Some of the Ins and Outs of Outsourcing

A company faces a number of tradeoffs when it outsources an activity. The loss of control—particularly when it comes to product quality and safety—is one of them. Just ask Mattel. Beginning in 2007, Mattel was forced to recall tens of millions of toys it had outsourced for production because they were tainted with lead. But Mattel isn’t the only company to experience problems. In a recent global survey, more than one-fifth of the companies that outsource their production said they have experienced “frequent” and “serious” quality problems.PRTM Management Consultants, “Global Supply Chain Trends 2008–2010,” http://www.prtm.com/uploadedFiles/Strategic_Viewpoint/Articles/Article_Content/Global_Supply_Chain_Trends_Report_%202008.pdf (accessed December 2, 2009).

The U.S. Consumer Products Safety Commission randomly inspects products, but there is no way the commission’s personnel can begin to test them all. To protect their customers, many companies either test their suppliers’ products themselves or contract with independent labs to do so. For example, if you sell a product to Walmart, you need to be prepared to send it to such a lab, should Walmart ask you to.“Quality Assurance through Testing,” Walmartstores.com, http://walmartstores.com/Suppliers/248.aspx (accessed December 2, 2009). Companies also do on-site audits, or checks, of their suppliers. Other companies station employees with their suppliers on a permanent basis to be sure that the quality of the products they’re producing is acceptable.

The loss of control of their technology is another outsourcing risk that companies face. Some countries are better about protecting patented technologies and designs than others, and some supply chain partners are more trustworthy than others. How can you be sure your supply chain partner won’t steal your technology? A few years ago, General Motors began working with a Chinese firm to produce a car called the Spark for the Chinese market. But before GM could even get the automobile plant up and running, the U.S. automaker alleged that the design of the car had been stolen, sold to another company, and knockoffs of it were being driven around China’s streets.Bureau of International Information Programs, U.S. Department of State, “China Pressed to Forcefully Attack Intellectual Property Theft,” America.gov, January 13, 2005, http://www.america.gov/st/washfile-english/2005/January/20050113180002asesuark0.9782831.html#ixzz0Mada2mLk (accessed December 2, 2009).

Another aspect of outsourcing relates to the social responsibility and environmental sustainability companies exhibit in terms of how they manage their supply chains. Social responsibilityThe idea that companies should manage their businesses not just to earn profits but to advance the well-being of society. is the idea that companies should manage their businesses not just to earn profits but to advance the well-being of society. Both issues are becoming increasingly important to consumers. Environmental sustainabilityThe idea that firms should engage in business practices that have the least impact on the environment so that it is sustained for future generations. is the idea that firms should engage in business practices that have the least impact on the environment so that it’s sustained for future generations.

To demonstrate to consumers they are socially responsible, Starbucks and other companies have joined the Fair Trade movement. Members of the Fair Trade movement pay farmers and other third-world producers higher prices for their products so they don’t have to live in poverty. The prices consumers pay for products with fair-trade labels are often higher, but one Harvard study has showed that consumers expect them to be and that sales actually increased when the prices of them went up.Jeff Chu, “Are Fair-Trade Goods Recession Proof?” Fast Company, March 27, 2009, http://www.organicconsumers.org/articles/article_17395.cfm (accessed December 2, 2009).

The push for environmental sustainability is also having an impact on supply chains, partly because the stricter environmental laws in many counties are demanding it. But companies are seeing the upside of producing “greener” products and disposing of them in ethical ways. First, it improves a company’s image and makes it stand out among its competitors. Second, many consumers are willing to pay more for green products, even during a recession.John Birchall, “Greener Apple Helps Clean Up,” Financial Times, March 24, 2009, 11. Walmart recently announced that it’s planning to require its suppliers to measure the environmental costs of producing their products. The “green” ratings will then be put on the products labels.Steve Rosen, “Wal-Mart to Create Green Index to Rate Products,” Kansas City Star, July 15, 2009, http://economy.kansascity.com/?q=node/2844 (accessed December 2, 2009). Figure 9.3 "Why Firms Say They Are “Going Green” with Their Supply Chains" shows the reasons why firms “go green” with their supply chains.

The outdoor clothing company Patagonia takes both social responsibility and environmental sustainability seriously. Patagonia tries to design, source, produce, and recycle its products so they cause the least environmental damage possible. The company also audits it supply chain partners to ensure they treat workers fairly.

One of the drawbacks of outsourcing is the time it takes for products to make their way to the United States and into the hands of consumers. The time it takes is a big issue because it affects how responsive a company is to its customers. Retailers don’t like to wait for products. Waiting might mean their customers will shop elsewhere if they can’t find what they want. As we explained in Chapter 8 "Using Marketing Channels to Create Value for Customers", for this reason and others, some companies are outsourcing their activities closer to home.

When firms that can’t resolve their supplier problems, they find other suppliers to work with or they move the activities back in-house, which is a process called insourcingWhen firms move activities, such as logistics, in-house.. Insourcing can actually help set your company apart these days. The credit card company Discover doesn’t outsource its customer service to companies abroad. Perhaps that helps explain why one survey ranked Discover number one in customer loyalty.