Ops Mngt Lesson 5 Exercise
In October 2007, IBM announced that had awarded an outsourcing contract to AT&T which will provide outsourced telecommunication and networking services to IBM. The deal is worth $1 billion and it will last 5 years. IBM will transition an unspecified number of employees to AT&T. A link to the announcement follows:
This blog will analize the above case as an example of supply chain de-integration, but first a little of history about IBM supply chain de-integration.
IBM succeeded with vertical integration for many years, in 1989 the company had $60 billion in sales and 420,000 employees. But from that point on, the company began to experience increasing competition from more agile competitors that were highly networked with strategic alliances focused on providing unique core competencies.
After losing billions in the early 90s, IBM shifted from a command and control vertical integration to a service-based networked integration, shedding employees, and gaining back revenue.
The AT&T outsourcing deal is one more of the many movements IBM took in the last years to de-integrate his supply chain
Accordint to Slack et al (p. 75) the movement should benefit IBM in the following aspects:
- Quality: ST&T is a telecommunications company that is specialised in this area, quality should improve as the range of skills and economies of scale that AT&T have are bigger than IBM's.
- Speed: IBM requirements regarding speed can be built into the AT&T outsourcing contract in the form of SLAs (Service Level Agreements)
- Dependability: Again, SLAs should assure delivery on time
- Flexibility: The way the outsourcing contract will be built will determine the flexibility, but usually it exist a high range of variation that the contract permits, so in this case, the flexibility is increased a lot and this is, in my opinion, one of the main benefits of the operation.
- Cost: One of the main reasons for outsource is reducing costs and headcount. In fact AT&T said that "the deal is not expected to materially impact its financial results", making clear that the company doesn't expect huge profits from the operation in the short term (although in the long term the deal could help AT&T to reinforce his position as a global communications provider)
This is a long term relationship so can be considered as a partnership relation that has as main concept, according to (Slack et al p.216), the closeness of the relation ship is influenced by a number of factors, the following will take part in this deal:
- Success is shared. From the deal, IBM will obtain flexibility, innovation and probable cost saving and AT&T will obtain reinforcement of his overall position as communications provider and an considerable source of revenue)
- Long term expectations. Clear from the paragraph above
- Problems will be solved together
- A lot of information sharing
Supplier selection is another important concept talking about supply chain de-integration, according to Slack et al p. 218, the following aspects, among others should be considered:
- Range of product or services. Surely the range of products, regarding communications that AT&T has is very high, taking into consideration that this is their core business (and not IBM's)
- Quality. Communications is the AT&T core business so the quality should be high
- Delivery and volume flexibility. This will be assured by the outsourcing contract and facilitated by the economies of scale AT&T can achieve
- Ease of doing business. IBM already signed an outsourcing contract with AT&T in 1998 that lasted several years so, IBM already know very well AT&T as a provider (see link below)
The deal can also be seen as a movement towards what is called like "agile supply chains" (Slack et al, p.214) as the main objectives of the deal, from my point of view, are to increase responsiveness and produce innovative products.
However the deal can have some disadvantages for IBM, compared to the current situation, among others:
- If problems arises, these can be more difficult to trace as the visibility is reduced to the level that AT&T decide
- Communicating of quality problems can be also difficult as these will have to be articulated by the mechanisms that the contract will provide
- Improvements when needed will take more to implement (and may require contract re-negotiations)
- Speed will be assured by the Service Level Agreement in place, but exceptions can be difficult to manage