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Make or Buy? A Strategic Assessment of the Benefits of Outsourcing

Outsourcing has many converts across the manufacturing sector. But rather than join the evangelical throng urging companies to shed assets and be born again as product designers, solutions providers, industry innovators or supply chain integrators, this article advises manufacturers to take more of an agnostic approach and not to regard outsourcing as a panacea for every ill.

On the surface, the arguments for outsourcing are compelling. Improved information technology and communication links, falling interaction costs and global access to vendors mean that manufacturers now can choose more freely than ever before how to structure their business. In one stroke, outsourcing seems to offer the chance to dump operational headaches and bottlenecks, sidestep labour conflicts and management deficiencies and secure immediate cost savings.

But, while it is undoubtedly true that outsourcing lightens a company's asset base, if manufacturers automatically assume that it is the solution they will be failing to address the core question - that of how to improve a company's performance and maximise value.

Statistics indicate that growing numbers of businesses are becoming disenchanted with outsourcing. Dun & Bradstreet report that 20 to 25 per cent of all outsourcing relationships fail within two years and 50 per cent fail within five, the costs of which are high. Possible ramifications for a company include one-time and year-on-year financial goals being missed, delays in outsourcing timelines, lowered workforce morale and productivity, dissatisfied customers, greater consumption of management resources and large switching costs should operations need to be brought back in-house.


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By Blair McCallum, Head of McKinsey & Company's Production System Design Centre (PSDC)

Blair McCallum is the Head of McKinsey & Company's Production System Design Centre (PSDC). He has worked at Toyota, where he was part of the team that developed the European supplier base, and was responsible for Toyota production system training throughout Europe.

In 1995, he moved to Rover Group as a Senior Manager and subsequently became General Manager responsible for the supplier base and its five main manufacturing plants. Since joining PSDC in August 1998, Blair has worked with UK manufacturing companies of varying sizes and across all sectors to help transform their production processes.

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Blair McCallum
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