Outsourcing in the Automotive Industry

Outsourcing in the Automotive IndustryThe global automotive effort continues to stick worldwide at around 2.5% annually, driven by increasing automobile ownership in the developing economies. In the mature economies, including the UK, growth is frequently low-downer or even out absent (NGAIT, 2008). Because of market proximity and local anesthetic content restrictions imposed by the G overnments of legion(predicate) developing nations who wish to get on the establishment of local automotive sectors, the vast majority of newly manufacturing expertness in the last 6 years to support this growth has been in the BRIC countries and within the EU, in Eastern Europe. Lower labour be in these developing automotive economies cast too stimulated a peddle of drudgery eastwards, save this has to date mainly affected the automotive summate base and less(prenominal) so vehicle assembly sites.The UK automotive industry has transformed itself in the last decade from a sector with dissolute labour relations and a poor reputation for smell and productiveness to one that is fully belligerent. Independent external reliability surveys put UK built cars at the top of the rankings, and productiveness and labour relations atomic number 18 among the scoop up in the world.Until the impact of the global financial crisis, the industry was profitable and self-sufficing in Europe and in the UK. Technology and modern focussing practices befool transformed the shop floor environment, and product engineering science embraces lightweight materials, stinger edge design analysis and visualisation tools and the extensive use of incorporate electronic systems to ex angle digital go to most functions of the car. The climate intensify agenda is accelerating technological change at an unprecedented rate, and the industry in Europe and the UK has embraced the CO2 challenge and is investing heavily in mickle and engineering science to provide innovative solutions while continuing to offer exciting, galosh and satisfying products that people want to buy. In 2008, 1.65 billion vehicles and 3 million engines were built in the UK, by a diverse range of manufacturers in car, commercial vehicle, off-road and premium vehicle sectors. The vehicle turnout trains (until the present turning point began) were relatively stable for some years, but employment has been declining as productivity improved and in that location has been severe hollowing out of the supply chain. This is important because about 75% of the rank of material in a new vehicle is added by the supply chain (NGAIT, 2008).Literature reviewManufacturing outsourcing continuumThere is such(prenominal) debate in the fakement literature on defining outsourcing (Gilley and Rasheed, 2000 Harland et al., 2005). The definitions of outsourcing relevant to supply chain management emerge from these elementsOutsourcing implies a agate line family relationship between devil parties the outsour cing subject (also called the principal or the thickening) who makes the purpose of whether to source or non and an external outsourcing firm (Arnold, 2000).The objects of outsourcing are general business military operationes or processes results which might be outsourced (Arnold, 2000 Kimura, 2002). This chamberpot include core (e.g. manufacturing, marketing, RD) as well as support (e.g. maintenance, accounting, IT, logistics) processes (Gilley et al., 2004).Outsourcing is non simply a buy decision. While all firms purchase elements of their operations, outsourcing is less common and represents the fundamental decision to reject the internecineization of an activity (Gilley and Rasheed, 2000). and then, outsourcing occurs in two situations. First, is when the node outsources objects that were in the first place sourced internally, resulting from a vertical dis consolidation decision (Gilley and Rasheed, 2000). Second, when the client sources objects that, although they rush not been completed in-house in the past, are within the clients capabilities and hence could hasten been sourced internally notwithstanding the decision to go removed (Gilley and Rasheed, 2000 Van Mieghem, 1999).The outsourced objects are peculiar(prenominal) to the client. That is, the outsourced activities are perpetrateed according to a plan, specification, form, or design, of varying detail, provided by the client (Kimura, 2002 Van Mieghem, 1999 Webster et al., 1997). Hence, a firm buying an off-the-shelf, standardized component or a suppliers proprietary part is not considered outsourcing, because no customization is performed for the buyer.The client whitethorn outsource all or part of a process or process result (Gilley et al., 2004). For example, the outsourcing of manufacturing processes may take the form of a part, component, or a finished product (Harland et al., 2005).Manufacturing outsourcingThroughout the 1990s a remarkable increase of outsourcing activities by firms has been observed. It has been hypothesized that this increase results from the decline in deed cost in connection with the intensified use of information technology (Abraham and Taylor, 1996). Today, activities that utilize to be performed in-house (e.g. auditing, maintenance, repair, transportation, janitorial and legal gos) are usually outsourced to firms in the business service sector. Consequently, outsourcing has contributed signifi send packingtly to the growth of business-related services during the last decade (Fixler and Siegel, 1999). Moreover, manufacturing firms are outsourcing not only services but also internal production. One bragging(a) example is the automotive industry, where some large car manufacturers only perform the concluding assemblage of major parts whose production is outsourced to external suppliers. Since this typewrite of outsourcing quite often occurs at an international level, it is also closely entwined with the globalisation proces s (Feenstra and Hanson, 1996).Various aspects of the trend to outsource have been discussed in the faculty member literature. A large literature starting with the seminal paper by Coase (1937) and papers by Grossman and Hart (1986), Bolton and Whinston (1993) and Grossman and Helpman (2002) examines theoretically a firms decision of whether to levy in-house or to outsource. At the heart of this literature are issues concerned with exercise cost and, in particular, incomplete contracts leading to either vertical integration or specialisation. Lyons (1995) provides an empirical application to evaluate the importance of transaction cost theory for firms outsourcing decisions.The trade related aspects of outsourcing have also attracted increasing tending in the literature. Trade theoretic models such as Deardorff (2001), Jones and Kierzkowski (2001) and Kohler (2001) examine the personal beliefs of trade in fragmented products on countries patterns of specialisation and resulting i mplications for factor prices. On the empirical side recent papers by Feenstra and Hanson (1996, 1999) and Gorg et al. (2001) have analysed the effect of international outsourcing (or fragmentation) on relative operates and labour study utilise industry level information for the US and UK respectively. In line with traditionalistic HOS trade theory these papers find that international outsourcing (moving low acquisition intensive production to low skill abundant countries) leads to increased penury and increases in the wage premium for graduate(prenominal) skilled peeers in the US and UK. Egger and Egger (2001) investigate the effect of outsourcing on the productivity of low skilled labour in the EU using industry level data. They find that increases in outsourcing have a negative effect on low skilled labour productivity in the short run, but a positive effect in the long run.Drivers of manufacturing outsourcingThere have been several studies that have examined the motivat ions for and benefits of outsourcing. Abraham and Taylor (1996) identified three reasons for outsourcingSavings on wage and benefit payments,Transfer of requisite un reliablety to the outside contractor get to to specialized skills and inputs that the makeup brooknot itself possess.Kakabadse and Kakabadse (2000) report that the main reasons for outsourcing areEconomic great specialization in the provision of services, as outsourcing allows economies of scale and the longevity of demand for the activityQuality access to skills, the competency and focus of potential suppliers and geographic coverage is increased andInnovation improvements in quality through innovation, and the teaching of new service products, can lead to new demands.Bendor-Samuel (1998) also asserts that outsourcing provides certain power that is not gettable within an systems internal departments. This power can have many dimensions economies of scale, process expertise, access to detonator, access to expens ive technology, and so forth The combination of these dimensions creates the cost savings inherent in outsourcing, because the outsourcing supplier (the organization specializing in a particular business function) has the economy of scale, the expertise and the capital investments in leading technology to perform the same tasks more expeditiously and effectively than the internal departments of the outsourcing buyer .Another possible benefit is that outsourcing provides companies with greater capacity for flexibility, especially in the purchase of quickly developing new technologies, fashion goods, or the myriad components of complex systems (Carlson, 1989 Harrison, 1994). Companies can buy technology from a supplier that would be too expensive to replicate internally. A network of suppliers could provide an organization with the ability to adjust the scale and range of a function of their production capability upward or downward, at a cast down cost, in response to changing dema nd conditions and at a rapid rate. As such, outsourcing claims to provide greater flexibility than the vertically integrated organization (Carlson, 1989 Harrison, 1994 Domberger, 1998). Furthermore, outsourcing can decrease the product/process design cycle time, if the client uses multiple best-in-class suppliers, who work simultaneously on individual components of the process (Quinn and Hilmer, 1994).Issues in manufacturing outsourcingThe case against outsourcing is based on arguments such as loss of management control, reduction in flexibility and increased costs. For instance, competitive outsourcing requires a exalted standard of supplier management to avoid the pitfalls of transferring critical functionality, or comely too dependent on a supplier for day-today performance of racy business functions. In addition, outsourcing can generate new risks, such as the loss of critical skills, developing the wrong skills, the loss of cross-functional skills, and the loss of control ov er suppliers (Domberger, 1998 Quinn and Hilmer, 1994). The possible loss of flexibility is connected to the typical long-run contractual relationship that is formed as part of an outsourcing agreement, and that during the contract term, the customers business, the available technology, and the competitive and regulatory environment may change dramatically. Thus, this inflexibility is more often than not linked to an unyielding and inappropriate contract. Although outsourcing is undertaken by many organizations to control or reduce costs, there is some evidence that it does not decrease costs as expected, and in some cases, costs increase. For instance, when an item is outsourced, the assumption is that the suppliers costs and required contribution is less and entrust continue to be less than the cost of internal provision. A survey based on guanine managers worldwide by the PA Consulting Group (PACG) revealed that only 5% of organizations gained high levels of economic benefit f rom outsourcing (PA ConsultingGroup (PACG), 1996) and that 39% of organizations admitted mediocre economic benefit. Also, as outsourcing leads to a re-definition of organizational boundaries and, by implication, structural adjustments involving human resources, these changes incur social as well as financial costs. Although the social costs are short and can be mitigated by facilitating the adjustments through the re-training and redeployment of module within the organization, their transfer to the supplier organization and ensuing redundancy payouts can still be considerable (Domberger, 1998 Hall and Domberger, 1995). Also, outsourcing can lead to industrial disputes between employers and employees, which in turn can damage morale, trust and productivity.Experts control that global supply chains are more difficult to manage than domestic supply chains (Dornier et al., 1998 Wood et al., 2002 MacCarthy and Atthirawong, 2003). Substantial geographical distances in these global situ ations not only increase transportation costs, but stupefy decisions because of inventory cost tradeoffs due to increased lead-time in the supply chain. distinct local cultures, languages, and practices diminish the effectiveness of business processes such as demand forecasting and material planning. Similarly, infrastructural deficiencies in developing countries in transportation and telecommunications, as well as inadequate worker skills, supplier availability, supplier quality, equipment and technology provide challenges normally not experienced in developed countries. These difficulties reduce the degree to which a global supply chain provides a competitive advantage.Cost benefits of manufacturing outsourcingIn the absence of transaction costs, a firm will decide to outsource when the market price for an outsourced activity is lower than internal marginal cost for that activity (Fixler and Siegel, 1999). It is an unresolved empirical issue whether outsourcing really has a po sitive influence on a firms performance as is expected a priori. Some case studies have reported that firms tend to underestimate the transaction costs associated with outsourcing. For instance, it has been documented that some firm have again in-sourced activities that were previously performed by external firms, because they were dissatisfied with the quality or because they have underestimated the amount of as ready specific investments (Benson, 1999 Gornig and Ring, 2000 teenage and Macneil, 2000). A few studies have analysed the impact of outsourcing on firm efficiency (Heshmati, 2002). Although efficiency is for certain an important aspect of firm performance, it neglects the product market performance of firms. For instance, even if efficiency of firms remains unchanged after outsourcing of internal production, higher quality of intermediate inputs might result in higher quality of final products and hence higher sales and higher margins. The lack of empirical studies on th e link between outsourcing and firm performance might be also due to a limited availability of suitable micro data for analysing this subject.Theoretical considerations for manufacturing outsourcingIn theory, efficient firms will allocate their resources within the value chain to those activities that give them a comparative advantage (Shank and Govindarajan, 1992). Other activities that do not offer such advantages will be outsourced to external suppliers. When firms postulate in outsourcing, they assess the productivity of their in-house service functions and decide to outsource if others can provide comparable services cheaper. Basically, when firms outsource activities and functions related to producing their products and services, they move towards a business strategy based on core competencies, a set of skills and knowledge that helps maintain their competitive advantage in serving customers (Porter, 1985 Sharpe, 1997). Thus outsourcing is expected to imply cost savings relat ive to internal production or internal service functions. This will be the case if outside suppliers benefit from specialized knowledge and/or economies of scale (Heshmati, 2002).However, recent work by Grossman and Helpman (2002) shows that the choice between continued internal production or an outsourcing decision means taking into consideration more than just production cost differences. According to transaction cost economics, outsourcing is desirable only when transaction costs incurring from asset specificity, incomplete contracting and search efforts are lower than the production cost advantage (Williamson, 1971). In addition, the attractiveness of outsourcing to a certain producer may well depend on how many firms can potentially provide the inputs it needs. As mentioned above, some case studies have also reported that benefits from outsourcing are quite often not derived right off and that managers tend to overestimate the resulting benefits and underestimate the involved transaction costs (Benson, 1999 Gornig and Ring, 2000 Young and Macneil, 2000).Earlier worksWasner (1999) presents a state-of-the-art view on the outsourcing process by combining a thorough literature review with two independent case studies of the Swedish aircraft industry (Saab AB) and the electronics industry (Ericsson Radio Systems AB and one key supplier Swedform Metall AB). The first case concentrates on outsourcing of aircraft sub-systems and later(prenominal) in-sourcing of related software activities, whereas the second case deals with outsourcing of radio base site production. However, he argues that the process of carrying out the transfer of an activity from being internally controlled to becoming externally managed is equally difficult because of interdependencies at the operational level. The effectuate of outsourcing are far reaching in terms of physical, temporal and make-upal reach. Physically, because there is an inherent complication of losing control as an ac tivity is turned over to an external supplier. Temporally, because it is difficult to estimate how conditions will change over time. Organisationally, because outsourcing involves converting decisions at the strategic level into actions at the operational level and transferring functions from one organisation to another.