The ultimate goal for any business enterprise is profit maximization. A business facing high demand for its products must increase its scale of production to meet the rising demand. To effectively expand its productivity, the firm must consider the cost of such increased production versus the returns expected from such undertaking. If the business increases its operation capacity to a certain level and the utility derived from such expansion is not proportional to the cost, then such an undertaking is not worthwhile. A good understanding of cost benefit analysis is very essential in decision making. The total cost includes acquisition costs, ownership costs, maintenance costs, operation costs and logistics costs. Life cycle costs in most cases are usually higher than acquisition costs. The management should take initiative of analyzing the ownership costs while purchasing products to determine the growth of the ownership costs after the purchase of the product. Bluejay Company was in the process of improving the quality image of its products. As a result the management decided to operate in-house in order to maintain control of its operations. Due to increased demand of its products, the need for outsourcing is a must. They can no longer maintain low level of production with the rising demand. The first step the management has to undertake is to carry out the life cycle cost analysis of the product (Ascott & Elizabeth, 2006. p. 156).
The firm must establish the cost benefit of increasing their scale of production. Before outsourcing for suppliers, the management needs to understand, clearly analyze and manage probable risks that might result from long term partnership with suppliers. This is important for the company to ensure that the suppliers comply with the contractual terms and show commitments to the standards imposed by the company. Careful outsourcing will assist Bluejay Company to reduce its operation costs, improve product and service quality, reduce time to the market and increase the range of customer services as well as being able to focus on the most capable areas of the organization. The decision to establish the best cost effective system to adopt should be made in consideration of cost and the effectiveness of the system. This involves system characteristics such as product quality and production capacity as well as its performance characteristics. This includes shut down systems, availability and safety integrity level (Wykstra, 1981. p. 211).
In making his cost benefit analysis to decide on the viability and benefit associated with such a move, the cross-functional team must consider in depth the reliability, availability and maintainability economic and risk analysis associated with external partners. Before making final decision that will influence the operation of the company, proper research on development, construction, maintenance, operation and disposal of the intended products is paramount. The team should evaluate and compare all alternative methods of operation, assess the economic viability of the partnership, recognition of cost drivers and effective cost reduction strategies. They should also examine and compare alternative strategies for increasing production, compare different approaches of production through optimal use of the available human and economical resources as well as long term planning on availability of resources. Once the above factors are put into consideration, the team should in clear terms, advice the senior leadership team on the importance and benefits to be leaped from outsourcing. Once the senior leadership team is satisfied by the facts presented to them and the cross-functional team is granted permission to outsource, they should select the best partner. The next step is to make a formal agreement and start the transition planning process. The anticipated outcome from the partnership should be estimated and compared with the current outcome. The comparison should be on the basis of value in terms of sales increase, quality aspects, customer satisfaction, as well as in terms of costs. The process should be review by the cross- functional team, revise it if need be and set up performance gauge related to attainment of service objectives in order to cater for the welfare of both parties (Cooper & Fava, 2006. p. 229).
To better convince the Senior Leadership Team of the benefits of outsourcing, the team has to analyze all the risks associated with outsourcing. The risks to be taken care of include strategic, operational, financial and hazardous risks. Strategic risks are associated with shifting the goals of the firm such that it looses the intended direction. Outsourcing providers may make a firm loose control when the skilled staff from the service providers depart or are fired leaving few employees who can not efficient handle the work. This may result into cancellation of contract which can be very costly to both parties
Outsourcing providers may damage the brand. This has a direct impact of tarnishing the name of the firm by providing substandard products to their customers as well as poor customer service by providers in far regions. Business world keep on changing and hence the business requirements. Outsourcing requirements may not adequately respond to the new changes. Firms encounter costly and complex change process of providers.
The firm therefore may be unable to cater for the new changes or more innovations.
Operational risks on the other hand refer to problems connected to in-house activities resulting from outsourcing (Baumann & Tillman, 2004. pp. 256-257).
These problems are hard to realize and hard to control. These problems can be in form of poor service performance, weak governance by the buyer, staff resistance and poor process fragmentation. Outsourcing can lower staff morale resulting to high rate of turnover and low human productivity. Financial risks associated with outsourcing occur in terms of unforeseen costs. These costs occur due to lack of considering costs of assessing providers, managing contracts and visiting sites. The team has to plan for all costs by use of detailed financial model to cater for unexpected costs. Regulatory risks associated with protectionist nature should be considered. Vendors should be compliance in areas of accountability and privacy. The hazard risk cost may be natural or man-made. The cross-functional team should as accurately as possible, identify all possible issues and carefully asses’ possible ways of alleviating them. The most common problems they have to deal with include workers compensation issues. Complications might occur regarding workers compensation especially where the outsourcing is done in far countries or regions. Hazards may also occur in form of personal injury gaps and errors and omissions coverage. Political risks such as trade disruption, exchange rate fluctuations and trade exploitation can greatly affect a company’s supply performance. Similarly national disaster risks such as fire and floods can disturb and destroy activities at the vendor’s premises and cause losses. Outsourcing if well done can bring savings of 25% to 50% even when incremental management and communication costs have been adjusted. This can be through benefits of economies of scale, use of expertise and lower wage rates (Chakravarty & Sukhamoy, 1987. pp.689-690).
Reference list
Ascott & Elizabeth, (2006). Benefit Cost Analysis of Wonder world Drive Overpass in San Marcos, Texas. Applied Research Project. [17], Texas State University
Baumann, H. & Tillman, A, (2004), The hitchhiker’s guide to LCA: an orientation in life cycle assessment methodology and application. ISBN 91-44-02364-
Chakravarty & Sukhamoy (1987), “cost-benefit analysis,” The New Palgrave: A Dictionary of Economics, v. 1, pp. 687-90.
Cooper, J. & Fava, J. (2006), “Life Cycle Assessment Practitioner Survey: Summary of Results”, Journal of Industrial Ecology
Wykstra, R. (1981) Human Capital Formation and Manpower Development, The Free Press, New York.