Outsourcing involves contracting out certain business functions or processes to external
suppliers or service providers. It has become a common practice for organizations seeking to
improve efficiency, reduce costs, and focus on core competencies. However, outsourcing also
comes with its own set of risks and challenges. Below is a discussion of the **benefits** and
**risks** associated with outsourcing products and services.
---
## **Benefits of Outsourcing**
### 1. **Cost Savings**
- **Labor Cost Reduction**: Outsourcing can significantly reduce labor costs, especially when
services are outsourced to countries with lower wage rates.
- *Example*: A company outsourcing customer service operations to countries like India or the
Philippines can save on salaries and benefits.
- **Operational and Infrastructure Savings**: Companies can save on overhead costs such as
office space, equipment, and technology by leveraging the infrastructure of the service provider.
- *Example*: Outsourcing IT services eliminates the need to invest in expensive hardware and
software maintenance.
### 2. **Focus on Core Competencies**
- **Enhanced Focus**: By outsourcing non-core activities, organizations can concentrate
resources and attention on their primary business functions and strategic initiatives.
- *Example*: A manufacturing firm outsourcing its accounting functions can focus more on
production efficiency and product development.
### 3. **Access to Specialized Expertise**
- **Skilled Professionals**: Outsourcing provides access to a global talent pool with specialized
skills and expertise that may not be available in-house.
- *Example*: Hiring an external digital marketing agency with expertise in the latest online
marketing strategies and tools.
### 4. **Scalability and Flexibility**
- **Adjustable Resources**: Companies can easily scale operations up or down based on
demand without the complexities of hiring or laying off employees.
- *Example*: Retailers ramping up customer support services during holiday seasons through
outsourcing.
### 5. **Improved Efficiency and Service Quality**
- **Process Optimization**: Outsourcing firms often have experience and best practices that can
lead to improved process efficiency and service quality.
- *Example*: Outsourced logistics providers utilizing advanced tracking systems to ensure
timely and efficient delivery.
### 6. **Risk Mitigation**
- **Shared Risk**: Outsourcing can distribute certain risks to the service provider, such as
compliance and regulatory adherence.
- *Example*: Outsourcing data storage to companies specializing in cybersecurity and
compliance reduces the risk of data breaches.
### 7. **Time Zone Advantages**
- **24/7 Operations**: Leveraging different time zones can enable round-the-clock operations,
improving customer service and productivity.
- *Example*: A company based in the US outsourcing IT support to Asia can provide 24/7
customer support.
### 8. **Access to Latest Technology**
- **Technological Advancement**: Service providers often invest in the latest technologies to
stay competitive, allowing client companies to benefit without direct investment.
- *Example*: Outsourcing to a firm that uses advanced AI and machine learning tools for data
analysis.
---
## **Risks of Outsourcing**
### 1. **Loss of Control**
- **Reduced Oversight**: Companies may have less direct control over the outsourced
functions, leading to potential misalignment with company standards and objectives.
- *Example*: An outsourced customer service team not adhering strictly to the company's
customer interaction policies.
### 2. **Quality Issues**
- **Inconsistent Quality**: There is a risk that the quality of products or services may not meet
the company's or customers' expectations.
- *Example*: Manufacturing defects arising when production is outsourced to suppliers with
lower quality control standards.
### 3. **Security and Confidentiality Risks**
- **Data Breaches**: Sharing sensitive information with external parties increases the risk of
data leaks and breaches.
- *Example*: Outsourced HR services mishandling employee personal data leading to privacy
violations.
### 4. **Hidden and Unforeseen Costs**
- **Unexpected Expenses**: Costs related to contract management, transition, and potential
re-outsourcing can add up, reducing the anticipated savings.
- *Example*: Legal fees and expenses arising from renegotiating contracts or resolving
disputes with service providers.
### 5. **Dependence on Suppliers**
- **Vendor Dependency**: Over-reliance on a single supplier can create vulnerabilities,
especially if the supplier faces financial or operational issues.
- *Example*: Supply chain disruptions when a sole overseas manufacturer faces political
instability or natural disasters.
### 6. **Communication Challenges**
- **Language and Cultural Barriers**: Differences in language and culture can lead to
misunderstandings and miscommunication.
- *Example*: Misinterpretation of project requirements due to language differences resulting in
project delays.
### 7. **Legal and Compliance Issues**
- **Regulatory Compliance**: Ensuring that outsourced operations comply with all relevant laws
and regulations can be complex, especially across different jurisdictions.
- *Example*: Outsourced operations violating labor laws in the provider's country, leading to
legal repercussions for the contracting company.
### 8. **Impact on Employee Morale**
- **Job Security Concerns**: Existing employees may feel threatened by outsourcing, leading to
decreased morale and productivity.
- *Example*: Staff layoffs due to outsourcing leading to a negative workplace atmosphere and
potential loss of remaining talent.
### 9. **Potential for Reduced Innovation**
- **Innovation Stagnation**: External providers may focus on meeting contractual obligations
rather than innovating or improving processes.
- *Example*: An outsourced IT department maintaining current systems without proactively
suggesting technological improvements.
### 10. **Time Zone Differences**
- **Coordination Difficulties**: While time zone differences can be advantageous, they can also
make real-time communication and coordination challenging.
- *Example*: Delays in project progress due to limited overlapping working hours between the
company and the service provider.
---
## **Conclusion**
Outsourcing can offer significant benefits, including cost savings, access to expertise, and
operational flexibility. However, it also poses various risks such as loss of control, quality
concerns, and security issues. Organizations considering outsourcing should conduct thorough
due diligence, carefully select reputable service providers, and establish clear contracts and
communication channels to mitigate these risks. A balanced approach that weighs both the
advantages and potential drawbacks will help companies make informed decisions and optimize
their outsourcing strategies for better overall performance.
Outsourcing products and Services
Firms have been outsourcing non core products and
service functions (e.g. maintenance and other support
services),
In some supply chain situation, more specific products or
services are outsourced to maintain the competitiveness of
a firm.
Notably, outsourcing provides the potential to leverage
larger purchase volumes to gain quantity discount.
There are benefits and risks of outsourcing products and
services.
Benefits and risks in outsourcing products and Services
Benefits :
allows a firm to concentrate more on increasing core
capabilities while reducing overall costs
reduce staffing levels or redeployment of staff
reduce reengineering efforts and management problems
gains in manufacturing flexibility
Risks:
loss of control
increased need for supplier management
Increase reliance of suppliers
Benefits must be viewed against the risks
Question 1
Given:
● Inventory holding cost per unit per year h=4h = 4h=4
● Annual demand D=1000D = 1000D=1000 units
● Ordering cost per order A=800A = 800A=800 Taka
● Transportation cost per truckload T=3700T = 3700T=3700 Taka
● Order quantity QQQ units
1. Annual Inventory Holding Cost and Annual Ordering Plus Transportation Cost
● Annual Inventory Holding Cost =hQ2= \frac{hQ}{2}=2hQ
Annual Inventory Holding Cost=4Q2=2Q Taka\text{Annual Inventory Holding Cost} =
\frac{4Q}{2} = 2Q \text{ Taka}Annual Inventory Holding Cost=24Q=2Q Taka
● Annual Ordering Cost and Transportation Cost =D(A+T)Q= \frac{D(A +
T)}{Q}=QD(A+T)
Annual Ordering and Transportation Cost=1000(800+3700)Q=4500000Q
Taka\text{Annual Ordering and Transportation Cost} = \frac{1000(800 + 3700)}{Q} =
\frac{4500000}{Q} \text{ Taka}Annual Ordering and Transportation
Cost=Q1000(800+3700)=Q4500000Taka
2. Cost Trade-off Relationship
To illustrate the cost trade-off, we plot the functions 2Q2Q2Q and
4500000Q\frac{4500000}{Q}Q4500000.
3. Optimal Order Quantity to Minimize Total Cost
To find the optimal order quantity Q∗Q^*Q∗, we minimize the total cost function:
Total Cost=2Q+4500000Q\text{Total Cost} = 2Q + \frac{4500000}{Q}Total Cost=2Q+Q4500000
To find the minimum, take the derivative with respect to QQQ and set it to zero:
d(Total Cost)dQ=2−4500000Q2=0\frac{d(\text{Total Cost})}{dQ} = 2 - \frac{4500000}{Q^2} =
0dQd(Total Cost)=2−Q24500000=0 2Q2=4500000 ⟹ Q2=2250000 ⟹ Q∗=2250000=1500
units2Q^2 = 4500000 \implies Q^2 = 2250000 \implies Q^* = \sqrt{2250000} = 1500 \text{
units}2Q2=4500000⟹Q2=2250000⟹Q∗=2250000=1500 units
4. Annual Minimum Total Cost
Substitute Q∗=1500Q^* = 1500Q∗=1500 into the total cost function:
Minimum Total Cost=2(1500)+45000001500=3000+3000=6000 Taka\text{Minimum Total Cost} =
2(1500) + \frac{4500000}{1500} = 3000 + 3000 = 6000 \text{ Taka}Minimum Total
Cost=2(1500)+15004500000=3000+3000=6000 Taka
To solve Question 2 of Section 2 from the mid-term exam, we will analyze the make-or-buy
decision for a component part based on the given data.
### Given Data:
- **Annual Requirement (Q)**: Varies from 1000 to 1500 units.
- **Supplier Cost (Buy)**: $4 per unit.
- **Contract Preparation Cost**: $700.
- **Making Cost**: $6 per unit.
- **Investment for Equipment**: $2500.
- **Selling Price**: $12 per unit.
### 1. Draw the Lines for the Make and Buy Options
**Cost to Buy (C_b)**:
$$
C_b = 4Q + 700
$$
**Cost to Make (C_m)**:
$$
C_m = 2500 + 6Q
$$
### 2. Draw the Revenue Function
**Revenue (R)**:
$$
R = 12Q
$$
### 3. Find the Breakeven Point for Each of the Options
To find the breakeven point, set the costs equal to each other.
**Breakeven Point (Make vs. Buy)**:
$$
4Q + 700 = 2500 + 6Q
$$
Rearranging the equation:
$$
700 - 2500 = 6Q - 4Q
$$
$$
-1800 = 2Q
$$
$$
Q = 900
$$
Since the annual requirement varies from 1000 to 1500 units, the breakeven point of 900 units
is not within this range. Thus, we need to analyze the costs at the boundaries (1000 and 1500
units).
### 4. Find the Point of Indifference
The point of indifference is where the total costs of making and buying are equal. Since we
calculated the breakeven point already, we can determine which option is better at the given
range.
### 5. Carry Out a Breakeven Analysis to Show the Profitable Option to the Firm
**Calculate Costs at 1000 and 1500 Units**:
- **At Q = 1000**:
- Cost to Buy:
$$
C_b = 4(1000) + 700 = 4000 + 700 = 4700
$$
- Cost to Make:
$$
C_m = 2500 + 6(1000) = 2500 + 6000 = 8500
$$
- **At Q = 1500**:
- Cost to Buy:
$$
C_b = 4(1500) + 700 = 6000 + 700 = 6700
$$
- Cost to Make:
$$
C_m = 2500 + 6(1500) = 2500 + 9000 = 11500
$$
### Summary of Findings:
- **At 1000 units**:
- Buying costs $4700, making costs $8500. **Buying is cheaper.**
- **At 1500 units**:
- Buying costs $6700, making costs $11500. **Buying is still cheaper.**
### Conclusion:
For the annual requirement range of 1000 to 1500 units, the firm should **buy** the component
part from the supplier, as it is more cost-effective than making it in-house.
Citations:
[1]
https://ppl-ai-file-upload.s3.amazonaws.com/web/direct-files/26860134/700917f8-4323-4834-9c
82-e416a6211b41/MSC423.1_Mid-T-Exam_Summer24.pdf
[2]
https://ppl-ai-file-upload.s3.amazonaws.com/web/direct-files/26860134/3f6c6782-9413-4e62-91
07-970fe2e1ce5b/MSC423.1_Mid-T-Exam_Summer24.pdf
To solve Question 2 of Section 2 from the mid-term exam, we will analyze the make-or-buy
decision for a component part based on the given data.
### Given Data:
- **Annual Requirement (Q)**: Varies from 1000 to 1500 units.
- **Supplier Cost (Buy)**: $4 per unit.
- **Contract Preparation Cost**: $700.
- **Making Cost**: $6 per unit.
- **Investment for Equipment**: $2500.
- **Selling Price**: $12 per unit.
### 1. Draw the Lines for the Make and Buy Options
**Cost to Buy (C_b)**:
$$
C_b = 4Q + 700
$$
**Cost to Make (C_m)**:
$$
C_m = 2500 + 6Q
$$
### 2. Draw the Revenue Function
**Revenue (R)**:
$$
R = 12Q
$$
### 3. Find the Breakeven Point for Each of the Options
To find the breakeven point, set the costs equal to each other.
**Breakeven Point (Make vs. Buy)**:
$$
4Q + 700 = 2500 + 6Q
$$
Rearranging the equation:
$$
700 - 2500 = 6Q - 4Q
$$
$$
-1800 = 2Q
$$
$$
Q = 900
$$
Since the annual requirement varies from 1000 to 1500 units, the breakeven point of 900 units
is not within this range. Thus, we need to analyze the costs at the boundaries (1000 and 1500
units).
### 4. Find the Point of Indifference
The point of indifference is where the total costs of making and buying are equal. Since we
calculated the breakeven point already, we can determine which option is better at the given
range.
### 5. Carry Out a Breakeven Analysis to Show the Profitable Option to the Firm
**Calculate Costs at 1000 and 1500 Units**:
- **At Q = 1000**:
- Cost to Buy:
$$
C_b = 4(1000) + 700 = 4000 + 700 = 4700
$$
- Cost to Make:
$$
C_m = 2500 + 6(1000) = 2500 + 6000 = 8500
$$
- **At Q = 1500**:
- Cost to Buy:
$$
C_b = 4(1500) + 700 = 6000 + 700 = 6700
$$
- Cost to Make:
$$
C_m = 2500 + 6(1500) = 2500 + 9000 = 11500
$$
### Summary of Findings:
- **At 1000 units**:
- Buying costs $4700, making costs $8500. **Buying is cheaper.**
- **At 1500 units**:
- Buying costs $6700, making costs $11500. **Buying is still cheaper.**
### Conclusion:
For the annual requirement range of 1000 to 1500 units, the firm should **buy** the component
part from the supplier, as it is more cost-effective than making it in-house.
Citations:
[1]
https://ppl-ai-file-upload.s3.amazonaws.com/web/direct-files/26860134/700917f8-4323-4834-9c
82-e416a6211b41/MSC423.1_Mid-T-Exam_Summer24.pdf
[2]
https://ppl-ai-file-upload.s3.amazonaws.com/web/direct-files/26860134/3f6c6782-9413-4e62-91
07-970fe2e1ce5b/MSC423.1_Mid-T-Exam_Summer24.pdf
To solve Question 3 of Section 2 regarding facility location selection among Malaysia,
Singapore, and Thailand, we will follow the steps outlined in the question.
### i. Reasonably Score for Each Location Factor
We will assign scores (on a scale of 1 to 5) for each country based on the facility location factors
provided. The scores are subjective but should reflect common perceptions about these
countries.
| Facility Location Factor | Weight | Malaysia | Singapore | Thailand |
|--------------------------|--------|----------|-----------|----------|
| Labor Cost | 0.25 | 4 |2 |3 |
| Proximity to Market | 0.15 | 3 |5 |4 |
| SCM Capability | 0.25 | 3 |5 |4 |
| Quality of Life | 0.20 | 3 |5 |3 |
| Stability of Government | 0.15 | 3 |5 |4 |
### ii. Compute the Weighted Scores for the Countries
To compute the weighted scores, we multiply each score by its corresponding weight and then
sum the results for each country.
**Malaysia**:
- Labor Cost: $$4 \times 0.25 = 1.00$$
- Proximity to Market: $$3 \times 0.15 = 0.45$$
- SCM Capability: $$3 \times 0.25 = 0.75$$
- Quality of Life: $$3 \times 0.20 = 0.60$$
- Stability of Government: $$3 \times 0.15 = 0.45$$
**Total for Malaysia**:
$$
1.00 + 0.45 + 0.75 + 0.60 + 0.45 = 3.25
$$
**Singapore**:
- Labor Cost: $$2 \times 0.25 = 0.50$$
- Proximity to Market: $$5 \times 0.15 = 0.75$$
- SCM Capability: $$5 \times 0.25 = 1.25$$
- Quality of Life: $$5 \times 0.20 = 1.00$$
- Stability of Government: $$5 \times 0.15 = 0.75$$
**Total for Singapore**:
$$
0.50 + 0.75 + 1.25 + 1.00 + 0.75 = 4.25
$$
**Thailand**:
- Labor Cost: $$3 \times 0.25 = 0.75$$
- Proximity to Market: $$4 \times 0.15 = 0.60$$
- SCM Capability: $$4 \times 0.25 = 1.00$$
- Quality of Life: $$3 \times 0.20 = 0.60$$
- Stability of Government: $$4 \times 0.15 = 0.60$$
**Total for Thailand**:
$$
0.75 + 0.60 + 1.00 + 0.60 + 0.60 = 3.65
$$
### iii. Identify the Country Where the Facility Should Be Located
Based on the calculated total weighted scores:
- **Malaysia**: 3.25
- **Singapore**: 4.25
- **Thailand**: 3.65
The country with the highest weighted score is **Singapore** with a score of **4.25**.
Therefore, the facility should be located in **Singapore** due to its favorable scores in key
location factors.
Citations:
[1]
https://ppl-ai-file-upload.s3.amazonaws.com/web/direct-files/26860134/700917f8-4323-4834-9c
82-e416a6211b41/MSC423.1_Mid-T-Exam_Summer24.pdf
[2]
https://ppl-ai-file-upload.s3.amazonaws.com/web/direct-files/26860134/3f6c6782-9413-4e62-91
07-970fe2e1ce5b/MSC423.1_Mid-T-Exam_Summer24.pdf
