2. Objectives Today
โข Definition
โข Decision making
โข Consideration in make-or-buy decision
โข Drivers of outsourcing
โข Type of outsourcing
โข Benefits of outsourcing
โข Problems of outsourcing
โข Implementing outsourcing
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3. Definition
โข โOutsourcing is not simply another word of
buying. It is the process of taking a whole
section or function of a company and giving
the responsibility for the relevant activities to
an outside contractor.โ
โข This will lead to a long-term and mutually
dependent relationships.
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4. Definition
โข In construction industry, engaging sub-
contractor is an outsource activity.
โข Subcontracting is generally outsource on
project based term.
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6. Decision Making
โข Outsourcing is concerned with make-or-buy
decisions.
โข There are different levels of make-or-buy decision
(Probert, 1995). The general levels are:-
(a) Strategic make-or-buy decisions
(b) Tactical make-or- buy decisions
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7. Decision Making
โข Strategic make-or-buy decisions determine
the shape and capability of the organizationโs
manufacturing operation by influencing:-
- What products to make.
- What investment to make in machines
and labor to make the products.
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8. Decision Making
- ability to develop new products and
processes as the knowledge and skills
gained by manufacturing in-house may be
critical for future applications.
- the selection of suppliers / sub-con as
they may need to be involved in design
and production processes.
**New product โ e.g. Green Building
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9. Decision Making
โข Tactical make-or-buy decisions deal with the
issue of a temporary imbalance of
manufacturing of capacity:-
- Changes in demand may make it impossible
to make everything in-house.
- A fall in demand may cause the enterprise
to bring in-house work that was previously
bought-out.
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10. Decision Making
โข In such situations, managers require criteria
for choosing between the available options.
โข Such criteria may be quantitative, qualitative
or both.
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11. Considerations in Make-or-buy
Decisions
โข Quantitative factors:-
- Chance to use up idle capacity and resources
- Potential lead time reduction
- Greater purchasing power within larger orders
of a particular material
- Large overhead recovery base
- Transfer risks
- Costs of work is known in advance
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12. Considerations in Make-or-buy
Decisions
โข Quantitative factors:-
- Quantities required too small for economic
production
- Avoidance of costs of specialist machinery or
labor
- Reduction in inventory
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13. Considerations in Make-or-buy
Decisions
โข Qualitative factors:-
- Ability to manage resources
- Commercial and contractual advantages
- Worries are eliminated regarding such
matters as the stability and continuing
viability of suppliers
- Maintaining secrecy/privacy
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14. Considerations in Make-or-buy
Decisions
โข Qualitative factors:-
- Ability to control quality when purchased
from outside
- Availability of vendorโs specialist expertise,
machine and / or patents
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15. Drivers of Outsourcing
โข There are FIVE main drivers for considering
outsourcing:-
(a) Quality
(b) Cost of outsourcing
(c) Finance
(d) Core business
(e) Cooperation
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16. Drivers of Outsourcing
(a) Quality
- Actual capacity is temporary insufficient to
comply with demand.
- The quality motive can be subdivided into
three aspects:- increased quality demands,
shortage of qualified personnel, outsourcing
as a transition period.
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17. Drivers of Outsourcing
(b) Cost of Outsourcing
-Outsourcing is a possible solution to decrease
costs and is compatible with a cost leadership
strategy.
-By controlling and decreasing costs, a company
can increase its competitive position.
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18. Drivers of Outsourcing
(c) Finance
-A company has a limited investment budget.
-The funds must be used for investments in core
business activities (long-term decisions).
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19. Drivers of Outsourcing
(d) Core business
-A core business is a primary activity that
enables an organization to generate revenues.
-To concentrate on core business activities is a
strategic decision.
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20. (e) Cooperation
-Cooperation between companies can lead to
conflict.
-In order to avoid such conflict, those activities
that are produced by both organizations should
be subject to total outsourcing.
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Drivers of Outsourcing
21. Type of Outsourcing
โข Outsourcing options can be categorized as:-
(a)Body Shop Outsourcing
- Is a situation where management uses
outsourcing as a means of meeting short-term
requirements, such as a shortage of in-house
skills to meet a temporary demand.
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22. Type of Outsourcing
(b) Project Management Outsourcing
-Is employed for all or part of a particular
project, such as developing a new IT project,
training in new skills (New system, new
machine).
(c) Total outsourcing
- Is where the outsourcing supplier is given full
responsibility for a selected area.
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24. Benefits of Outsourcing
โข Frees management time
โข Reduced staff costs
โข Increased flexibility
โข Cost certainty
โข Reduction in staff management problems
โข Improved consistency of service
โข Reduced capital requirement
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25. Benefits of Outsourcing
โข Reduced risk (transfer risk)
โข Gain access to world class capabilities
(expertise/specialization)
โข Improve organization focus (core business)
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26. Possible Problems of Outsourcing
โข High staff turnover
โข Poor project management skills
โข Lack of commitment to the client or industry
โข Shallow expertise
โข Insufficient documentation
โข Lack of control
โข Overdependence on suppliers
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27. Possible Problems of Outsourcing
โข Over-promising at the negotiation stage
โข Lack of flexibility (control by sub-contractor)
โข Divergent/different interests of the customer
and provider
โข Cultural mismatches between customer and
provider organizations
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28. Implementing Outsourcing
1. Consider the alternatives.
2. Set up working party to consider
- What to outsource
- Why (strategic reasons)
- Cost comparisons of internal and external
provision
- Anticipated benefits and problems
- Possible effects on staff, capital, finance and
competitiveness
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29. Implementing Outsourcing
3. Prepare, as appropriate, a technical performance,
specification and Service Level Agreement (SLA).
4. Consider possible supplier
5. Invite tender
6. Evaluate tender
7. Post-tender negotiation
8. Award contract
9. Set up management control and monitoring
processes
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30. Discussions
โข How can a construction company reduced the
costs by using outsourcing?
โข How to minimize the problems of outsourcing
in construction industry?
โข List out the tasks can be outsourcing to
outsider in order to minimize costs and
increase efficiency in construction project.
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