in-house. Additionally, these perceptions of core competencies and risks are dynamic and must be continually reassessed to ensure that the make-or-buy decisions align with the evolving business landscape and strategic objectives.