Difficulties And Barriers When Implementing Outsourcing

Published Date: 02 Nov 2017

Out sourcing is " the practice of contracting out to a supplier work previously done within the operation". Slack et al., 2010

Outsourcing is important as no company can do everything that is required to produce its products

Outsourcing is important as mentioned by "Slack et al., 2010" Bakers do not grow wheat or even mill it into flour.

This shows that every product has some part of it process outsourced, whether it is a human resource operations or a whole manufacturing process outsourced.

These outsourcing operations are essential and enable a healthy level of competition to still remain for the outsourced operation.

According to Slack et al., 2010, there are four key contributing factors to whether a company should look to outsource a process.

Is the activity of strategic importance?

Does the company have specialist knowledge within this activity?

Is the company’s operations performance superior?

Is significant operations performance improvement likely?

If the answer to all the above questions are no then outsourcing should be considered. If the answers to any of them are yes than the company should take more thought in to keeping the process/ operation in house.

A large contributing factor to the decision to outsource is if there is a cost benefit/ reduction.

Jim Madden, CEO of Exult states, " I don’t believe any company will sign up to this ( outsourcing) without cost reduction being a part of it," Slack et al,. 2010

When Outsourcing, cost can pay a huge effect on the decision whether to outsource or not. To outsource can be cheaper than producing in house if the process is small scale or the outsourcing operation is small scale. An example of this can be seen at Rolls- Royce turbines Precision Casting Facility.

The Rolls- Royce Precision Casting Facility uses the lost wax process to manufacture turbine blades.

Within the lost wax process, is the wax process area.

This is where a product is manufactured using wax that is injected in to a metal die to form a wax component. This is then assembled in to a mould ready for the next process.

The wax operations area outsources a small percentage of its wax assembly operation to two different suppliers.

The decision to outsource a percentage of the wax assembly process was taken to alleviate some of the capacity pressure from the internal operation.

The older, similar parts, with a low steady loading, were primarily selected as this would leave the internal operation with enough capacity to process new parts and higher priority products.

No development products or products with new technologies will ever be considered for outsourcing to keep the companies trade secrets, secret.

When the wax assembly operation was outsourced it was done so with Trainers from the PCF wax area going to the supplier and training the staff on assembly and inspection techniques.

Difficulties and barriers when implementing Outsourcing

According to "Slack et al., 2010" When a company is deciding whether or not is should outsource there are other aspects that should be considered as these may be affected when outsourcing the process-: Quality, Speed, Dependability, flexibility and Cost.

Quality

Quality of the product, process or service must be thought about when considering outsourcing. Depending on the situation quality can be a deciding factor whether to outsource or not. If the supplier whom the company is out sourcing is a specialist in the field of the process / operation being outsourced then the quality of the incoming products / process should be higher and possibly more efficient.

If the supplier is not a specialist and just a cheaper alternative then the quality of the incoming product could be an issue for the company looking to outsource.

When looking at quality problems they are inherently easier to trace in an in house situation.

However if the process is outsourced to a supplier it may be more difficult to communicate the quality problems and due to the expended line of communication it may not be as quickly resolved compared to if the process was completed in house.

When Rolls-Royce PCF outsourced the wax assembly operation to the first supplier, an immediate issue with quality was found.

The quality issues found with incoming assemblies from the supplier should have been spotted by the supplier’s inspection team.

An over inspection was implemented at the PCF at additional cost to the PCF and the inspectors at the supplier had to attend further training.

Speed

Speed of the process / service can also become a barrier when implementing and outsourcing strategy. Speed can be an issue if the supplier cannot complete the task in a similar time to what it could be completed in house.

The time for transportation will also have to be taken into account as this could affect the speediness. / Smoothness of the operation / process.

When Rolls-Royce PCF outsourced the wax assembly operation, the speed at which the operation was being conducted was seen as an issue.

This was because Rolls-Royce has been completing this process for many years a skill set had been developed and the operators produced the assemblies in a timely fashion and to a high standard. The supplier had to learn all the skills to produce the assemblies and this takes time and practice. This meant the first 2 months had a low throughput of intermediate quality while the operators at the supplier learned the skills necessary. Rolls-Royce invested a lot of time with trainers to go to the supplier to ensure this transition was as smooth as possible.

Dependability

When an operation is processed in house the process is typically dependable as there is a lot of focus and pressure on the process and its managers to keep it running smoothly and solve all problems quickly and effectively.

However when the operation/ process is completed externally by a supplier,(Outsourced) the drive /focus can be lost in communication and it is easier for issues to be missed and build in to larger issues.

Flexibility

When a process/ operation or service is completed in house it can be more difficult to be flexible to change as the scale and scope of the internal operations may hamper the flexibility.

When outsourcing an operation to a supplier, Flexibility can be barrier as it will be very dependent on the supplier, whether they have the capability to be flexible with the work load, work content etc. if for example if the supplier is a small company, then they may not be able to do any other tasks then the original process. This has to be reviewed when considering outsourcing.

Cost

Slack. Et al 2010 reports that " in-house operations do not have to make the margin required by outside supplier so the business can capture the profits which otherwise would be given to supplier."

However this is not always the case, if the scale of production is small or only a percentage of the production is being offloaded then the cost benefit may be there. If a component requires specialist equipment or skills then if the supplier has already have these, then it could cost less to outsource then it does to complete the process in house.

Cost can pose difficulties when wanting to outsource to a supplier because the supplier has to make a profit and if it is not possible for the supplier to reduce the cost far enough for them to make their margins while staying competitive to the company outsourcing then outsourcing cannot always be a viable option.

When Rolls-Royce outsourced a percentage of the wax assembly operation it was because of capacity constraints and it was not a viable option at the time to keep the whole process in house. This meant it would cost the company a higher hourly rate than completing the operation in house. But because there was not the capacity to complete the required loading in house the decision was taken to outsource to a supplier and use a supplier that already delivered products to the company. This decision was also taken as the supplier in question had experience in a similar process that meant the training of the wax assembly operation should be simpler than starting with a supplier that had not done anything similar in the past.

Benefits of outsourcing

Outsourcing can free up assets and reduce costs in the immediate financial period.

Organisations outsourcing parts of their in-house operations report significant savings on operational and capital costs (Rimmer, 1991; Hendry, 1995; Uttley, 1993).

There can be other motivations involved in the decision to outsource beyond the short term cost benefits. Outsourcing some processes can enable companies to focus on primary activities. This could be for example a computer manufacture may outsource the manufacture of the casing to focus heavily on the processing capabilities of its hardware.

Other benefits can be in the form of cost saving through less people required and less equipment. This can reduce costs or in the case of Rolls-Royce outsourcing a percentage of the wax assembly operation, they did not have to increase the internal capacity which saved the company money because they did not have to invest in new equipment, personnel or alter any of the existing infrastructures.

If the loading for the process then dropped this would cost the company more money to sustain then it would if it was outsourced, because if a percentage of the process is outsourced and the loading went down then Rolls-Royce has no risk internally as it could bring the process back from the supplier at no extra cost to its self.

Risks of outsourcing

The potential risks associated with outsourcing can vary upon the operation/ process being outsourced and the company outsourcing.

However when outsourcing there is always a potential for a increase in price over time from the supplier.

Other risks are that in training of external company could pose a threat if the process being offloaded is sensitive. If the supplier starts working with a competitor they could accidently expose trade secrets etc

There is also a risk that the outsourcing company could in the current economic climate be in danger of going out of business.

Capacity planning

Armstrong 2006 describes capacity planning as being "The capacity of a process sets the maximum amount of a product that can be made in a given time. The aim of capacity planning is to make sure that there is enough usable capacity to meet demand over the long, medium and short term."

The aim of capacity planning is to plan the right amount of capacity to keep an operation/ process running as desired by the organisation to meet the customers requirement.

When looking at capacity planning, all operations/ processes have some form of limitation on their capacity.

There are two types of capacity, Designed Capacity and effective capacity.

Designed capacity is defined as the maximum rate of output under the ideal conditions for that operation.

Effective capacity is the maximum output that can be realistically expected under normal working conditions within that operation.

The difference between designed capacity and effective capacity is that effective capacity allows for set-up times, rests, maintenance times, breakdowns, possible inefficiencies with the process and scheduling difficulties.

Also most companies do not like to operate at maximum capacity as this can lead to equipment becoming overworked and less reliable. Operators can start to feel overstretched and if it worked at maximum capacity there is no cushion to deal with unexpected events in the process.

The actual output of the planned operation is normally lower than the effective capacity due to issues that may occur that have not been planned for adequately such as holidays down time of the machine etc.

Capacity Planning Strategies

There are several strategies for capacity planning and depending on the organisation/ company capacity may be applied using one of these methods.

Slack et Al,.2003 explains that there are three pure capacity strategies and these are shown below.

Level capacity plan – where capacity is kept constant, the operation either tolerating the under use of the capacity or its inability to serve all demand, or alternatively (if it is capable of it) making to stock for future periods when demand will exceed capacity.

Chase demand plan – where capacity is frequently adjusted in an attempt to match it to demand at any point in time. This can be done a number of ways such as using overtime, varying the size of the workforce, using part-time staff, or subcontracting.

Managing demand – where demand is influenced or changed in order to bring it closer to capacity at any point in time.

Three other types of capacity strategies commonly found are.

Leading Strategy

This strategy works by adding capacity in anticipation of an increase in demand. It is a a strategy that aims at reducing the possibility of becoming too lean and going running out of work.

Lagging strategy

The lagging strategy woks by timing the introduction of capacity. This is done so that the demand is always equal to or greater than capacity. These means it will not add capacity until the demands exceeds the current capacity.

Match strategy

This strategy adds capacity incrementally in response to any changes in demand from the customer.

Rolls-Royce precision casting facility conducts monthly forecasting that looks at the current year and next years forecast.

Within the PCF there is the Cast area. The cast area takes ceramic moulds from shell and casts them into a single crystal alloy product.

The Cast area uses more of a level capacity /match strategy, as they are in between different operations that take place in the PCF and can only process what has come from the previous operation.

The capacity in cast can change depending on the circumstances within the rest of the factory. If there is a major problem up stream then the capacity will be largely increased to ensure that the higher demand can be met.

However the overall level of capacity is a constant and cannot grow as there is only a set number of machines and all operators are on 12 hour shifts so the area is running 24hours a day 7 days a week.

This means there would be not a chance to increase capacity without major investment and bringing in new furnaces.

The capacity of the area before cast (called "Shell") and cast are very closely monitored to ensure cast is not overloaded with work or is not running to lean on work in progress.

If cast becomes lean then operators will be moved on to support other processes until full capacity is required again.

The capacity planning in the cast area and other processes before it are all based on the demand of the customer. This demand is then worked out in to the required demand for the standards of the product. (What yield the product is running at) .

This means the PCF will launch 10,000 bits a week but only expect to deliver 9000 components to the customer.

Some of the advantages of the match strategy is that the cast area can be flexible when they become lean and operators can be put in to areas before cast to help improve the flow of work coming in to the cast area.

Another advantage is that using the match strategy the build of inventory/ work in progress can be kept to a minimum enabling the cast area to operate a lean system and be efficient.

A disadvantage of the match strategy is that the production area will rarely beat the demand as it is only planned to match the demand and not to over achieve. This means if there are issues that they will affect the capacity in that process harder.

An advantage of the level capacity strategy is the maximum output is known and as long as the demand stays below or equal to this figure than the capacity in the area can be flexiable and assist other operations in the plant.

A disadvantage is once the demand goes above maximum capacity more investment is required for new machines before the capacity can go up.

The author feels that level capacity is the best strategy for the cast area as it is limited by machinery, so using level capacity means that the area can build up inventory to cushion any effect of a undesirable event happening within the plant.