Full text available at: http://dx.doi.org/10.1561/0200000030 Designing and Controlling the Outsourced Supply Chain Andy A. Tsay, Ph.D. Leavey School of Business Santa Clara University OMIS Department, 500 El Camino Real Santa Clara, CA 95053, USA [email protected] Boston — Delft Full text available at: http://dx.doi.org/10.1561/0200000030 Foundations and TrendsR in Technology, Information and Operations Management Published, sold and distributed by: now Publishers Inc. PO Box 1024 Hanover, MA 02339 United States Tel. +1-781-985-4510 www.nowpublishers.com [email protected] Outside North America: now Publishers Inc. PO Box 179 2600 AD Delft The Netherlands Tel. +31-6-51115274 The preferred citation for this publication is A. A. Tsay. Designing and Controlling the Outsourced Supply Chain. Foundations and TrendsR in Technology, Information and Operations Management, vol. 7, nos. 1–2, pp. 1–164, 2013. 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Please apply to now Publishers, PO Box 179, 2600 AD Delft, The Netherlands, www.nowpublishers.com; e-mail: [email protected] Full text available at: http://dx.doi.org/10.1561/0200000030 Foundations and TrendsR in Technology, Information and Operations Management Volume 7, Issues 1–2, 2013 Editorial Board Editor-in-Chief Charles Corbett UCLA Anderson School of Management United States Editors Fernando Bernstein Duke University Cheryl Gaimon Georgia Institute of Technology Uday Karmarkar UCLA Sunder Kekre Carnegie Mellon University Panos Kouvelis Washington University Christoph Loch University of Cambridge Michael Lapré Vanderbilt University Karl Ulrich University of Pennsylvania Luk van Wassenhove INSEAD Full text available at: http://dx.doi.org/10.1561/0200000030 Editorial Scope Topics Foundations and TrendsR in Technology, Information and Operations Management publishes survey and tutorial articles in the following topics: • Applications of technology, • Information chain structure information and operations and competition • B2B commerce • International operations • Business process engineering • Marketing/Manufacturing and design interfaces • Business process outsourcing • Multi-location inventory • Capacity planning theory • Competitive operations • New product & service design • Contracting in supply chains • Queuing networks • E-Commerce and e-business • Reverse logistics models • • Electronic markets, auctions, Service logistics and product and exchanges support • Enterprise management • Supply chain management systems • Technology management and • Facility location strategy Information for Librarians Foundations and TrendsR in Technology, Information and Operations Management, 2013, Volume 7, 4 issues. ISSN paper version 1571-9545. ISSN online version 1571-9553. Also available as a combined paper and online subscription. Full text available at: http://dx.doi.org/10.1561/0200000030 Foundations and TrendsR in Technology, Information and Operations Management Vol. 7, Nos. 1–2 (2013) 1–160 c 2014 A. A. Tsay DOI: 10.1561/0200000030 Designing and Controlling the Outsourced Supply Chain Andy A. Tsay, Ph.D. Leavey School of Business, Santa Clara University OMIS Department, 500 El Camino Real Santa Clara, CA 95053, USA [email protected] Full text available at: http://dx.doi.org/10.1561/0200000030 Contents 1 Introduction and Preliminaries 3 1.1 Terminology to describe an outsourced relationship . 4 1.2Outsourcingversusoffshoring................ 6 2 Motivating Case Studies 9 2.1Boeing’s787Dreamliner.................. 10 2.2Toysrus.comandAmazon.................. 14 2.3 Factory labor headaches for Apple and Foxconn . 18 2.4Theoriginal“Nikemoment”................ 20 2.5 Menu Foods and the 2007 pet food recalls ......... 23 2.6 Cisco’s $2.25 billion inventory write-down ......... 25 3 Advantages and Disadvantages of Outsourcing 28 3.1Constructsfromfoundationaltheory............ 29 3.2Advantagesofoutsourcing................. 33 3.3Disadvantagesofoutsourcing................ 39 4 Lifecycle of the Outsourcing Decision 48 4.1Initiatingconsiderationofoutsourcing........... 49 4.2Findingexpertiserelatedtooutsourcing.......... 51 4.3Organizingtomakethedecision.............. 52 4.4Definingandprioritizingthegoals............. 54 ii Full text available at: http://dx.doi.org/10.1561/0200000030 iii 4.5Makingthedecision..................... 56 4.6Structuringandmanagingtherelationship......... 63 4.7Investingresourcesinprocesscontrol............ 70 4.8Decidingtoendanoutsourcingprogram.......... 71 5 Outsourcing in a Physical Goods Supply Chain 72 5.1Outsourcingofmanufacturing............... 73 5.2 Outsourcing of product design/development . 82 5.3Outsourcingofprocurement................. 93 5.4Outsourcingoflogistics...................104 5.5 Who will orchestrate the outsourced supply chain? . 108 6 A Comment on the Research on Outsourcing 111 7 Conclusion 115 Appendix: Offshoring and Offshore Outsourcing 117 A.1Motivesforoffshoring....................117 A.2 Combinations of offshoring and outsourcing . 127 A.3 Hazards of offshoring and offshore outsourcing . 129 A.4Alternativestooperatingoffshore..............130 A.5 Regarding the focus on national boundaries . 132 Acknowledgments 133 References 135 Full text available at: http://dx.doi.org/10.1561/0200000030 Abstract All organizations outsource. They differ only in the scope and extent of what they procure as goods and services from outside entities. These choices drive an organization’s financial performance and long-term competitive viability, and establish the tenor of day-to-day operations. Outsourcing can solve many problems, but is also fraught with hidden costs and risks. This monograph examines outsourcing from a lifecycle perspective. This means tracing the full arc from the germination of the idea to outsource, to the assessment of options, to the installation of control mechanisms, to grappling with conflicts that inevitably arise over time, all the way to the sunset of the chosen strategy. The analysis is highly attentive to the details of operational execution, especially regarding how human resources participate in these decision processes and are impacted by the choices made. The lifecycle discussion applies regardless of the type of business process considered for outsourcing. This has standalone value, but also serves as a preamble to the topic from which this monograph derives its title: outsourcing in the endeavor of stewarding a product from con- cept to market and then operating the resulting supply chain. Specifi- cally, this monograph looks deeply at the outsourcing of manufacturing, product design, materials procurement, and logistics. This monograph also presents the phenomenon of offshoring in order to dispel the common confusion between outsourcing and off- shoring. Both can be pursued simultaneously (“offshore outsourcing”), and this monograph makes clear which benefits and risks are due to offshoring and which are due to outsourcing. This monograph targets scholars and practitioners at once, guided by a belief that both communities will benefit from a treatment Full text available at: http://dx.doi.org/10.1561/0200000030 2 of outsourcing that ties together ideas from theory and extensive industrial evidence. Highlights include extended case studies featur- ing Amazon, Apple, Boeing, Cisco, Foxconn, Menu Foods, Nike, and Toysrus.com, with significant supporting appearances by more than fifty other firms from diverse industries and countries. A. A. Tsay. Designing and Controlling the Outsourced Supply Chain. Foundations and TrendsR in Technology, Information and Operations Management, vol. 7, nos. 1–2, pp. 1–160, 2013. DOI: 10.1561/0200000030. Full text available at: http://dx.doi.org/10.1561/0200000030 1 Introduction and Preliminaries Much like “it takes a village to raise a child,” increasingly a village (possibly a global one) must collaborate in order to bring a product from concept to market. For a firm to perform every required task solo would be economically overwhelming, even if logically feasible. The decision of whether to outsource, in a supply chain or any other