What does outsourcing cost once you price the risks?
Four options rather than two, because outsourcing is not a switch. Price every drawback in dollars and the option that wins is the one that is best at nothing, which is a result an argument never reaches on its own.
Operations Intermediate Addressing Tradeoffs Pro engine
After you install, this is the model to open.
Outsource or Keep It In House?
- In your spreadsheet, click the Sortia icon in the strip of icons down the right-hand edge. No strip? Click the arrow at the bottom-right to open it. You can also use Extensions, then Sortia, then Open Sortia.
- Click Start from a template and put that name in the search box.
- Pick the card with that name and click Load this template. It arrives on a new tab with real numbers already in it.
This one runs on a Pro engine, and every free install includes five full-quality runs on your own numbers, shared across all five Pro engines rather than five for each. After that, Pro is $199/year.
The answer
- The winner
- $125,000 a year: outsource with a qualified second source
- Its margin
- $60,000 over outsourcing everything at $65,000
- Keep it all in house
- -$185,000 best on quality and lead time, last on the sum
- What the winner is best at
- Nothing second best almost everywhere takes the total
Four ways to source a part, and the argument in the room only ever has two. Value is the annual saving against making everything in house, and every other column is a dollar penalty: what you would pay each year to fix that weakness, with a zero on whichever option is best on that row. Click Run. Outsourcing with a qualified second source wins at $125,000 of adjusted value, ahead of outsourcing everything at $65,000, outsourcing the high volume part at $60,000, and keeping it all in house at minus $185,000.
Now look at what the winner is best at. Nothing. Outsourcing everything has the biggest saving and the best capacity position. Keeping it in house is best on quality, on lead time and on knowledge. The second-source option is second best on almost every row and it wins the total by $60,000, because it takes most of the saving while giving up much less of what makes the saving risky.
That is a shape an argument cannot find on its own, because arguments are won on rows and this decision is settled on the sum. Two numbers deserve a second look before you act. The first is the $185,000 against keeping it in house, which is not a cost at all but the contribution the line could earn on other work. If your factory is not busy that number is zero, and if you set it to zero and rerun, keeping it in house scores zero and is still last, so the answer survives.
That is worth knowing: the winner is not an artifact of the capacity assumption. The second is the margin itself. At $60,000, any single penalty in this table that is wrong by more than that could change the answer, and the one most likely to be wrong is the $120,000 for the process knowledge you lose by outsourcing everything, because nobody has ever had to buy it back.
Move it and rerun. What the tool cannot price is time. Every figure here is annual and steady state, while the transition costs money, takes eighteen months and is where outsourcing programs actually fail. To make it yours, replace the four option names with the arrangements you are genuinely considering, put your own saving in the Value column from real quotes, and set each penalty by asking what you would pay a year to fix that weakness rather than how bad it feels.
The model
It arrives on a tab called Template: Outsource or Keep It In House, carrying these columns:
- Option
- Value ($/year)
- Quality escapes ($/year)
- Lead time you cannot control
- Capacity not sold ($/year)
- Knowledge lost ($/year)
Once it is in your sheet
- The model arrives with real numbers in it and runs as it stands, so you can press the button first and understand it second.
- Change the numbers to yours. The sheet marks which cells are inputs and which hold formulas, and most labels carry a note explaining the row.
- Press the run button at the bottom of the panel. It is labeled for the tool you are in, and the result lands on its own tab, with a written reading of it beside the figures.
Never used Google Sheets? Start here goes the whole way, in seven steps, and assumes nothing.
Next question
- Are three of your regions really scoring the same?Do the Regions Rate Us Differently?
- The season looks fine on pace. Is it really?Will the Season Fill?
- Should weekends be staffed like any other day?Weekday and Weekend Are Not the Same Business
- What is the standing recipe costing you a tonne?The Cheapest Blend That Meets the Spec
- Will the changeover fit inside the weekend?How Much Buffer Does the Changeover Need?
- Same average fill. So why is one supplier a risk?Which Supplier Is More Consistent?
Every model like this one, and the method behind them: Decision trees.