January 10th, 2018
Insourcing-outsourcing case – Nature of the Supply Market
A second concern that affects Demwalt’s outsourcing option is the current status and players in the supply market. Factors relating to the supply market include capacity of the suppliers to provide adequate supplies and the competitiveness in the supply market. On the first aspect, Demwalt’s position seems to be unfavorable. Such is for instance exemplified the importance placed in on the safety buffer and the unavailability of a supplier to provide supplies on a just-in-time arrangement as the entity preferred. This aspect becomes critical since, as noted by the sourcing strategy expert, outsourcing significantly alters the capacity of the entity to return the outsourced products to in-house production.
On the second aspect, the competitiveness in the market, Demwalt’s position appears, similarly, to be unfavorable. Although the entity has identified a supplier, it for instance does not consider outsourcing the pistons from multiple suppliers. Such aspects are also noted in the engineers concern about the outsourcing decision leading to a locked-in commitment, where the suppliers would be at-will to raise their prices. Such aspects indicate that despite the positive cost analysis in favor of outsourcing, Demwalt needs to further evaluate the external market in terms of capacity and existence of multiple qualified suppliers that would enhance competitiveness in the market, thus sporadic increases in prices.
Outsourcing presents an opportunity through which entity’s can hire out services and processes that are not core to their products, to reap from benefits such as cost efficiency and expertise of the supplier. The subject of this paper was to analyze Demwalt’s outsourcing/insourcing strategy with regard to its R series pistons. The cost and other aspects (nature of the product being outsourced; whether a core competency and the competitiveness of the market) formed part of the analysis conducted.
With regard to cost, outsourcing the piston offers an opportunity for the entity to achieve higher cost efficiencies in the years considered. By outsourcing Demwalt could save approximately $ 450,689 during the first year and $209,072 during the second year. These savings are however based on projected demand, which, according to historical data, could have a plus or negative 15% error. Demwalt’s outsourcing option is also favored by the fact that pistons are not its core competencies. Through the sound process management framework and qualified personnel, as evidenced in the work cell model, Demwalt could manage various challenges that outsourcing would embody. On the converse side, Dewalt’s continued in-house production of pistons is favored by the existing supply market. From the analysis conducted, the existing supply market does not appear to possess the required capacity to meet Dewalt’s preference for just-in-time suppliers. Additionally, the seemingly lack of competitiveness in the market may lead to Demwalt’s entry into a locked-in commitment with the supplier which could lead to sporadic price hikes thus affecting Demwalt’s performance. From such analysis, it is therefore critical for Demwalt to perform a full analysis of the external market so as to quantify the risks against the cost benefits it stands to gain by outsourcing.