Seven Basic Quality tools documents
Definition of Quality Management -- it is a method for ensuring that all the activities necessary to design, develop and implement a product or service are effective and efficient with respect to the system and its performance. It is also a principle set by the company to endure the continuous advocacy of quality services and products, or the further improvement of it.
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Outsourcing Decisions
Alex Baker, Jon Clarke, Allen Ellis, Suzie Feldman, Bart GourleyOriginal text on freequality.org
The
decision to outsource different business functions is critically impacts
company operations. The decision is a
factor in determining capacity, resource needs, the type of service or
manufacturing process used, and even the kind of information system
necessary. Because of its importance, an
outsourcing decision is generally strategic and made by top management. The decision involves two main alternatives:
- Insourcing:
provide products and services through internal firm resources;
- Outsourcing:
provide some products and services through external resources.
In
general, outsourcing will increase a company’s flexibility, provide access to
advanced processes and technologies that would otherwise be unavailable, and make
available liquidity that would have otherwise been spent on capital resources. While there are many benefits to outsourcing,
it is a decision which requires careful attention. Several factors need to be considered beforehand,
the first of which is cost effectiveness.
Cost/Benefit Analysis
As
part of a company’s option to insource or outsource, a company must evaluate
the financial obligation it will shoulder when choosing to outsource externally
or internally. There is a cost associated
with the decision to make a product in-house or not. The total cost of the outsourcing decision
can be broken down into two types of costs:
- direct costs
- indirect costs
The
process of analyzing the company’s sourcing options quantitatively based on these
two costs is known as a total cost analysis.
Direct
costs are directly tied to the company’s level of production or amount of
service. For example: if a Crow’s
Country Cabinets was making wooden entertainment centers and the price of wood
for the entertainment center was $1.75 per square foot, and the company needed
a total of 60 square feet of wood for one entertainment center, the price of
wood for one entertainment center would be
$1.75(60
feet) = $105
Indirect
costs, such as overhead, are not easily tied to the level of production or
activity. Executive’s salaries or plant
security costs may not easily relate to the direct level of production.
By
allocating indirect costs to individual units of production, managers can get a
better overall picture of the total cost in the sourcing decision. If project planning would account for an
initial overhead of $50,000 and in the first year the company plans to produce
25,000 units the company could apply the indirect cost on an average bases to
the 25,000 units as follows:
$50,000/25,000
units = $2.00 per unit
Furthermore,
for the company to develop a more accurate idea of the total cost of
outsourcing the above average unit overhead cost can be updated with additional
cost information as it becomes available.
Suppliers can assist in collecting additional information such as
projected costs at various levels of output.
This information can then in turn be used in determining total cost
projection.
Another
aspect of outsourcing that should be considered in the total cost analysis is
the reduction in administration costs.
Because the outsourcee is responsible for and producer of the component,
it will account for additional costs via the supplier’s invoice. Also, the accounting involved in production
is the outsourcee’s responsibility. The
outsourcer can focus on the accounting of expenses rather than the accounting
of the production process.
Comparing
analyses of insourcing vs. outsourcing side-by-side can present a clears
picture of the bottom line. If the
benefits outweigh the decision alternative costs, than the conclusion to
outsource or insource will be reached.
In
making an outsourcing decision a rule of thumb should remembered: long-term
sourcing issues may be better suited to be outsourced, whereas short-run
decisions may be better suited as insource decisions. The principle idea behind this rule is the
learning curve. As time increases, the
efficiency of the outsourcee will most likely also increase, which can leave to
more cost saving.
Core Competencies
While
cost savings is important to every company, it is no longer the only driving
force in an outsourcing decision.
Companies today need to take a broader view of outsourcing by isolating
their core competencies, and then chipping away at all the functions that do
not contribute to them. When a company
starts evaluating their activities for outsourcing potential, any products or
processes involved in the company’s core competencies should automatically be off-limits. Core competencies are the organization’s
strengths and abilities developed over a long period of time. They provide value to customers and are
difficult for competitors to replicate (Bozarth, 298). These core competencies are the most
important activities to the firm, so they need to stay inside the firm’s control. Rather than outsourcing these core
competencies, a company would want to outsource the non-core, but still significant,
functions to experts outside the firm (Li, South China Morning Post). By doing so, skilled employees are freed up
to focus on the core operations - the activities that add value to the product
or service.
For
example, if the finance department in a manufacturing company were looking to
outsource, they would want to look at activities with high transaction volumes
but low values to the customer. These
would include basic functions such as billing, account payables, and financial
accounting. Then, the personnel usually
assigned to these repetitive tasks would be able to work on tasks such as analyzing
the feasibility of a new machine, one that would increase the quality of the
end product, improving customer satisfaction.
Capacity
Another
factor in the outsourcing decision is the capacity the firm will need to meet
customer demand. With each process that
is outsourced, the capacity of the firm is increased. The opposite ends of the spectrum are total
insourcing, which is the capacity only the firm itself can manage, and total
outsourcing, which creates a virtual supply chain with limitless capacity. Each company will need to find someplace in
the middle of each extreme that fits their situation and future goals.
Capacity
is also a source for flexibility. Firms
that outsource for higher capacity can respond quicker to changes in demand and
technology (Bozarth 298). Instead of being
stuck with out-of-date equipment and tools, a firm can demand the advanced
technology from the supplier. If the
supplier can’t deliver, the company can find someone else who can. If that technology wasn’t outsourced, the
company would be stuck with obsolete machines and processes, creating a huge
cash outflow.
Ethics
There
are many ethical issues a firm must when management is considering outsourcing
an aspect of the business. Important factors range beyond the financial issues
facing the company. Among these issues
are two that relate directly to the firm, they are: (1) an employer’s
responsibility to his/her employees, (2) the cultural impact on the firm and
new employees. Each one needs to be
considered before making the decision to outsource.
Case:
The phone rang on a Thursday night. It was my boss; he wanted to
meet for breakfast before work the next morning.
At breakfast, he explained that our corporate headquarters had
decided to close our California manufacturing facilities. The 500+ employees
who worked here would either be let go or relocated. The manufacturing
operations would be moved to Georgia, South Carolina, and Hong Kong. As a
selected member of the relocation team, he gave me the uncomfortable task of
traveling to Hong Kong to train our replacements. The assignment: to teach the
intricacies of building complex aerospace valves in a foreign language, 7,000
miles away.
A few months later between overseas trips I stopped by the
"home" plant. What I saw was overwhelming and depressing. Virtually
all that remained in the 100,000-sq-ft facility was my desk, surrounded by a
few file boxes. Even my filing cabinets had been surplused. At that moment the
loss of jobs seemed grossly unfair. However, as I look back on that event, I
now understand that there are many reasons why companies are deciding to send
their manufacturing overseas.
I have
heard some people argue that as long as these actions are legal, they are
ethical. Others argue back that these actions (by greedy companies that disrupt
the economic futures of many people) are purely unethical (Harrison).
Each
firm needs to make these decisions. It
is sometimes difficult to give appropriate weight to the contrasting aspects,
but it is important in the process of making a good decision.
Additional
Information
The
four factors outlined above—cost/benefit analysis, core competencies, capacity,
and ethics—can make the difference between a good and bad outsourcing
decision. Each of these evaluation
criteria can be used in every business, but some decisions may require a more
in depth analysis. For more information
on outsourcing decisions, please review the following list, along with the
sources included in the bibliography.
Stcak,
Martin and Richard Downing. “Another
Look at Offshoring.” Business
Horizons. Greenwich: Nov/Dec 2005. Vol. 48, Iss 6; p.513
Balaker,
Ted. “Domestic Outsourcing.” Reason.
Los Angeles: Nov 2005. Vol. 37,
Iss. 6; p. 14, 2 pgs
Bibliography
Bozarth,
Cecil and Handfield, Robert. Introduction
to Operations and Supply Chain Management.
New Jersey: 2006.
Gentry, Connie Robbins. “Park Season
Preparations.” Chain Store Age. New
York: Oct 2005. Vol. 81, Iss. 10; pg. 70, 2 pgs
Harrison,
Kenneth. “Is International Outsourcing
Ethical?” Machine Design. Cleveland: Aug 19, 2004. Vol. 76, Iss. 16; p. 105, 1 pg
Li, Andrea. South China
Morning Post. Hong
Kong: Oct 29, 2005. pg. 8