Vertical Integration and Outsourcing

VERTICAL INTEGRATION AND OUTSOURCING

Vertical Integration and Outsourcing

January 14 , 2008

Introduction

The outsourcing phenomenon started 30 years back when large companies started giving out their work to other small and big companies . The examines the factors that influence outsourcing and vertical integration and examine the factors that prompt organizations to outsource their work

Discussion

The author has given examples of Eastman Kodak , which sold its mainframe computers to IBM and signed a 10-year contract with IBM . In return , IBM undertook the data processing , took responsibility of the

Kodak data centre , provided the operating software and hardware and took responsibility for maintaining the backups and protection . The author reports that this was the first instance where two very large companies had helped each other . The author reports that outsourcing soon became a very big business and the outsourcing business was worth 170 billion USD in 2003 (p . 563

The author has reported further outsourcing activities in which IBM was involved . In 1998 , IBM developed and managed a procurement system for United Technologies (UT ) who make the Pratt and Whitney Aircraft engines , Carrier ACs , Otis Elevators and others . UT managed to save about 750 million USD in procuring costs and IBM was involved in creating the online purchasing system and payments and in negotiating and handling contracts with suppliers . The author reports that in addition to IT services , services that are outsourced include trucking catering , copying and accounting . In 1992 , Du Point sold its copy machines to Lanier and contracted with the company to provide meals for the 40 ,000 employees at its headquarters in Rochester . In 1992 , Kodak sold this operation to the Marriott Corporation . Reebock one of the leading manufacturers of athletic shoes owned no plants but it contracted out all footwear production to suppliers in various Asian countries . Chrysler bought about 70 of its parts from external suppliers in 1999 . The author has argued that Outsourcing involves a fundamental change in organization architecture and that is reassigns decision rights relating to certain assets and employees from one firm to another . The companies that have taken up the outsourced work are able to work in a much more efficient manner and instil their own rewards and recognition system (p : 563

The author speaks of the vertical chain in which consumer goods are produced through a series of steps that is called the vertical chain of production . Giving an example of PC , the author has pointed out that raw materials such as chemicals , metals , rubber , etc . are transported to processors who make the intermediate products which are then again transported to the assemblers who assemble the final product and later sold . Firms can be located at different positions along the vertical chain and when a firm participates in more than one successive stage in the vertical chain , it is said to be vertically integrated . The degree is vertical integration varies with different companies and while Dell out sources most of the components , IBM makes quite a few of...