When we talk about supply chain management, one of the most fundamental decisions that is involved in supply chain management is this decision that companies have to make. Should we make something ourselves or should we buy it from outside? So it's the make or buy decision and the make or buy decision could be about many different types of activities that the company might be involved in. So you have the core activities of a company, so if you're talking about a cell phone manufacturer R&D for manufacturing that cell phone is a core activity. The assembly of the cell phones is a core activity and the marketing, if it's a branded cell phone is a core activity. And companies have to think about whether they're going to outsource any of these activities, no, it was unheard of that companies would outsource R&D. But given our current developments and information technology that has become a possibility. So companies are doing that and of course companies can outsource their marketing and their assembly, so a lot of companies are doing that. When you talk about outsourcing, you could be thinking about the supporting activities, so it's not just whatever the core activity of that company is. But it could be for example their payroll maintenance, it could be their logistics, their distribution, even distribution of within their own plans. If they have an assembly plant in a different part of the country and they have a finishing plant in a different part of the country, they might even outsource their logistics. So you have third party logistics that are taking care of the logistics aspects of it. And then you have the information systems maintenance being outsourced to the experts in doing that. You could be thinking about outsourcing in terms of a way of entering a global market, so if you want to get into the. If you are a US company wanting to get into the car market in India or in china or in Vietnam, you might outsource in the sense that you might partner with somebody who's already there. And use that in terms of making products for that market, so you are outsourcing because you want the production to be closer to consumption in that sense. Now let's take a look, let's unpeel the onion of outsourcing a little more and see why do companies outsource. So at a very basic level, at a very, in a very traditional sense, why did companies outsource, why did they used to outsource? And it was basically because you wanted to access something that a supplier is able to do better than you are. Right, so you're getting access to some kind of specialized knowledge if you're talking about distribution. You are going to a UPS or a FedEx because they know how to do these things, they do it on a day to day basis. You may be outsourcing one of the reasons for outsourcing could also be volume, you simply don't have the volume if you are a car manufacturer. You make many different types of cars, only a few of those or a small percentage of the cars may need a particular component. Let's take, for example, sunroof and you don't have enough volume to make that sunroof yourself. So you say, I'm just going to purchase it from somebody who's who's making this in larger volumes. And it has a cost advantage based on that, it could be because of, you want to keep your company size small. You don't, you want to keep it manageable, you don't want to have a large company to manage, so, because of that, you might outsource the activities that you could. So, those are the reasons that companies typically outsource, of course, when you talk about outsourcing from that sense, from the conventional sense. There were the typical risks of outsourcing, one of the easiest ones that you can think of is you become dependent on the company that you outsource to. So if the manufacturing plant or the manufacturing facility of that company has to shut down because of a strike because of. If you're offshoring to that country because, if there there's political disturbance in that country. That might shut down your dependence on that particular manufacturing plant or the country as a supplier, is going to cause trouble for you as a manufacturer. You are scared, you are going to be aware of not wanting to outsource your core activities, right? So if you're a car manufacturer and you're thinking about the engine, that's a core activity. And if there's some proprietary technology that has got to do with that particular aspect of your product, like the engine of the car, you'll say, well, I don't want to lose that core activity. I don't want to give it to somebody because it might get copied, also, I want to keep it in house because that's something that I want to learn more about and and develop more. So I want to keep that core activity in house and not outsource it and something that we can all relate to in terms of, what if I give the production of this to a supplier? What about the quality, are they going to pay as much attention as I, as a company, whereas my company would to the quality of that component? And that's something that you think about from an outsourcing perspective, whether the supplier is going to pay that much attention to the quality of the product that they're selling to you.
