Invest or divest? On the relative improvement potential in outsourcing manufacturing

Abstract

The study sought to clarify the comparative effect of outsourcing in relation to alternative manufacturing practices. A representative sample of 267 Swedish manufacturing plants was subjected to multiple regression analysis. Results show that in comparison to outsourcing manufacturing, the other practices related to the enhancement of manufacturing capability had a much stronger ability to predict improvements in operating performance. While investments in higher manufacturing capability have only positive effects, outsourcing may entail negative as well as positive effects on operating performance. For the most part, outsourcing leads to negative effects when used as the main strategy to improve performance, but is more likely to cause positive effects if concurrent initiatives are taken to develop manufacturing capabilities. Thus it is argued that there is a far greater performance improvement potential in investing in, rather than divesting, the manufacturing function. Outsourcing is mainly beneficial when used to free resources in order to invest in higher manufacturing capability.