Businesses can also avoid expenses associated with overheadequipment and technology. In addition to cost savings, companies can employ an outsourcing strategy to better focus on core aspects of the business.
An analysis of the outsourcing production costs for each unit Unit cost of purchasing from outside supplier price less any discounts available plus shipping, etc. Number of available suppliers Production capacity available to manufacture components Opportunity costs of using facilities for production rather than for other purposes Amount of space available for storage Costs associated with carrying inventory Increase in throughput generated by buying components Reliability of supply sources Ability to control quality of inputs purchased from outside Nature of the work to be subcontracted such as the importance of the part to the whole Impact on customers and markets Future bargaining position with supplier s Perceptions regarding possible future price changes Although companies may gain the best knowledge, experience, and methodology available in a process through outsourcing, they also lose some degree of control.
Thus, company management should carefully evaluate the activities to be outsourced. The pyramid shown below is one model for assessing outsourcing risk. Factors to consider include whether: Outsource Decision Here is information about inkjet printers produced by Online Computers.
This amount is a common cost incurred because of general production activity, unassociated with the cost object cases. Therefore, because this portion of the fixed cost would continue under either alternative, it is not relevant. Each amount is the incremental cost of making and buying, respectively.
Relevant costs are those costs that are avoidable by choosing one decision alternative over another, regardless of whether they are variable or fixed. In an outsourcing decision, variable production costs are relevant. Fixed production costs are relevant if they can be avoided when production is discontinued.
The opportunity cost of the facilities being used by production is also relevant in this decision. If a company chooses to outsource a product component rather than to make it, an alternative purpose may exist for the facilities now being used for manufacturing.
If a more profitable alternative is available, management should consider diverting the capacity to this use. The existence of this cost makes the outsource alternative even more attractive. The opportunity cost is added to the production cost since the company is foregoing this amount by choosing to make the cases.
Sacrificing potential revenue is as much a relevant cost as is the incurrence of expenses. The next figure shows calculations relating to this decision on both a per-unit and a total cost basis.
Another opportunity cost associated with in-sourcing is the increased plant throughput that is sacrificed to make a component. Assume that case production uses a resource that has been determined to be a bottleneck in the manufacturing plant. Management calculates that plant throughput can be increased by 1 percent per year on all products if the cases are bought rather than made.
This analysis is the typical starting point of the decision process—determining which alternative is preferred based on the quantitative considerations.
In this case, management would likely decide to in-source rather than outsource the cases from this supplier. In this instance, quantitative analysis supports the purchase of the units, but qualitative considerations suggest this would not be a wise course of action because the stability of the supplying source is questionable.
This additional consideration also indicates that there are many potential long run effects of a theoretically short-run decision. If Online Computers had stopped case production and rented its production facilities to another firm, and the supplier had then gone bankrupt, the company could be faced with high start-up costs to revitalize its case production process.
This was essentially the situation faced by Stonyfield Farm, a New Hampshire-based yogurt company. Stonyfield Farm subcontracted its yogurt production, and one day found its supplier bankrupt—creating an inability to fill customer orders.
It took Stonyfield two years to acquire the necessary production capacity and regain market strength. These costs should be referred to as long-run variable costs because, while they do not vary with volume in the short run, they do vary in the long run.
As such, they are relevant for long-run decision making. These long-run costs would, in turn, theoretically cause product costs to increase because of the need to allocate the new overhead to production.
To suggest that products made before capacity is added would cost less than those made afterward is a short-run view. However, many firms expect prices charged by their suppliers to change over time and actively engage in cooperative efforts with their suppliers to control costs and reduce prices.
Outsourcing decisions are not confined to manufacturing entities. Many service organizations must also make these decisions. For example, accounting and law firms must decide whether to prepare and present in-house continuing education programs or to outsource such programs to external organizations or consultants.
Private schools must determine whether to have their own buses or use independent contractors.
Doctors investigate the differences in cost, quality of results, and convenience to patients between having blood samples drawn and tested in the office or in an independent lab facility.
Outsourcing can include product and process design activities, accounting and legal services, utilities, engineering services, and employee health services.Outsourcing was first recognized as a business strategy in and became an integral part of business economics throughout the s.
The practice of outsourcing is subject to considerable controversy in many countries. Those opposed argue it has caused the loss of domestic jobs, particularly in the manufacturing sector. 4. Contact Center Outsourcing Services Market: Revenue Forecast by Fulfillment Region, Aggregated Domestic Demand, LATAM, – 5.
Total Contact Center Outsourcing Services Market: Agents Forecast by Country, LATAM, – 6.
Total Contact Center Outsourcing Services Market: WKs Forecast by Country, LATAM, – 7. Outsourcing is an allocation of specific business processes to a specialist external service provider.
Most of the times an organization cannot handle all aspects of a business process internally. Additionally some processes are temporary and the organization does not intend to hire in-house professionals to perform the tasks.
The Outsourcing Decision Matrix is a good starting point for making decisions about whether or not to outsource tasks in your business. Tasks that are strategically important to your organization should usually be kept in-house.
An Economic Analysis of Outsourcing Outsourcing can be termed as shifting of major functions (production, back office processing and call centers) of a firm from one area to . Outsourcing: Cost-Benefit Analysis (CBA) Outsourcing has become a very controversial topic, particularly around the time of presidential elections.
The working public has a very different view of outsourcing than the business owners, partly .