In the textile and fashion industry outsourcing often affects firm performance positive. But not always, underestimation of long leadtimes and risk that the products are out of fashion when they arrive at the stores are high.

Thanks for the reply, i think that in the food sector should be the same, since long lead times may result in products reaching or exceeding the expire day.

Outsourcing:

allows the firm to concentrate its resources (financial, managerial,..) in its 'core competences',

provides access to the best-performers outputs of the outsourced tasks, taking advantage of their scale economies, their innovation in that areas...

may increase the flexibility of the firm, since it does not develop on so many tasks

avoids presure of some of the groups of interests in the company (for instance, to get higher wages as their colleagues in other parts of the firm)

may bond the firm to some of their suppliers, generating some transaction costs

The overall balance depends on the industry, the firm, its suppliers and the management of the relations with them.

Hi fernando, thanks for offering an answer to my question, what you present seems to be more strategic than operational benefits or not? When a firm concentrates on core competences this is a strategic decision?

Yes, although a proper strategy will lead to a better performance (at least, that is expected)

Yes, agree

Outsourcing helps in enhancing competitiveness of the organization. by fussing on core activities and delegating others to outsourcing partners. By this, resource utilization is improved and it also helps in streamlining in house operations.

Outsourcing cannot always 'help' improve performance. Even for the so called non core products, blind outsourcing could increase transportation (at a minimum) or could cause a loss of skill and complete dependency on the vendor.

I agree to what Mr. Shah said. Outsourcing of activities can result in a loss of skills in your company and that you will become dependent of the company that manages your activities. But Ok, it is good to outsource in areas that are not your own core competence as in many case logistics.

Two good articles that provide a holistic view (financial and operations) of some of the factors to consider in addition to the strategic impact are given below:

Gardiner, Stanley C. and John H. Blackstone Jr. “The Theory of Constraints and the Make-or-Buy Decision,” International Journal of Purchasing and Materials Management, (27:3), 1991, pp. 38-43.

Balakrishnan, Jaydeep and Chun Hung Cheng (2005). The Theory of Constraints and the Make or Buy Decision: An Update and Review. The Journal of Supply Chain Management. Winter, pp. 40-47.

Simple examples illustrating the concepts of truly variable costs (used to compute throughput = revenue minus truly variable costs) and fixed costs (operating expenses) in outsourcing decisions are provided. In these types of outsourcing decisions one must know the impact on the production process of outsourcing versus making the product in house. Does the product being considered cross the constraint or is it made by non-constraints. If made by non-constraints then the truly variable cost is what is considered. Does the proposed selling price exceed the truly variable costs? Certainly it should. BUT what also is the impact of making the item in house on the capacity requirements. Do we impact the current constraint? Have we created a new constraint? Have we jeopardized the current production environment by reducing the amount of protective capacity at the non-constraints?

Many TOC firms when using the throughput accounting methodology bring many parts outsourced back into their production facility at significant profit. Traditional cost accounting and activity-based costing both with their cost allocation methods distort the true impact of outsourcing parts and services.

One must also consider the impact on lead time, delivery reliability and quality of in-house versus outsourcing. Developing rapid reliable replenishment using TOC is also a topic you might investigate. The TOCICO website (theory of constraints international certification organization provides a wealth of information on various supply chain topics: http://www.tocico.org/

See for example the supply chain tab under success stories. Hope this is helpful.

Most enterprises rely on raw materials, products, services, infrastructure offerings, and data during a given business cycle. Companies that manufacture or assemble products also rely on component parts manufactured by other companies. Supply chain participants can outsource - which can work with other supply chain participants to benefit themselves and their industry sector.

Might want to checkout my 2007 paper with Michael A. Hitt in Journal of Operations Management on Strategic Outsourcing. 

Article Toward a Model of Strategic Outsourcing

This issue is a bit more complicated than many make it seem. If you are an operations person you will understand that there are interdependencies between products made in a facility. These can include raw materials purchased in bulk, shared labor across products, shared lines.process flows, expertise in labs for quality, supplier relationships and manager training to name just a few. Why is the interdepency so important? Example 1: A line makes two products. A very expense high margin product and a much cheaper low margin one. Both products fill the capacity of the line. Financial managers want to focus on higher margin items and decide to outsource the low margin one. This means that (assuming equal use of all aspects for simplicity) the line is now at 50% capacity usage and labor is now too expensive so layoffs begin. Too many managers to support this labor so layoffs or transfers...losing expertise and knowledge. The quality lab is now only testing half the product samples...this lab is now reduced as well.

Result? Financials improve but there has been a loss of capacity usage and staffing and expertise. (you can go the other way if the high margin item is outsourced...similar outcome if the market and sales don't ramp up fast enough to fill the void) Now lets assume they outsourced to China..a common theme. The lower margin product was sent because it had labor costs that were too high and labor is so much cheaper in China. But demand for this product varies a lot so now inventory levels go up to meet demand fluctuations because shipping takes much longer (up to 3 weeks) and there is all that inventory in the pipeline on the way so now in transit inventory levels are higher as well. This further burdens the lower margin product with costs and it begins to look very unprofitable. These are a few of the issues that financial managers and leaders without operations knowledge overlook in their analyses of these decisions. I wrote and article from a case study where my colleague and I strongly advised a mfg company against outsourcing. They did it anyway because China labor costs. A year later they were nearly bankrupt, the financial manager was fired and they reversed the outsourcing decision (reshored). A lot of people that worked there lost their jobs and never returned. How did we know this would happen? We used simulation and Linear programming to investigate the issues completely including ALL costs.

Ilias, inasmuch as outsourcing is used by companies as a way of reaching out for talent, competencies and skills sets that they might not have in house, there is the potential that this could deprive staff within the appropriate development opportunities that they may badly need. Again, some companies outsource partly as a way of buying out cheaper expertise elsewhere, even in instance where they may have the requisite expertise in house. Whatever the reason may be for outsourcing, the organisational performance could either be positively or adversely impacted if the outsourced function is not properly coordinated and the results of the activity carefully monitored and evaluated. Interesting.