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Outsourcing of Manufacturing Processes: Negotiating with a Single Sourcing Supplier

Outsourcing von Produktionsprozessen: Verhandlungsstrategie für Single Sourcing-Lieferanten

Research Paper (undergraduate) 2010 14 Pages

Business economics - Supply, Production, Logistics

Excerpt

Table of Contents

1. Introduction

2. Framework considerations for procuring outsourcing solutions
2.1 Single Sourcing
2.2 Outsourcing and Manufacturing Outsourcing
2.3 Negotiations: a strategic process

3. Negotiating a single sourced manufacturing outsourcing agreement
3.1 Objectives and BATNA
3.2 Conflicts and Synergies
3.3 Aligning interests and resolving conflicts
3.4 Value contribution and critical analysis of negotiation planning

4. Conclusion

References

1. Introduction

In some industries, such as consumer electronics, outsourcing has played an important role in business strategy since the 1980s (Lonsdale 2000). However, the breakthrough of the concept is usually dated to the 1990s, where companies increasingly started to focus on their core competencies and contracted out all those activities they did not consider as “strategic” (Berggren / Bengtsson 2004). Production was long time considered as a core activity for most manufacturing businesses (Berggren / Bengtsson 2004). Yet again, this has changed as well over the last years. Even well known companies such as Nike (sportswear) or Apple (consumer electronics) have chosen to leave production to subcontractors and focus their efforts on the development and marketing of their products (Tompkins 2005). This of course brings certain risks to the outsourcing firm, such as security of supply. Moreover, very often only one provider is selected to take over the outsourced activities, the high dependency on a “single source” is also considered as a potential risk (Burt et al. 2003; Bostick 2007). Thus, setting up this relationship needs to be carefully planned, negotiated and contracted.

This paper analyses this situation for a manufacturing company that plans to source out one of its key production processes to a single provider. In order to do this, the implications of manufacturing outsourcing and a single sourcing strategy are analysed. Then, these considerations are set into the context of how an agreement for the above situation is best negotiated in order to maximise the value for the procuring business.

2. Framework considerations for procuring outsourcing solutions

In the following chapter, important considerations for the procurement of outsourcing solutions from a single source are discussed.

2.1 Single Sourcing

As opposed to sole sourcing, where the supplier has a market monopoly, the term “single sourcing” refers to the conscious decision of a company to rely on only one source of supply for a good or service (Arnold 2002). One of the key aspects that is promoted in terms of single sourcing is price reduction due to scale effects. The assumption is that by specialisation, high capacity utilisation and planning security, the supplier is expected to be able to reduce costs and/ or invest into the relationship much more than it would if it was in constant competition with other suppliers (Morgan 1987).

However, critics claim a number of risks in relation to relying on one supplier. The most obvious is the one of getting “locked in”, thus becoming too dependent on one supplier. The buyer may not be able to appropriately react to supplier price increases, supply disruptions or quality problems, as alternative sources of supply are not at hand (Berger et al. 2004). This becomes even more critical for outsourcing to a single supplier, as with outsourcing usually, the know-how for the respective business function is transferred to the provider and thus lost for the business itself (Oshri 2009). These risks are discussed in more detail in the next section.

2.2 Outsourcing and Manufacturing Outsourcing

As previously mentioned, outsourcing refers to procuring services externally that have previously been performed within a company (Wijers / Verhoef 2009). Very often, businesses use the concept of outsourcing for non-core activities (e.g. administrative tasks) (Barthélemy / Adsit 2003). In some industries however, the extent has reached the core of operations – manufacturing processes. The driving forces behind this are (Hwang 2003):

- shortened product development lifecycles, requiring the companies to focus on research & development and marketing of their product portfolio
- decreasing prices due to increased competition, forcing to reduce costs
- globalising markets, demanding global presence or at least flexibility to serve customers on such a scale

With that, the desired outcomes of manufacturing outsourcing, as there are scale economics by outsourcing to a specialised provider, improved business focus (e.g. R&D, marketing), higher innovativeness, reduced capital investment, shortened time-to-market, capability to serve a wider geographical range as well as decreasing risks or at least transfer (Schniederjans et al. 2005).

However, not all of this comes automatically, if at all. The provider selected needs to be capable of supporting these goals. Moreover, relying on an external supplier for providing key processes such as manufacturing brings a number of risks (Axelrod 2004). Most obvious, it is the dependency risk: whether it is the potential lock if the supplier wants to raise prices or quality problems arise. Also if the supply chain is disrupted due to operational issues or financial problems, this could lead to massive consequences, such as not being able to serve the end customers. Attached to this is the loss of control: problems arising in-house are much easier to solve if not having to rely on the responsiveness of an outside party. Another key risk is the loss of knowledge to the supplier, again increasing the dependency on the external providers (Oshri 2009). Lastly, if internal resources are transferred, a dedicated transition and implementation planning needs to set a frame for a smooth transfer (Zhu et al. 2001).

Yet, it may have become clear that the role of the selected provider(s) is critical to successful manufacturing outsourcing. Thus, forming the relationship is one if not the key success factor. The next section describes the negotiation process, which is a key step in setting up the relationship with a single source manufacturing outsourcing provider.

2.3 Negotiations: a strategic process

Negotiations occur not only when business relationships are formed, but also when disputes occur – and of course beyond economics at all, e.g. when negotiations in politics take place (Brett 2007). For long it was common sense that negotiations simply happened when two parties discuss aligning their interests (Dietmeyer / Kaplan 2004). Moreover, no strategic value was acknowledged to negotiations – it was considered as being a tactical “art”, largely depending on the persons involved. This has significantly changed: negotiations are more and more seen as process of achieving the strategic objective of creating value for a company (Dietmeyer / Kaplan 2004).

There are numerous suggestions in the literature about which steps are part of the negotiation, yet most of them seem to point out the importance of planning. It usually starts with coming across what the goals for the own organisation are - but also mirror what these could be for the opposite negotiation party. It should then be identified where common interests are, but more importantly where they are conflicting. For these issues, it should be analysed what could be done to overcome the conflicts. In the long run (usually applying to outsourcing decisions), these issues are best resolved if a mutual gain is achieved, yet without compromising the own position (Fisher et al. 1991). To set a frame for this, negotiators should not only define their most desired outcome, but also be aware of the point where the negotiated terms turn unfavourable for them. Therefore, the awareness of the consequences of outcomes is also critical for a successful negotiation (Dietmeyer / Kaplan 2004). Knowing the best alternative of not reaching an agreement is therefore another step in planning negotiations. If the assumed “cost” of conceding to an unfavourable term is larger than the best alternative to a negotiated agreement (BATNA), this is also called the “walk away point”, which also should be part of the negotiation planning (Fisher et al. 1991).

The generic goal of a procurement negotiation is creation of value – the actual meaning of which is at least twofold (Dietmeyer / Kaplan 2004): first, value is created when a general agreement is achieved that leaves both the buyer and the seller (provider) better off than if the alternatives had been followed. Secondly, value is created when negotiation goals are achieved that are acceptable for both parties. What these goals could be for the organisation in scope of this report and the specific situation the company is in will be analysed in the next chapter.

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Details

Pages
14
Year
2010
ISBN (eBook)
9783656145707
ISBN (Book)
9783656146155
File size
470 KB
Language
English
Catalog Number
v190101
Institution / College
Robert Gordon University Aberdeen – Aberdeen Business School
Grade
1,0
Tags
Outsourcing Single Sourcing Lieferantenbeziehung Einkaufsverhandlungen Produktionsoutsourcing

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Title: Outsourcing of Manufacturing Processes: Negotiating with a Single Sourcing Supplier