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Decisions about outsourcing are rarely stand-alone. They have a significant impact on the complete operations of a business. Once the strategic intent to explore outsourcing is established, it is essential to understand the full financial and operational consequences of the outsourcing decisions. This document identifies common practices that lead to poor outsourcing decisions. Using current standard costs of products or activities to make business decisions
Standard costs are based on fixed cost allocations determined by current operations. Outsourcing typically alters these operations significantly enough to make current standard costs invalid, even for the products that are retained in-house. Also, standard costs often do not account for costs such as outbound logistics and warehousing. Outsourcing can significantly impact these costs, both for the outsourced products and the ones that remain in-house.
. The accompanying graph shows the decrease in Cost of Goods Sold (COGS) at various levels of change. A & B represent some operations being outsourced, C & D represent combination of operations and some products being outsourced and E represents facility shutdown. Limiting the options prior to such analysis can result in shortsighted decisions.
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B
-10% -15% -20% -25% -30% -35%
C D
Restructuring ($m)