I. Current Situation and Problem
Wonderful Widgets is a manufacturing company that produces widgets. While widgets are its only product, it has two means of producing them. At times, it produces the widgets completely in-house; using a certain proportion of its own staff, equipment, facilities, material and layout to produce the widget components needed to assemble the widgets; then combine them into one finished widget. Alternatively, at other times the company outsources the production of the components parts too various suppliers so that it can devote its full resources into producing finished widgets. Recently, however, Wonderful Widgets has faced a steady increase of operational costs. In order to cut costs, it must decide on which component procurement strategy, namely in-house or outsource, is the most effective in streamlining its production process and reducing costs.
II. Issues and Options
There are a number of advantages of producing the widget components in-house. First, of in-house manufacturing will provide Wonderful Widgets with complete control over the product. By having everything under the supervision of the company, of in-house manufacturing can better guarantee the quality of the product. Second, of in-house manufacturing allows for flexibility by providing the capacity to deal with any problems, issues, or changes in customer demands or product design, for example; without having to contact and negotiate with another company. Conversely, the disadvantages of in-house manufacturing are it could be costly if producing a finished product in higher volumes and each product has a number of components. Moreover, in-house manufacturing will necessarily limit our ability to manufacture the final product as some capacity will need to be dedicated to the production of components.
Alternatively, the advantages of outsourcing are that it will reduce the costs of manufacturing (Kaya, 2009). Reductions in costs are possible in a number of ways such as lowering overhead expenses. In addition, outsourcing also decreases the investments that need to be made for or to the in-house manufacturing process such as the development of more effective techniques to make the components. Second, outsourcing allows for the repurposing of staff, equipment and resources so that the production process can be streamlined to focus on more profitable activities such as the manufacturing of the customer-facing finished product. Third, outsourcing allows a company to take advantage of the specialization of the outsourcing partner. The disadvantages of outsourcing are that clock-speed could be slow if a company relies of too few suppliers. Second, the company loses control over the quality of the product. Third, outsourcing can create a future competitor in the supplier.
III. Recommendations
Based on Wonderful Widgets current situation, the recommendation is for an outsourcing procurement strategy. First, Wonderful Widgets’ customers do not place much value in the separate components of the widgets. Second, there is no competitive advantage to the in-house production of the widget components. Third, while there are potential issues with clock-speed, they can be overcome with proper planning. By outsourcing, Wonderful Widgets will save outlays by decreasing or limiting the expenses that it would need to expend on fixed and variable costs associated with making the components.
It is important to note, although the recommendation is to outsource, other aspects about the type of outsourcing must also be considered. An initial question is should outsourcing be from a single or multiple suppliers? Since outsourcing to multiple suppliers decreased the clock-speed and supply risk. It is recommended that multiple suppliers are used. Secondly, one needs to choose a procurement strategy. On the one hand, a minimizing total landed costs, which refers to sum of what it costs to make and deliver a product to the client (Gilroy, n.d). On the other hand, a reducing lead-time and supply flexibility strategy decreasing the time it takes for producing a good and delivering it to the customer (Manikandan, 2003). In this case, since the components of the widget are functional, the recommendation is to choose a reducing lead-time strategy.
IV. Question and Answers
1. The most challenging part about the scenario was analyzing which procurement strategy would be the most effective for Wonderful Widgets’ situation.
2. Strategic alliances would impact procurement outsourcing by provided a large and capable network of suppliers to provide the needed components to make the widgets.
References
Gilroy, J. (n.d.). Procurement outsourcing: The 10 things companies really want to know. Retrieved from http://www.werc.org/assets/1/workflow_staging/Publications/617.PDF
Kaya, O. (2009). Outsourcing vs. in-house production: A comparison of supply chain contracts with effort dependent demand. Retrieved from https://ais.ku.edu/tr/AR/OKAYA200916_SC-Contract-Omega-revised2.pdf
Manikandan, M.V. (2003). Why should you consider procurement outsourcing? Retrieved from http://www.enterprisemanagement360.com/wp-content/files_mf/white_paper/Why_should_you_consider_Procurement_Outsourcing_MMI_A_Nov08_073_0.pdf
