Offshore outsourcing and ownership of facilities with productivity concerns

ABSTRACT

We examine how companies may create appropriate portfolios of onshore/offshore facilities. Such decisions are complex due to demand volatility, payoff uncertainty, decentralization, productivity differences, and location uncertainties. We study a Build–Operate–Transfer (BOT) scenario where an offshore supplier builds a facility and trains workers and the principal leases it for a period before purchasing it. The parties participate in BOT only if both are better off in relation to continued leasing. The decisions of the principal and supplier include the size, unit price, and productivity of the offshore facility and an appropriate experience level for managing it. We show how economic equilibrium can be restructured to overcome productivity concerns. Although productivity improvements help both parties, we find that the principal stands to gain more. Such improvements should be scheduled early if the principal is sufficiently experienced in offshore operations and delayed if the on-the-job learning is rapid. We establish that the principal should not purchase the facility if productivity cannot be maintained at a pre-purchase level. We also find that an experienced principal can benefit the supplier, not just herself. We develop simple rules for assessing the viability of offshore outsourcing and for allocating budget for productivity improvement.

KEYWORDS:

• offshore outsourcing
• build-operate-transfer
• productivity improvement
• cost and risk
• economic equilibrium

Additional information

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Amiya K. Chakravarty

Amiya K. Chakravarty holds PhD and Master's degrees in operations research from the London School of Economics, and a Bachelor's degree in engineering from the University of London. He was appointed a professor and endowed chair in Operations and Supply Chain Management at Northeastern University, and held the Freeman endowed chair at Tulane University, USA. He was awarded the Fulbright Distinguished Chair in Austria by the Fulbright Commission, USA. He has published over 100 refereed articles in top-tier journals; and has written four books on interdisciplinary issues in supply chains, including supply-chain transformation. He has served on the editorial boards of prominent journals, and is currently serving as a department editor. He helped set up research programs on telecom service-chain at UCD, Ireland, and supply chain analytics at Lucent technologies. He has been a keynote speaker at many international conferences, organized focused symposiums, and has served as conference-chair. He has delivered faculty seminars at eminent universities worldwide. He has conducted research in the automobile, telecommunication, and aeronautics industries. His research interests include globalization, outsourcing, humanitarian operations, intellectual property, supply-chain restructuring and agility, supplier coordination, and manufacturing/inventory systems. He has led initiatives on system improvement, faculty development, industrial affiliates, and has built strong faculty groups. He has served as a vice president of POMS.