Part A

1.     
Quantitative
approach

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

The estimated cost of producing 100000
book covers:

 

Total Cost of 10000 Book covers (£)

Cost per unit (£)

Direct materials

75000

0.75

Direct Labour

50000

0.50

Manufacturing Overhead

100000

1.00

Foreman’s Salary

50000

0.50

Total Cost

275000

2.75

 

The first
analysis used absorption costing, which allocate all fixed and variable
production costs as product costs. This approach may cause over- or
under-costing by not allocating the proper share of overheads, leading to
inappropriate measurement in cases of multiple options.

After gathering
information, Ethan found out that the foreman could be laid off if Smartline
decides to outsource the book cover. Manufacturing is an indirect cost, so that
it is allocated to the production of books based on the direct labour hours used
in each process. Despite the fact that overhead costs will be taken into
account even if Smartline choose to outsource the book covers, Ethan, by
examining past utility bills, estimates that by closing off the part of the
plan where book covered are produced, Smartline would save about £30000 of the
manufacturing overhead, or £0.3 per unit.

According to
Collier (2015), relevant cost, by its definition, excludes unavoidable cost
which will occur independently of the management decisions. In this case, it
can be seen that £30000 is the amount saved when closing the in-house plant producing
book covers. With the assumption that Smartline’s management has no alternative
use for the plant, the potential opportunity cost continuing to produce the
book covers in-house is zero, and the unavoidable amount of £70000 is the
irrelevant cost, while the amount of £30000 (or £0.3 per unit), which can be
avoided when choosing outsourcing, is the relevant cost for the decision making
process.

 

Cost per unit

Total cost
for 100000 book covers

Relevant
costs

Make (£)

Buy (£)

Make (£)

Buy (£)

Purchase book
cover

 

2

 

200000

Direct
Materials

0.75

 

75000

 

Direct Labour

0.5

 

50000

 

Manufacturing
overhead

0.3

 

30000

 

Foreman’s
salary

0.5

 

50000

 

Total
relevant cost

2.05

2

205000

200000

 

In this table, direct
materials, direct labour, and the manufacturing overhead cost of £0.3 per unit
are relevant cost as all of those costs are subject to change by management
decisions. The purchase book cover cost is the relevant cost which occurs when the
decision of outsourcing book covers from Afram is made. If Smartline decide to
outsource book covers, the foreman could be laid off, indicating that the
foreman’s salary is also the relevant cost to this make-or-buy decision.

As the cost of
outsource option (£2 per unit) is less than the relevant cost of in-house
production option (£2.05), choosing outsource option for an order of 100000 would
save £5000 (£0.05 per unit) compared with insourcing book covers. It can be
said that given everything else equal, Afram has no significant cost advantage
over Smarline in producing book covers. Hence, based on the financial
perspective, Smartline should be indifferent between the two options,
considering the fact that transportation cost for the outsourcing option has
not been accounted. However, the process above is merely a quantitative
approach, which is not necessarily sufficient to make the last decision on either
insourcing or outsourcing.

2.     
Qualitative
approach

One of the
first qualitative factors should be examined is the quality of the product or
services offered by the outsourcing provider. It is of Smartline’s interest
that Afram can consistently provide book covers with high standard. It has been
noticed that Afram’s sample covers are of high quality, possibly more than the
standard Smartline can manage to produce. However, for a successful long term
outsourcing plan, one should consider analysing other aspects of Afram, both
intrinsic and extrinsic including reputation, experience, reliability and its
core competency to reduce the risk of products being poorly produced. The
quality of Afram’s management structure and its financial status also need to
be discussed with Smartline’s managers, as they indicate the capability of
Afram to perform its obligation with consistency. This process of evaluation can
also assess the risk of the supplier practicing inappropriate activities that
can damage the reputation of Smartline.

Adaptability to
changes is deemed crucially important in an outsourcing partnership, especially
in this fast changing business world. The ability of supplier to cope with changes
in production volumes is strongly related to the ability of its clients to meet
their business objectives. Considering the fact that publishing is a seasonal
industry, with Autumn being the busiest season in the year for book-publishing
sectors, Smartline may reasonably expect Afram to increase the book cover
production level to retain their market share when the demand in the market is
high. As such request may come with costs and terms which differ from what has
been specified, Smartline should examine the capability of Afram to adjust
their own production level without compromising other factors such as costs,
quality, timing,…. of the book covers. “Outsourcing drivers that support
flexibility include a desire to increase process responsiveness and the ability
to change production volumes and supply chain activities in response to
changing in demand” (Wilkinson, 2013, p.131). Thus, a flexible supplier plays a
vital role in the way its client reacts to the uncertainty in the market.

Many other
aspects including the negotiation processes, commitment and management
structure of the two parties should be estimated. However, in this case it is
most essential to assess the two options based on the Smartline’s business
strategy. Considering the fact that Smartline itself is a book cover
manufacturer, manager should evaluate carefully the long term sustainability of
the firm in the industry, especially since its outsourcing partner, Afram,
might well be seen as a potential competitor. Gilley, Greer and Rasheed (2004)
argued that firms should focus on a set of function using its competitive advantage
and outsourcing others with supplier. According to Machogu et al. (2017), the
core competency of a firm should remain indispensable to their business with
the highest level of control. It is worth of consideration that when a firm decide
to transfer its core functions and processes to a third party, and in this case
is the book cover production, it may be subject to breach of confidentiality,
which Hoecht and Trott (2006) identified as “the risk of losing
technology-based core competencies”. In their work, Hoecht and Trott (2006)
aslo implied that the financial perspective concerns in the short run are far less
important that retaining the core competency and its future sustainability. Moreover,
transferring a strategic resource and knowledge to a third party may compromise
the ability of firm to perform at the required level in the future, as it will
become increasingly dependent on the supplier.

3.     
Strategic
prioritisation

The quantitative approach with
financial perspectives results in no clear determinant in deciding the best
option for book covers production. The cost advantage of £0.05 per unit of
Afram is hardly considered to be an advantage given the absence of transportation
cost. This suggest that the decision making process towards the two options might
be decided mainly by the qualitative approach.

The qualitative analysis has given
some views on this case study regarding Afram’s reliability, flexibility and
capability to meet the business objective of Smartline. The analyst of
Smartline should further examine not only factors regarding Afram, but also any
parameter may arise before and after the outsourcing implementation takes place,
in order to get the sufficient point of view on this case. There is the risk
for Smartline with the outsource option, however, as giving up a book cover
production process, which is a strategic resource, may compromise the
sustainability of the firm in the future.

Overall, no concussive conclusion
can be made for the two options given. However, it is suggested that manager should
make a decision based on the specific strategy of the firm, and more often in
this competitive business environment it involves the risk-return trade-off.     

 Part B

Over the years,
outsourcing has been employed by business managers in various industries across
the world, with the intention to have the edge in this ever-changing business
environment. By its very definition, outsourcing is the business practice when the
firm partly transfers its own tasks or processes to an outside source to improve
business efficiency. Machogu et al. (2017), in their work indicated that firms
may capitalize on outsourcing to reduce cost and become more competent in their
core business, which has been now considered a strategic human resource
approach in such competitive business world. There is evidence showing that outsourcing
practice has the potential to achieve performance enhancement, however, it does
not serve business without being challenged. As outsourcing become more and
more popular in the modern business, every factor of the process must be taken
into consideration in order to optimize business performance. Hutchins and
Gould (2004) referred to risk management in outsourcing as a key
competitiveness differentiator for a successful outsourcing implementation.
Zhu, Hsu and Lillie (2001) implied that a decision making process in
outsourcing a function should address non-financial factors in the overall consideration.
This essay will provide a broad perspective to identify relevant qualitative
factors from a manager’s point of view in a make-or-buy decision.

When it comes
to dealing with other parties, like many other business decisions, the intrinsic
and extrinsic factors of a business partner are among top priorities to be
taken into account. In the outsourcing relationships, the well-being of a
company is strictly tied to the operational and financial status of the
outsource provider, thus, one should evaluate the provider’s quality of
management as well as financial stability to ensure its technical competency. It
is also in the interest of the company that provider’s business attributes
including its experience, reputation, creditworthiness are critically analysed,
as the lack of consistent control may prove to be costly in the long run.
Machogu et al. (2017) implied that the quality of resources, and subsequently
outcomes in many outsourcing practices might be compromised as the outsourcing provider
may perform its obligations with profit-seeking motivation. According to Shukla
(2010), the risk of the supplier underperforming their obligation will force
firms to adjust the outsourcing strategy, which urges the manager to evaluate
the supplier’s capability to adapt to changes in demand by adjusting production
level.

 The mutual understanding of the outsourcing
implementation plays a significant role in its success. Embleton and Wright
(1998) indicated that for outsourcing, a mutually beneficial deal should be
negotiated and the agreement must be at their comfort. Deckelman (1998)
described outsourcing as contract intensive by their nature and argued that it
is the responsibility of both parties that the contractual document are mutually
understood about the strategic relationship. There is always the possibility
that either or both parties are not operationally prepared to proceed with the
implementation. The process of outsourcing may vary with subjective point of
view of both client and supplier, resulting in the uninformed views about the
procedure. Lewis and Radmore (2012) in their work indicated: “The service
description must be prepared in a logical manner, be sufficiently detailed to
include firm’s requirement, describe the scope of the services and define all
relevant definition to ensure a mutual understanding of these” (p. 12). Thus,
the negotiation process is crucial for an effective long-term outsourcing
partnership.

Embleton and
Wright (1998) argued that the management structure should be subject to changes
when the outsourcing implementation occurs .It is essential that manager
properly consider the adaptability of firm to changes in management structure
as well as effectively manage knowledge transfer and training process. Zhu, Hsu
and Lillie (2001) identified outsourcing as a top management issue, while Embleton
and Wright (1998) expressed that the policies and procedures should be modified
to sustain employee productivity and consistency. Restructuring the management
system in compliance with the outsourcing implementation is crucially important
to avoid overlapping and redundant processes, which necessarily results in
business inefficiency. Staff transition and allocation for outsourcing should
also be appropriately managed as Zhu, Hsu and Lillie (2001) mentioned the
complexity of the process due to economic, legal and social impact on both
parties.

 Outsourcing, by its nature, almost always
means job eliminations, which can have negative effects on morale, loyalty and
productivity among remaining employees. According to Shukla (2010), layoff may
result in unstable morale among the “in house survivors”, leading to
distraction, dissatisfaction and inefficiency. Embleton and Wright (1998)
viewed the human aspect in the context of outsourcing as often overlooked. Questions
regarding outsourcing will create a confusing atmosphere in the workplace with
a sense of insecurity among employees. Subsequently, rumours and speculations might
cause a breach in the employer-employees relationship. Noer (1996) indicated:
“Business with a high morale factor have a competitive edge over other
businesses… It is an intangible feeling transmitted form each employee to every
other employee and to the customer”, (p.16), while Nanvran Assoc (1996) implied
that an appropriate policy for communicating an outsourcing strategy is a key
to a successful transition.

There is no
denying the fact that firm which outsources may have greatly reduced control
over part of the business. Outsourcing process, therefore, should be
accompanied with the information sensitivity being under control at the highest
level. Gilley, Greer and Rasheed (2004) argued that “a firm could be vulnerable
if it outsources its executive compensation function and confidential
information is leaked to competitors that may then conduct raids on its
executive talent” (Gilley et al., 2004 p.234). Shukla (2010) included the risk
of service provider accessing firm’s confidential information in an outsourcing
partnership, which might include the potentially personal information about
customers and employees, posing enhanced security risks. Lum (2004) indicated
that breach of confidentiality may happen when outsourcing and the obligation
of those who are responsible for the integrity of sensitive information must be
clearly stated to both parties.

In business
partnership, the relationship and commitment of both sides play a key role in
the success of the plan. As for outsourcing, there exists a commercial
relationship between two sides, which may lead result in corporate clash. It is
followed by the unwillingness to adapt to changes and the resistance to the
process, whether intentional or not, leading to performance monitoring and
measuring processes not being able to fully represent the effectiveness of
outsourcing. The lack of participation and communication in such case will be
costly in the long term. Lacity and Willcocks (2017) argued that commercial
conflicts are the most daunting challenge for a successful outsourcing
implementation as the relationships in this context based on commercial
grounds. Thus, resolving conflicts between the two parties is crucial in
realizing the long term strategic benefit of outsourcing.

With the rise
of conscious customers who pay a great attention to the ethical practices of
businesses, manager need to consider the reputation of the firm in an
outsourcing deal, based on how public would respond to it. With the inevitable
lack of control from the client, suppliers may practice environmentally
damaging processes or even involve in illegal activities. The process of
outsourcing, which is based on specific expertise and cost advantage, in many
cases has been deemed morally wrong. Over the years, there have been many
implementations exploiting the low wages and poor working condition in
developing countries. Nike Sweatshop throughout the 1990s is the case in point,
when the sport giant was criticised for practicing and had to lay-off staff by
1998, witnessing declining sales and stock price.

Another
important factor need to be considered thoroughly is the question regarding the
business strategy of the manager, which relates to the sustainability of the
firm in the industry. Kotabe (1992) argued that the increasing dependence on
outsourcing may eventually result in innovation being diminished. Empleton and
Wright (1998) in their work suggested that by selling a potentially strategic
resource in the process of outsourcing, firms may witness opportunity loss in
the long run. There is also evidence showing that not all firms are beneficial
from outsourcing. Studies of Lonsdale (1999) suggested only a minority of
companies examined can prevail with outstanding returns using outsourcing. Cox
(1996) identified one of the reasons for an unsuccessful outsourcing
implementation is the tendency toward short term benefits of the analysis
process.

Despite being a
strategic choice for business to achieve enhanced profitability, outsourcing
remains a number of questionable factors. Harland et al. (2005) suggested that
outsourcing is superior to in-house producing due to the lack of in-house efficiency
instead of enhancing the whole business system. Wilkinson (2013) questioned the
consistency of outsourcing in generating value for the organization. Given
outsourcing as an option, the manager need to consider carefully which approach
should take for years to come.