Outsourcing

Outsourcing is utilized to reduce cost, Increase quality, fulfill staffing resources, reduce fixed costs, and Increase profit margins. Any of the aforementioned reasons or combinations offers organizations variable costs (Noreen, Brewer, & Garrison, 2011). Outsourcing has become necessary for many organizations, The economy has changed drastically over the past few years Influencing more organizations to analyze the financial advantages or disadvantages of producing products and services in- house or outsourcing. Numerous components and variances contribute to the cost of doing business.

The cost structure is the primary components of organizations. Some cost structures are fixed, variable, or mixed indicating a combination of fixed and variable. Variable cost is cost associated with activity, if activity increases variable cost increases. Variable cost warrant organizations to modify their business model. Some changes decrease expenses and increase return on investment (ROI). Profits are materialized when investments and expenses are maximized to Increase consistent residual Income. Residual Income “encourage managers to make Investment profitable for the entire company’ (Noreen, Brewer, ; Garrison, 0111.

The Investment of equipment, faculties, and labor Is related to fixed cost. Labor can be classified as fixed or variable, depending on the country in which the labor occurred. In other words, the flexibility of the management dictates the decision on whether labor is fixed or variable. Mixed cost components would be the monthly rent of a facility, labor, the overtime of production and services, and the increase in productivity (Noreen, Brewer, ; Garrison, 2011). The assignment and paper revolves around outsourcing of production or services.

The article regarding outsourcing opens the mind to real life situation. Ford outsourced a portion of their productivity requirement to Visited because of Eviction’s expertise. Eviction’s client base was limited and may cause shareholders concern If his or her primary revenue was lost. Ford’s agreement with Visited equates to 80% of Eviction’s revenue stream (Higher, 2003). Organizations cannot depend on excellent revenue to continue generating the same amount of ROI or long-term client base. Materials, labor, fixed costs, and technological advancements, and taxes increase over time.

The cost of tit geographic changes caused by wars, acts of God, the unemployment rate, and various other elements beyond control. The need to outsource Ford’s business and capture new revenue became apparent. Therefore, Visited contracted with International Business Machines Corporation (MM) to relieve liability of potential revenue loss. IBM has changed directions and narrowed their scope of business. IBM started out manufacturing and selling hardware, mainframes, computers, typewriters, printers, and peripherals. Technology and economics have shaped the direction of most industries.

IBM helped technology evolve and transform changes within industries. Additionally, automation found in many organizations was started with IBM technology created more enhancements leading to rapidly deployed product or service offerings. The numerous changes forced industries and organizations to squeeze every area possible to shrink the cost structure. Profits keep the doors open and shareholders investing more money. Diversification is one way to generate revenue and profits. During the diversification process labor and material change organizations mixed cost.

The variable cost elements are scrutinized and fluctuate until an organization solidifies direction. Sometimes diversifying includes outsourcing pieces of the business model. The outsourcing pieces vary, depending on the product or service the organization provides. The major focus in diversification relies on labor, materials, and sourcing (Noreen, Brewer, & Garrison, 2011). Labor for all industries have a wide range of wages based on Job descriptions and numerous other elements. The same Job at another organization or location in the same industry may provide different wages.

Labor is an expense requiring considerable analysis. Materials are another area similar to labor expense requiring exploratory analysis. Material and labor are key components to cost structure of organizations. Materials maintain fluctuating costs with location or source influencing the cost delivery timeshare, and expense of delivery. Each country, region, or states adds to the cost structure. Some countries have tax advantages and some have disadvantages depending on location (Eunuchs, Wallace, Wilson, Smith, 2004). Sourcing is an essential part of management duties and location of facilities.

The task of developing and maintaining budgets contribute to the performance of an organization. Management’s ability to carry out his or her Job duties in the best interest of the organization reflects on budgeting and management skills (Noreen, Brewer, ; Garrison, 2011). When outsourcing is under consideration an organizations core competencies determine the strength of their business model. Some companies have different opinions of a company’s strengths. An exercise used in mapping out strengths, weaknesses, opportunities, and threats (SOOT) is useful to identify areas warranting attention.

A representative from all management levels and business units should meet to form a consensus on all four fundamentals of SOOT (Mullions & Walker, 2010). SOOT will add validity to areas vulnerable, missing talent, merit outside engagement, and will benefit from cost adjustments. However, in this case generalities will establish objectives and mind shaping ideas. The strength of an organization is the people, which enhance the core competencies needed to succeed. The employee’s skills are prepared to handle the workload.

The gaps in delivering a product or service compose the preliminary area a third party vendor s the lack of skilled labor and gaps in deliverables to supply the product or service at a cost-effective rate. The labor and materials provided by a third party will increase profits without compromising quality. Opportunities will enhance an organization. The enhancements will deliver new revenue streams. The opportunities may open numerous situations resulting in potential profits. The opposite appears in threats. Threats Jeopardize the organization. Competition is the leading agent in extracting revenue.

The operating expenses exceeding ROI, labor, and material can push expenses out of control. However, taking control of expenses by contracting out portions of the business to third parties will off-set expenses stopping the threats and potentially saving the organization from closure or bankruptcy. The decision to in-house or contract to a third party a portion of an organizations product or service depends on the financial outcome. The bottom line for any organization should influence management’s decision. The areas of an organization requiring employees with skills and expertise demand higher wages.

Higher waged Jobs absorb a large portion of the operating expenses. Operating expenses are a huge allocation of the financial structure and cash flow. Operating expenses influences an organizations ability to invest and profits. Therefore, organizations must contain expenses and explorer all options to reduce fixed costs. Labor and material are another part of the operating budget. Every aspect of the operating budget demands scrutiny, evaluation, and comparing in-house to outsourced. In most cases in-house expenses are higher because wages, benefits, and fixed costs are extremely high in comparison to third-party.

Wages, benefits, fixed costs, and time enrich an organization adding alee to the mix helps to Justify outsourcing. Value-added components manifest positive results increasing revenue and production. Outsourcing to a third party should add value. A relationship with a third party must create an extension of his or her existing organization. The contract between both parties should set the terms, conditions, and expectations to ensure clarity. Additionally, outsourcing benefits the contract organization as well as the consumer. When products or services are outsourced a reduction of cost benefits all parties.

Many people do not look at the big picture. Jobs are lost in the country outsourcing but in return the country receives a cost savings to consumer purchases (Gorge & Hanley, 2004). Many companies outsource customer service, information technology help desk functions, and manufacturing, or assembly of parts. Labor and materials in low income, less restrictive labor laws, tax credits, and lower liabilities make outsourcing extremely cost-effective. The reduction in labor, materials, and fixed cost entice management to outsource (Gorge & Hanley, 2004).

Outsourcing in many peoples opinion is taking jobs away from one-country and moving them to another. In the United States volumes of research have been conducted with a range of 300,000 to a projected 1. 4 million will be lost to outsourcing. However, the research cannot identify the exact amount of Jobs lost to outsourcing or natural progression and technology advancements (Gorge & Hanley, 2004). A United Kingdom study reveals more than 68% of organizations outsource a portion of products or services offshore. The same study indicates more than 50% of information technological work outsourced was below par.

Additionally, more than 10% of work outsourced hampered production rage businesses. Small businesses will not profit or meet standard criteria for outsourcing Jobs (Gorge & Hanley, 2004). Some of the concerns people have in the United States is India and China will continue to take away more Jobs. The Jobs in information technology currently outsourced primarily require a college education. India and China have an average of six percent attending college between the ages of 18 and 24. Nonetheless, less than one percent of the six percent speak English.

Other things to consider -outsourced IT hardware reduced cost on the average of 10 to 30% 70% of Jobs in the United States cannot be outsourced -outsourcing has added Jobs in the import of products -outsourcing has increased the number of live contact with organizations instead of digitized prompting and automated responses -the United States economy has a projected growth rate of 13% that will increase the products and services currently offered -even though IT support is outsourced installation and repair will require local technicians and management of infrastructures -outsourcing businesses produced more than $50 billion in revenue for 2004 (Gorge & Hanley, 2004)

Outsourcing is an effective way to lower cost and deliver higher quality service at a more affordable cost. Outsourcing provides an increase in operating efficiency, higher return on assets, and increase in profits. Outsourcing can provide new revenue streams with fewer risk and lower collateral investment (Eunuchs, Wallace, Wilson, Smith, 2004). The make or buy analysis is a fast way to determine whether to in-house or outsource. Make or buy decision method can use full costing, incremental analysis, or variable costing. Full and variable costing process occurs when income statements are prepared. Income statements are not quickly prepared. The main goal is to decide if making or purchasing a product or service is cost- effective.

Another aspect of making or purchasing is outsourcing does not incremental revenue. However, it does allow incremental costs, reduction in fixed costs, and potential savings. The potential savings will materialize in direct labor, material costs, and variable overhead costs (Noreen, Brewer, & Garrison, 2011). The savings from fixed and direct material cost would be seen in reduction of employee salaries, smaller facilities, and smaller facilities should equate to lower utilities. Material cost reduction will be observed by making smaller purchases. The reduction of expenses will carry-on to various other organizational expenses (Noreen, Brewer, & Garrison, 2011).

Astray supported more than one-third of the Fortune 500 companies before the financial scandal in 2008. Astray is a company headquartered in India with more than 50,000 employees in 66 countries. The company enjoyed nine percent growth rate until the scandal. Satyr’s financial scandal devastated the family-owned business. Mr.. Raja managed the company and overstated financial. The inflated financial assets, revenue, and ROI amassed fraud o the level of Enron. Astray is among the largest outsourcing organizations based in India. Outsourcing in the information technology sector generated more than $63 billion in revenue for India. Customer service is the second largest revenue stream in India in the area of outsourced labor (Timings, 2009).

India maintains the largest percentage of outsourcing services in the world. The average salary is $10,250, the average income $8,000, and the average unemployment rate is 10%. However, various industries relies on India and China to squeeze out every penny of profit (Timings, 2009). Variable costs peak creating an environment of inconsistent expenses and profits. Consistent revenue enables price hedging for materials and dependable profits. Shareholders and board members manage investment portfolios with higher probability. Revenue steers long and short-term goals with accuracy. The Astray scenario adds to the degree of accuracy in accounting practices.

Astray provided outsourcing services creating added value to clients. Visited and IBM added value to Ford and outsourcing services. Astray, Visited, MM, and Ford contracted portions of products, services, or outsourcing skills to improve profits and apply quality expertise. Revenue projections strengthen analytical analysis shaping future stock predictions improving profits. The pros and cons of outsourcing take time and careful consideration before the answer is realized on the company’s financial statement. The pros and cons have been highlighted and opinions formed. Those opinions have objectivity and a sense of clarity to establish the strategy or mind shaping events.

Bakery is a virtual company, in this company many things go on, but it only deals with the core functions of the industry when the other portions of the company are contracted out. Since the bakery Is a leader when It comes to the Institutional baked goods market, the business may have ongoing concerns maintaining the quality of its goods and services. The Super Bakery management department agree to put into play the BBC plan (activity based costing plan).

Super Bakery has an extra challenge when putting this operation system to work by doing this plan. The reason for this Is due to the bulk of the functions being contracted out, but the plan is meant to help the company keep control over the contracted out functions. The strategy used by Super Bakery was to Identify an undeserved market and compete in that market. They decided to choose the school system within the institutional food market. The difficulties with this market are government requirements and funding shortfalls.

Super Bakery developed a high nutrient baked good that replaced the high fat donuts because it meets the USDA recommendations or the food that was to be served to the children. This market was also restricted by high costs associated with freshly produced baked goods. Super Bakery went against the market norm and began refrigerating their product. Through the use of vacuum sealing they are able to distribute the product nationally without having to have bakeries in every city, so they made their market anywhere in the US without adding costs.

Since Super Bakery was catering to the school systems, this gave them additional access to cheaper and fresher ingredients. This was due to the different overspent supported commodities which helped their distributors reduce costs by Implementing just In time delivery. Probably one of the most remarkable strategies used by Super Bakery was the outsourcing of the major operations of the bakery business. Super Bakery oversees the production and delivery of their products, but contract out the major functions such as manufacturing, selling and distribution of their product.

In this sense, they are a virtual corporation that oversees the process but doesn’t get bakers flour under their fingernails. The managers of Super Bakery sought out a new method for assigning costs because their old traditional system did not accurately reflect the differences In real cost structure. Super Bakery’s management thought it was necessary to install an BBC system, as an effective way to more efficiently manage the company activities. While attempting to add great value, the business managers desire to make the least investment in fixed assets, staff, and working capital.

Managers inside Super Bakery believe installing an activity-based system was required because the company understood that the company benefited by outsourcing some activities, but also realized the need to control and coordinate these services. The company’s ability to control the cost of the outsourced businesses was a big challenge that leads to manager’s decision to implement activity-based cost system. The management’s reasoning works because an activity-based cost system will enable Super Bakery to create a specific breakdown of the costs of customer’s orders.

Also, the BBC system prevents the distortion that may happen with traditional overhead cost allocation. Management suspects a wide fluctuation in the cost of serving customers throughout the country. A new improved pricing system was required due to orders with low profits margins being subsidized by orders with high profit margins. The key requirement of the new system would enable the company to more accurately assign costs to each customer’s order. The BBC system is beneficial to the company because it can accurately identify to managers which areas are more profitable and assist in strategic product planning.

The internal users will be able to aka better overall financial decisions that will have a positive effect throughout the company. Managers know that the Super Bakery business would certainly benefit from the installation of the BBC system. This reasoning works because in an activity-based costs system costs are tracked by individual accounts according to performances of outsourced activities and presents detailed data concerning workflow cost. The system assigns overhead costs directly to the actual activity cost pool and uses multiple bases.

Management’s plan involves implementing an effective activity-based costing system capable of thoroughly analyzing the company’s many activities. Super Bakery adapted the BBC system over the old traditional system because they realized the advantages in accurately identifying costs(internally and outsourced) associated with the business activities. The managers of Super Bakery found it necessary to install an BBC system that has now proven to be valuable in tracking profitability of individual accounts and outsourced performance. There are two different cost systems that Super Bakery could choose to use.

A Job order cost system is one that takes a specific Job into account and tracks all the costs for that one Job and then totals the costs together. The other system is a process order cost system which is used when a company produces a similar product and tracks the costs by department as a whole. The cost system that would be more suitable for Super Bakery would be a process order cost system. Since Super Bakery is a producer of similar baked goods, specifically doughnuts, and they outsource their entire production line, a cost system would make the most sense for taking into count the many different cost centers.

A process cost system also allow for multiple work in process accounts but Super Bakery has contracts and orders placed by vendors across the United States. With using a process cost system, Super Bakery would be able to keep track of multiple orders and contracts at the same time. Another aspect of a process cost system that Super Bakery can take advantage of is that costs are assigned by department. Super Bakery would be able to track the costs for each vendor and count it as a department.

A process order cost system would be the best option for Super Bakery because it allows for flexibility and the Super Bakery did a great Job figuring out the best cost system for their company. The cost system is activity based cost system that lets the company take full advantage of productivity, and this leaves room to provide each client with extraordinary care personally. The virtual corporation is able to monitor expenses with a minimal in-house staff while controlling outside vendor costs without sacrificing product and customer service excellence.

Printing plates were hard to locate when required for repeat orders which lead to constant delay in start of work. Shank and his crew often had to work overtime to complete the orders due to mismanagement of plates. Biennials is not ready to spend any money to upgrade the system but puppyish wants to improve the storage of plates. He should look to outsource storage and delivery of plates to external firm and introduce ERP technology for the same. WORD COUNT: 120 SITUATIONAL ANALYSIS Paranoia containers Pat Ltd, established in 1977 was a family based business owned by Biennials Meta in Iambi.

They used to manufacture customized aerosol containers and was the sole supplier of cans to BBC Pharmacy, a large NC since 1977. An informal meeting between Biennials Meta and Moan Sings, purchasing director of BBC Company had initiated the business partnership and within a year’s time Paranoia supplied aerosol cans to BBC Pharmacy. Paranoia had created a value on its own through product quality and fast service. Many new customers tied up with Paranoia because of its ever spreading capability and quality service (for which they were known) which resulted into an annual sales of about RSI 315 million by 009.

Biennials was also interested in bidding for new business and supply aerosol cans to Radiant healthcare who were entering Indian market to sell deodorants. Paranoia used to manufacture aerosol cans according to specific customer requirements biz. Size, shape, diameter of cans. These requirements were met by installation of 4 high speed automatic fabrication machines which operated at a rate of 25 cans per minute. The printing department had to decorate cans according to customers specifications and this required a high-capacity machine which could print 300 parts per minute.

By 2010, Puppyish Meta son of Biennials Meta Joined his family business after completing his family managed business (FM) program. On his first day in the company he walked into the printing area and saw Shank, the head printer sleeping on the Job and also observed that operation management in printing department was in total mess. Printing plates required for printing process were hardly found in time resulting in delay of entire process. Upon enquiring from Rakes the Accounts Assistant of the company he got to know that plates used for new orders were kept in storeroom after use to be subsequently used in repeat orders.

But there was no proper mechanism in place for arrangement of plates so they could not be located easily. So to compensate the time lost in finding the plates employees often worked overweight to complete the order. It resulted in extra costs as workers were paid overtime wages and new plates were made only in emergency orders in case old ones were not found. Paranoia received about 60 orders per day and manufactured 30,000 cans per day. It had produced nearly 30,000 designs during last 15 years. Plates of all these customers were maintained for use in case of new order. Maintaining accounts of such vast data required meticulous work.

But Shank insisted that they should hire another person to maintain the registers as he was already busy running the machine but this was not acceptable to Biennials. Puppyish decided to deal with the problems and discuss the same with his father. Puppyish wanted to restructure the storage operations of plates in his company, but further investment is not acceptable to his father. So Puppyish has to come up with a concrete plan whether he should introduce technology for data maintenance of printing plates, reduce the extra costs which are paid for working overtime or he would hire extra employees to maintain the registers of plates.

PROBLEM STATEMENT Improper management of print plates records leading to unnecessary load on the employees of printing department resulting to the low efficiency and extra costs. Biennials was not ready to make any investments in upgrading the present system. OBJECTIVES: 1 . To improve operation and time managing department of printing division with minimum extra cost. 2. To store and locate printing plates in an efficient manner. 3. To introduce technology for maintaining data of printing plates and customers orders. 4. To reduce excessive work load on employees. OPTIONS: 1.

Buy a new warehouse or rent it to store printing plates. 2. To introduce technology like ERP system to maintain computerized data of printing plates. 3. Hire extra people to specifically maintain printing plates registers. 4. Outsourcing the work to some company so they can maintain data storage of printing plates properly. EVALUATION OF OPTIONS: OPTIONS o c s 1. Buying a new warehouse will require lot of investments initially as well further operations costs for running the facility as well buy new equipments. It would be beneficial for proper maintenance of plates, cost incurred would hinder its implementation. Introducing ERP system will professionalism the system. It would store information of each and every plate and employees will be able to prepare printing plates whenever customers place their orders. But it will require huge setup cost and they will have to hire employees and train them. 3. Hiring employees for maintaining record of plates will be a better option keeping cost factor in mind. Although it will lead to extra costs but it will be negligible as they were paying Shank and his crew overtime wages. Also it will reduce unnecessary load of current employees and they will be able concentrate properly on their work.

But for maintaining huge amount of data, use of technology is advisable. 4. Outsourcing maintenance of printing plates to external firm will help Paranoia to focus on its core service of manufacturing and supplying aerosol cans which they are known for. Printing plates can be made depending on customers order and the outsourcing firm can maintain the data according to that. This will help employees of printing department to focus on decorations of cans and need not worry about locating plates for every order. But this implementation requires investment and he will have to convince his father who is not willing to spend any money.

RECOMMENDATION: Puppyish should try to negotiate with his father and convince him to invest money in outsourcing firm and to reduce constant bottleneck in printing department. Although hiring new employees will avoid extra costs but recommendation would be to outsource the work to the external firm. As Paranoia is well known aerosol manufacturer company,they should focus on its better quality service and fast service and let the external firm take care of the records of printing plates. This will reduce load from Shank as well as his crews shoulders and they will be able to work efficiently on printing machines.

CONNECTIONAL: Puppyish has to come up with a concrete plan and convince his father and take him into confidence to invest the money into the outsourcing firm by showing him that they are already spending extra cost due to mismanagement of printing plates so they can cut down on the unnecessary spending which is affecting the company and customers not receiving their delivery orders completely due to orders becoming an emergency order. To implement the idea of outsourcing firm Puppyish should ask his team to float tenders to invite firms interested in storing and delivering printing late.

CONTINGENCY PLAN: Puppyish should implement ERP technology in the firm as the data storage of the printing plates will be computerized. It will equip the company and it would help him as the company looks to expand the business in the future. Word count-11 50 UNDERTAKING To Whom It May Concern: l, Rural Augural, hereby declare that this assignment is my original work and is not copied from anyone/anywhere. If found similar with sources, I take complete responsibility of action taken thereof by WAC team. Signature NAME: Rural Augural ROLL NO: 131246 SECTION: B

To what extent is it necessary for companies to reinvest profits in research and development? In the past 20 years, intellectual property has been highly respected in the world. In other words, there has been a majority of companies that paid more and more attention with regard to the performance of department of research and development (R&D), and especially for technologic corporations that own the fast product-life-cycle.

Despite the fact that some people will argue whether reinvesting more source in research and development is successful strategy or not, an important issue for management studies would be normally discussed to be to what extent companies have to reinvest in research and development. This essay will seek to discuss some solutions of a number of large technologic companies form different views and also try to find the optimum one. Firstly, there are two solutions will be discussed. Secondly , They will be compared each other. In the end, the essay could summarize that which solution is the best.

One way of solving the problem would be to undoubtedly reinvest a significant amount of profits in R&D, even if it may occupy more 15% of the revenue. In fact, John Madden (2010) emphasized that “Most successful companies reinvest 3-6% of net sales into research and development” and some companies in the specific industries would arrive at 15% of revenue into R&D. In addition, according to Chesbrough, H. W. (2006: xix), “Internal R&D was viewed as a strategic asset and even barrier to competitive entry in many industries”.

In particular, those enormous technologic corporations with considerable capitals and extended schemes of R&D could compete, such APPLE, IBM and HTC. Therefore, it could be said that the solution entirely agree R&D is a vital cycle and asset in developing company. Evidence indicates that most products of technologic corporations be probably own shorter product-life-cycle. As a result, R&D will allow the company to create new products continually. Following that, company makes a majority of profit form these new products.

For example, ADES stated that more than 60% of revenue of Xerox earn from the new products that launched in the past two years. Moreover, investing R&D oneself will control the main techniques and put up the higher barriers to control competitor’s entrance. For instance, Apple enterprise continually devotes to discover new technology to take out enormous intellectual patents and then raise their competitiveness. On the other hand, firms need to spend huge time money and manpower to participate in the process of R&D and some companies that want to reinvest in R&D must ante up bigger risk.

Unfortunately, this investment may be frequently sunk costs. A number of businesses fail and go bankrupt in the bad condition. On balance, it is not only unsuitable methods for all enterprise, but it is not unique answer. Another way to solving the problem would be to stop any investment of R&D. This is to say, the corporations do not have to reinvest any resource into R&D and also do not need to organize the department of R&D oneself. However, it does not mean that they must not acquire any new techniques and products of next generation.

They just utilize some methods or strategies to gain a number of technology what they want, such as technical authorization, technical transfer, outsource R&D, hire consultants and enterprise merger and acquisition. To a certain extent, there are probably noticeable advantages in this solution. Firstly, the firms just spend lower cost to gain new technical knowledge and then finish the mission of R&D. Secondly, this should be able to compress the time of researching new technical knowledge and also shorten in the procedure of developing the coming products.

Furthermore, the brilliant product could be successfully launched at the good timing. In contrast, evidence indicates that the strategy of utilizing outsource seem to be marked difficult for how to execute deeply it. There is one instance of enterprise merger and acquisition of exploring the post-acquisition integration risks. According to Chen, C. H. and Shih, H. T. (2008), Whether the mission or vision of the both company is the same or not will be a vital factor. The reason totally affects the success of an acquisition. In addition, how to find out and to purchase the primary techniques is also an obvious problem.

Clearly, this method has some strengths and weaknesses, thus below two will be evaluated as follows. Both methods have probably offered most corporations to solve the R&D problem. Similarly, all of them agree that the importance of R&D and utilizing new techniques in the company. Moreover, there are also the similar risks in both ways. Tassey (1997) stated that uncertainty of R&D is “ the inability to estimate the reward and risk. ” On the other hand, one of their different points is the speed of exploiting new product.

This would seem to be the way of cooperating other R&D institutions. The other one could be whether they can control the key techniques to persistently maintain core competitiveness of the enterprise or not. According to Porter (2004:164), “Technological change is one of the principal driver of competition. It plays a major role in industry structural. ” technological As for that, organizing own R&D might be an appropriate way. Overall, how to keep the main technical knowledge is a very vital around growing energy and supporting stable profit of most firms.

Despite the fact that outsourcing can help corporations acquire rapidly knowledge, reinvesting income in R&D by themselves is apparently better. Obviously, every method has different characters to solve the R&D problem. So people should understand the situation of the companies themselves before choosing the solution. All in all, it is difficult to clearly identify what extent is suitable to plow revenue in R&D related to the large technologic companies to and decide the best way to solve this problem. However, Here there are two methods to solve the problem in this essay. The best way seems to be the first one.

It could be said that should do their own individual R&D seem to be one of competitive capabilities in a firm, and then it may affect the growth of a company in the future, such as launching latest production and recognizing new marking. Nevertheless, they should estimate the overall risk before deciding that. References: ADES (2008) Invest in R&D, It’s vital for your business’ survival. (school practitioner). ADESBLOG Weblog [online] 5th March. Available from: http://www. adesblog. com/2008/03/05/invest-in-research-and-development/. [Accessed 22/8/11]. CHEN, C. H. and SHIH, H. T. 2008) Mergers and Acquisitions in China: Impacts of WTO Accession. United Kingdom: Edward Elgar Publishing Limited. CHESBROUGH, H. W. (2006) Open Innovation: The New Imperative for Creating And Profiting from Technology. United States of America: Harvard Business School Publishing Corporation. MADDEN, J. (2010) Research and Development- reinvestment in innovation [www] Airborn Electronics. Available from: http://www. airborn. com. au/spec/econ. html [Accessed 22/08/11]. PORTER, M. E. (2004) Competitive Advantage. New York: Free press. TASSEY, G. (1997) The Economics of R&D Policy. United States of America: Quorum books.

A network and flow explanation to Zara’ success Angel Diaz and Luis Solis Instituto de Empresa, Maria de Molina 12, 5°, Madrid 28006, Spain E-mails: angel. diaz@ie. edu; luis. solis@ie. edu Abstract Zara is a Spanish fashion manufacturer and retailer that has known swift success. Spaniards have become used to visiting Zara frequently, as there is always a new product. Zara launches 100 different collections every year, with over 11000 models, none lasting more than five weeks in production and with an average lead-time (design to store delivery) of four weeks.

Inditex, the group to which the brand Zara belongs owns five brands with over 1000 stores in more than 30 countries. Although its global sales are still one sixth those of Gap, its sales have increased at an average 30% per year over the last three years, with net benefits over sales of close to 12% in the same period. In this paper we examine Zara’ production and distribution systems, looking for clues to its mass-customization capabilities. We argue that the key to Zara’ success is its Supply Chain (network and flows) approach.

The production network is made of a tightly integrated net of product specialized factories, intensive in capital and run under Toyota’s principles, and a secondary network of over 400 micro enterprises, tightly controlled by Inditex but independent. All these are located in the same small geographical area, Galicia (northwest Spain). The swift flow is facilitated through advanced automation and logistics systems, with emphasis on postponement.

We compare these network and flow approaches to those of Benetton and Gap, and argue that the key to Zara’ success is this combination of a tightly integrated local network coupled to the most advanced flow systems. A final consideration is the sustainability of these orderwinners over time. Keywords: Key words: Zara, logistics network, flow, fashion Introduction Intense competition in the global marketplace is forcing organizations to consider new practices by which they could enhance and sustain their competitive capabilities.

Network configurations and alliances is such one option through which an organization can leverage its resources to compete effectively against fast and nimble competitors. Furthermore, the emphasis on supplier integration in supply chain management has contributed to the growing interest on strategic supplier alliances by companies around the world. Strategic network alliances are innovative and interesting forms of relationships between buyers and suppliers, however, successful supplier alliances have proved to be very elusive for the most part (Landeros and Monczka, 1991).

Despite that academic and practitioner literatures have devoted considerable attention to supply network alliances issues, its dynamics has yet many unanswered questions. Furthermore, most of the literature has focused on cases in few developed countries like USA. There is a need to expand our understanding about international cases since more and more global supply chain networks are becoming more important. The study of the ZARA supply chain network in Spain is a contribution in this direction.

The Spanish integrated manufacturer-retailer of apparel Zara has been defined as the Armani for the masses. Although sales of Zara (close to two billion dollars, comparable to Benetton) are much lower than that of the clothing retailer leader Gap, its financial performance has been bright. Net profits of Inditex in 2001 were 340,4 million €, 31% more than the previous year, out of sales of 3. 249,8 million €, a growth of 24% with respect to 2000. Zara launches over 100 collections per year (11. 00 new garments) and has a total design-to-store cycle time of less than 4 weeks. Every garment will be on sale for a maximum of 5 weeks, after which is removed and sent to discount stores or destroyed. Zara invests close to zero percent of its sales in advertisement (5% of sales for Gap), relying instead on keeping customers perpetually interested in finding new surprises (Zara? s customers visit the conveniently located stores an average 17 times a year). While Gap brands, Zara intrigues.

We argue in this paper that the success of Zara is explained by a business approach in which a highly automated and largely local production and distribution network facilitates very fast response times as the key competitive advantage, and that this design can be due to cultural and market characteristics of Spain. History The founder of Zara, Amancio Ortega started a small garment factory in La Coruna, Galicia in 1963. In 1975 Ortega integrated downstream by opening his first store, Zara. By the end of the decade six stores with that name were located in Galicia.

The eighties saw important changes. Ortega created the parent company of Zara, Inditex (stands for Textile Design Industry) announcing a movement toward integrated designfabrication-retail operations. Also in this period an ex-IBM salesman, Jose Maria Castellano, the actual Vice-president of Inditex, imposed a vision of time-based competition sustained on the intensive use of technology that was to dominate the holding in the future. By the end of this decade Zara had 82 stores in Spain and six abroad.

In the nineties the group developed the quick response, integrated logistics network described in this case. An important milestone was the adoption at the beginning of the decade, and well ahead of other Spanish companies, of Just in Time and lean production practices, with knowledge provided by Toyota, Japan. By the end of the century, Inditex added four new brands, each for a different market niche and with their own distribution channels. At the closing of the 2001 exercise the group had 1080 stores (449 of Zara, that represents almost 80% of total sales) in 33 countries, over 20. 00 employees and the impressive profitability and growth figures mentioned in the introduction. Networks and Alliances Researchers have provided some evidence that companies relying on strategic network alliances are more profitable since closer buyer-supplier relationships may offer many technical, financial, and strategic advantages over spot market transactions and vertical integration (Mohr and Speckman, 1994). Furthermore, strategic alliances provide an effective alternative to improve economies of scale and scope.

Different scholars have studied the antecedents that lead to different forms of network alliances. These studies suggest that assets type involved will impact the type of relationships (Dwyer, Schurr, and Oh, 1987). A different stream of research has studied the relationship between environmental uncertainty and resource interdependence with the nature of relationships. Handy, 1995; and Mohr and Spekman, 1994, have conducted empirical exploratory studies on the formation and evolution of inter-organizational elationships. Production and logistics are largely regional at Inditex, with much less outsourcing than is common in this sector. Why the network evolved into this configuration can be due to cultural characteristics of Spain. There exist a rich literature on collaboration. According to this Industry Networks, a set of organizations that have developed recurring ties when serving a particular market, is a variation of the old idea of industrial districts (Ebers & Jarillo, 1998).

The drivers for collaboration have been extensively analyzed in the literature and can be synthesized in strategies of coespecialization; the search for mutual learning to support fastest product developments, better information and product flows (resulting in cost and time reductions, a dominating theme in logistics); the creation of virtual scale and scope economies; and in the creation of entry barriers, among others (Cervilla and Lorenzo, 2000). Hofstede characterizes Spain? culture as risk avoidance, hierarchical inclined (Granell, 1997). Solis et al. (2000) show that in Spain companies, integration and closer relationships with local and global suppliers in critical processes are becoming paramount. Strategic network alliances require time and resources to be built and sustained. In getting the benefits of integration and synchronization with suppliers, building trust represents the most critical issue for supply network managers.

Important for successful strategic supplier alliances is the communication expected behaviour, particularly the quality of information and participation, and the extent to which relevant information is transparent to suppliers. No less important for alliance success is the existence for a formal purchasing commodity selection process and a formal supplier assessment and selection process. These factors plus a comparatively low degree of outsourcing activity in Spain can explain the formation of this type of network.

Factories Inditex owns 25 factories, each dedicated to capital-intensive activities (dye, cutting) and the production of a family items. The large majority of these are located in La Coruna. Inditex has additionally developed a network of external micro-companies, many households, that provide labor-intensive services, mainly sewing, which has proven difficult to automate. According to Mr. Castellano the local work force has higher labor cost but also faster reaction time (than outsourced production in a low-cost area).

Distribution Inditex owns a single logistics center in La Coruna. This large facility (400,000 square meters) is largely automated, with 2 carrousels for fold garments (60,000 per hour) and 200 kilometers of elevated tracks. Products are transported directly to stores using outsourced but dedicated carriers (Azkar for land transportation –some 80% of deliveries in 2000, and different airlines for exporting, all taking-off from local Galician airports). Flows Two distinct flows can be appreciated at Inditex. One consists of long-term cycles, i. e. purchasing of raw materials and the other a short-term cycle, i. e. , design, fabrication and distribution. The long cycle starts three to six months before each fashion season and consists in the acquisition of two thirds of the raw materials required, mainly cloth (90% of which is sourced from India, China, Morocco, Mauricio, Korea, Italy Germany and Turkey –the remaining one third is supplied during the season), and of one half of all garments (15%-20% is acquired in advance, 50%-60% at the beginning of the season and the rest during the season).

These are those items that are thought to be stable, i. e. , basic products for which demand is fairly predictable. The rest of the garments (those thought to have a higher risk) are produced inhouse in the short cycle described bellow. The short cycle start with design. This is totally an in-house affair in which over 200 designer work simultaneously on three season collections, the current one for modifications and improvements and the next two (winter 2002 is being currently worked on in the Spring of 2002).

Target pricing and low scale customer acceptance trials are usual practices at this step. Patterns are scanned and sent electronically to the manufacturing plants. Here capitalintensive activities such as dying and cutting are performed, while sewing is manually done by the micro-companies described above. Processes in the plants are kept flexible using lean production principles such as multi-skilled and flexible work forces (with an enviable strike record) and simple Japanese-like control systems.

Production is thus pushed into the stores (15% at the beginning of the season, the rest according to demand), where the manager uses hand-held devices (currently Cassiopeia PDAs) to send feedback in close to real time about what moves and what doesn’t (colors, sizes, models), allowing for fast adjustments to the production plan. Replenishment to stores is done twice or three times a week, with a lead-time for existing (or subject to slight design modifications) items of two weeks, and of five weeks for new products. Comments

It is interesting to compare the strategy of Zara/Inditex to that of Benetton (a similar sized competitor) and of the market leader Gap. Of the three the more integrated, both upstream and downstream is Zara/Inditex. Benetton produces through a network of mainly regional subcontractors, distributes from a centralized, automated warehouse and retails through franchises. Gap subcontracts production to a network of global producers (over 3000 in more than 70 countries) and has a network of global warehouses and distribution centers. Design Zara Benetton Gap Own- continuous Own-periodic Own-periodic Production Distribution 0% own regional factories Centralized D. C. 50% subcontractors Own stores Regional subcontractors Global subcontractors Centralized D. C. Franchises Decentralized warehouses and D. C Zara/Inditex model is not a fashionable global, outsourced network. It evolved as a probable consequence of limitations in the Spanish market, but has proven that a vertically integrated local network when linked to advanced manufacturing and information technology practices can result in quick response times with little stock or waste, a by-product of the synchronization of offer and demand that the integration nature of the process allows.

Postponement of the (in-house) fabrication of fashion items considered of high uncertainty, plus the flexibility and quick response implicit in the lean and automated process results in low levels of stock (40% less than Gap, is proportion to sales) An important question is now whether the organization of Mr. Ortega and Castellano can maintain its characteristics and stellar performance as global growth takes place. Due to European expansion a new distribution center is being built in Zaragoza, close to the French border and facilities for production in Mexico are being considered.

Labor shortages in the small Galician area have also been reported. The organization could then decide to play in a niche market position and remain as it is, duplicate the actual local Galician network in other regions (e. g. , Mexico) or move towards a global and more externalized network. If the last, and arguably most probable option is pursuit, the challenge for Zara/Inditex will be to maintain their current flexibility. References Cervilla y Lorenzo (2000): “Redes de empresas y tecnologias de informacion: copciones para el desarrollo de la PYME”. Debates IESA.

Vol. 5. No. 1. Dwyer, F. , Schurr, P. , & Oh, S. (1987). “Developing buyer-seller relationships” Journal of Marketing, vol. 51 (2), 11-27. Ebers, M. y C. Jarillo (1998). “The construction, forms, and consequences of industry networks” International Studies of Management & Organization. Vol. 27. No. 4 Granell, E. (1998). Managing cluture for success. Ediciones IESA, 1997. Handy, C. (1995). “Trust and the virtual organization” Harvard Business Review, vol. 73(3), 40-50. Landeros, R. , & Monczka, R. (1991). “Cooperative buyer/seller relationships and a firm? competitive posture”. International Journal of Purchasing and Materials Management, vol. 11, 2-8. Mohr, J. , & Spekman, R. (1994). “Characteristics of partnership success: Partnership attributes, communication behaviour, and conflict resolution techniques”. Strategic Management Journal, vol. 15(2), 135-152. Solis, L, & Escobar, D. , (2000). “The Management of Successful Strategic Alliances in Supply Chain Management Networks: An Empirical Study of Success Factors in Spain” Proceedings of XXXV CLADEA Annual Meeting, September, Barcelona.

Lightwave Technology, Inc. is a lighting company owned by partners George Kinson and Dr. Schyler Weiss. The company focuses on marketing blue LED lighting products as a replacement for an ordinary LED lighting. The idea of blue LED technology rooted from Weiss and Kinson’s hobby in electronics during 1990’s (Timmons and Spinelli 2007). The two started their business by financing it using their own savings and credit cards. They also spent money to ensure patent of their technology and products. The products are marketed to various business industries like hospitals, schools, residences and others that use lighting (Timmons and Spinelli 2007).

Since the day that the two introduced their idea of blue LED, different industries started to recognize its economical, financial and environmental benefits. Unlike ordinary LEDs, blue LEDs has low UV output, long lifetime and strong color contrast. Furthermore, a lot of savings can be achieved by using blue LEDs due to its flexible characteristics and wide range of use. Weiss and Kinson strongly believe that their product is perfect to industries that use a lot of lighting like hospitals, factories and residences (Timmons and Spinelli 2007).

Manufacturing of lights are done through outsourcing. The company provides the idea and the complete product description as well as the materials to be used to the manufacturers in US and China. Between the two, the manufacturer in China offers lower cost than the one in US that is why more orders are produced in China (Timmons and Spinelli 2007). As more and more industries recognized the benefits of using blue LEDs, Lightwave Technology continued to expand, achieve profitability and even established a joint venture with a Japanese distributor in Tokyo.

In accordance, competition with other giant companies became tighter and the two decided that an initial public offering (IPO) was their best strategy. However, the 9/11 incident resulted to the decline in revenues of lighting industries including giant manufacturers like GE and Philips lighting. Now, the two are deciding on what to do next to keep their business moving forward (Timmons and Spinelli 2007).

References: Timmons, J. and Spinelli S. (2007) New Venture Creation. Mc Graw Hill Professional.

The key revenue drivers for Pkolino are the tables that they plan to sell, They plan on starting out with two high end tables in the first two years of business and then moving on to developing a mid level table in its third year. These tables are going to be the main point of sales for the company. Pkolino plans to sale a large majority of these tables during the holiday season (fourth quarter) in which they plan on making a significantly large portion of their revenue. Pkolino plans to influence its revenue drivers, its tables, by also selling storage units and toy kits as well.

These toy kits and storage units are products that are going to be bought at a much faster rate than that of the tables and can greatly influence the sale of tables. These products are said to be bought on a much more frequent pace than the revenue drivers, the tables, being purchased at a rate of up to three to four times a year. The key cost drivers for Pkolino is production of its products of which it plans to outsource during the entirety of the life of the business, Pkolino plans to start out by outsourcing its manufacturing to Brazil then moving to a larger Asian manufacturer by year three.

I think in all the projected expenses for Pikolino are a little low with is understandable because you want your company to appear as efficient as possible. They seem to be running on a very low expense system in which they plan on outsourcing and cutting expenses to be as efficient as possible. As an investor I would challenge the projected sales of Pkolino. I would question this because we live in such a technology driven world that it would be hard to imagine a company as such growing to a million dollar company as projected in there proposal.

I would also challenge the expenses. Even with outsourcing I don’t think all cost were present and well represented. Companies that outsource also have to take in account the cost of getting things to and from the countries of which they outsource from as well as the negative connotation of outsourcing in itself. Week 6 Case Study B: DayOne DayOne has the potential to be a really great investment. It is a company that relies so heavily on great customer service and wealthy customers that there is a substantial amount of hesitation in investing in it as a chain though.

DayOne has established itself as a strong hold in San Francisco despite having a worthy adversary in the local hospitals. I think that with the right business plan, that is specifies for being a retail chain, that DayOne would be a great investment. As long as they are put in wealthy communities that show a steady birthrate, you will always have new customers. The problem comes with maintaining customers after they’re children grow. DayOne can look into expanding being just infants and maybe open a new branch that is for older children as well. The gross margin on service sales is 39. 2 percent.

Day One can improve service sales by providing more cost efficient service. They can do this by either reevaluating the services that they provide or by charging more for these services. DayOne is trying to raise enough money to pay off its debts from opening its first center and to open a second center in Palo Alto. The total amount they needed was upwards of 1. 6 million dollars. I think that only trying to raise enough money to do this will result in them being in a similar predicament that they were in with the center in San Fansisco.

DayOne should look to improve their business plan so that they can secure funds to open several new centers as well as have funds to run these center for at least two quarters. I think that DayOne should seek to raise as much as 7 million dollars to effectively start a successful chain of centers. Andrew needs to focus on developing a more chain oriented business plan that differentiates from the one he used for his San Francisco location. Andrew needs to make sure that this new plan is more investor friendly. There is a reason why he is struggling attracting investors. Also read Sunbeam corporation case study

He needs to figure out what the problem is and make changes in his proposal. He has a proven business but to have a successful chain it can entail an entire different business strategy. I would invest in DayOne if they agree to improve their business model to be more efficient and would agree to maintain the extraordinary level of customer service that they seem to have. DayOne has a proven track record of making its customers happy and providing top notch service. They have proven that their business model is effective and can be a great addition to any cities market.