When is it better to do an activity internally versus when is it better to outsource it?
It is desirable to maintain in-house activities whose specialized resources are difficult to find on the market. On the other hand, it may be interesting to outsource activities for which internal expertise does not exist, when economies of scale are more interesting or when the activity has little added value. The purchase is to be considered when a specific product is expensive to produce and there is a similar one at a lower cost in the market. A partnership can also be viable to gain a strategic competitive advantage.
In the World Class Supply Management book, David Burt, Donald Dobler and Stephen Starling present an easy method for defining whether it would be useful to outsource or not.
If the activity is not in one of these three categories, then it is best to outsource it:
- The activity is critical to the success of the product, including the consumer’s perception of certain important attractions;
- The activity requires specialized design and manufacturing skills or specialized equipment and the number of suppliers with this expertise is limited;
- The activity fits well in the main skills that the company owns or wishes to develop and is considered strategic.