January 10th, 2018
Insourcing-Outsourcing Case – The Demwalt Piston Decision
Outsourcing has been a central strategy to most organizations that seek to benefit from such aspects as cost, risk and efficiency. Once entities developed ways to demarcate core from non-core processes, the non-core aspects have increasingly become candidates for outsourcing. Outsourcing could for instance offer entities cost advantages in terms of lower labor costs by reducing the amount of processes carried within the firm thus reducing work force requirements. Additionally, by outsourcing to entities that specialize in the outsourced aspects, entities may gain from the expertise of such providers, thus develop better products at reasonable prices and in a timely fashion. Other factors that favor outsourcing include capacity restrictions on the firm seeking to outsource parts of its processes, uncertainty about the future volume required thus a choice to transfer risk to the provider and the aspects being outsourced being of a routine nature and that they could be provided effectively from a variety of competitors in the market.
Conversely, outsourcing could have various adverse implications to the entity involved. Firstly, such may arise where aspects such as secrecy during product design process, is a critical component of the entity’s strategy. Secondly, where labor relations discourage outsourcing (e.g. to safeguard against retrenchments), outsourcing becomes a challenging feat. Other aspects that favor insourcing to outsourcing include lack of reliable providers in the market, excess capacity that would remain idle if outsourcing was to be chosen, and where the firm desires to have full control over production process and product quality.
Accordingly, insourcing/ outsourcing decisions (also referred to as make or buy decisions) are complex aspects that require careful consideration. With these aspects in mind, the subject of this report is to propose an insourcing/ outsourcing strategy that Demwalt, an industrial engines manufacturer, needs to employ with respect to its family of pistons. The report bases its recommendations on an assessment of factors such as costs involved in outsourcing and insourcing alternatives, nature of the process being considered for outsourcing (whether it is a core competency or not) and the characteristics of providers in the market. Go to part 2 here.