FlexCon, a $$3$ billion maker of small industrial engines, is undergoing a major internal

review to decide where the company should focus its product development efforts

and strategic investment. Executive management is arguing that too much capacity and

talent are being committed to producing simple, commodity$-$type items that provide

small differentiation within the marketplace. FlexCon concluded that in its attempts

to preserve jobs, it has insourced parts that are easy to manufacture, while outsourcing

those that are complex or challenging. Producing commodity$-$like components with

mature technologies is adding little to what FlexCon$$s customers consider important.

The company has become increasingly dependent on suppliers for critical components

and subassemblies that make a major difference in the performance and cost of finished

products.

Part of FlexCon$$s effort at redefining itself involves creating an understanding of

insourcing$/$outsourcing among managers and employees. The company has sponsored

workshops and presentations to convey executive management$$s vision and goals, including

educating those who are directly involved in making detailed insourcing$/$outsourcing

recommendations.

One presentation given by an expert in strategic sourcing focused on the changes in

the marketplace that are encouraging outsourcing. The expert noted six key trends and

changes that influence insourcing$/$outsourcing decisions:

$2.$Firms continue to become more specialized in product and process technology. Increased

specialization implies focused investment in a process or technology, which contributes

to greater cost differentials between firms.

$3.$ Firms will increasingly focus on what they excel at while outsourcing areas of

nonexpertise.

Some organizations are formally defining their core competencies to

help guide the insourcing$/$outsourcing effort. This affects decisions concerning what

businesses the firm should focus on$.$

$4.$ The need for responsiveness in the marketplace is increasingly affecting insourcing$/$outsourcing

decisions. Shorter cycle times, for example, encourage greater outsourcing

with less vertical integration. The time to develop a production capability or capacity

may exceed the window available to enter a new market.

$5.$ Wall Street recognizes and rewards firms with higher ROI$/$ROA$.$ Because insourcing

usually requires an assumption of fixed assets $($and increased human capital$),$ financial

pressures are causing managers to closely examine sourcing decisions. Avoidance of

fixed costs and assets is motivating many firms to rely on supplier assets.

$6.$ Improved computer simulation tools and forecasting software enable firms to perform

insourcing$/$outsourcing comparisons with greater precision. These tools allow the user

to perform sensitivity analysis $($what$-$if analysis$)$ that permits comparison of different

sourcing possibilities.