Managing Risks and Maintaining a Competitive Edge in Today's Outsourcing Environment

Abstract

Summary form only given. In today's highly competitive market and rapidly changing economy, businesses must continually make choices if they are to survive, choices that set themselves apart from the pack. Consequently, some of the most important choices a company must make are strategic, and are the responsibility of Management. For this reason, taking into consideration the current business environment where the creation of value in the eyes of the customer and the shareholder is paramount, it is nearly impossible to survive without outsourcing some part of the business. In fact, manufacturing outsourcing is one area in particular, due to the competitive pressures, where very few companies can afford to ignore. However, outsourcing is not a risk-free adventure. Two of the most substantial risks that companies face when outsourcing to a manufacturing contractor is creating a competitor and counterfeiting. Thus, the objective of this research is to determine the risks companies have encountered when outsourcing their manufacturing specifically focusing on current academic literature, case studies, and empirical data, then propose a framework for evaluating and mitigating those risks. For decades, companies have been facing the challenge of finding the right balance of outsourcing and in- house development/manufacturing. It is commonly believed that the company should keep its core expertise in house, outsource the rest to remain competitive and watch its bottom line. However, when looking at the issue in greater depth, it becomes clear that this is an over simplification of the outsourcing dynamics. To give a few examples, what was not core competency yesterday, may become core competency a year or two down the road, so a vision and roadmap is a necessary part of core competency definition. The markets shift, companies launch new product lines, and decide to leave one business and enter another. To exemplify, outsourcing strategy needs to account for these dynamics as today's contract manufacturer may become the competitor very easily if the company decides to pursue vertical integration strategy. Moreover, it is easy to outsource a component that was developed in house, but without an effective feedback loop, the company may start loosing touch with what is feasible when developing the next overall design. In addition, the relationship, which started out as an exclusive agreement between the company and contract manufacturer (CM), dynamically changes if the contract manufacturer accepts a new client who is a competitor of the company. As a result, is the company better off outsourcing as much as possible to the most trustful contract manufacturer, or should it hedge its bets and outsource to many different CMs despite quality differentiation? Equally important, how will the company cope when the contract manufacturer decides to exit the business, or is subjected to an acquisition or merger? These and other questions present a formidable challenge to any enterprise this day and age.