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Why IBM Outsourced Its Personal Computer ManufacturingResearch Paper

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¶ … Outsourcing Practices at IBM

Established in 1910, International Business Machines Corporation (hereinafter alternatively "IBM" or "the company") currently maintains headquarters in Armonk, New York and is a leading global provider of information technology (IT) products and services (Company profile, 2016). Although the company remains a leading provider of IT outsourced services for other companies around the world, IBM has also elected to outsource selected requirements to third world countries so as to better focus on its core competencies in view of increasing foreign competition. To determine the facts, this memorandum provides a critical evaluation of the outsourcing decisions undertaken by IBM in recent years to identify the internal and external factors that resulted in these decisions to outsource and a determination of the cost-effectiveness of these initiatives in view of the adverse public relations that can result from the loss of American jobs. Besides this introduction, the memorandum is divided into four other sections as follows.

The second section presents a review of the relevant peer-reviewed and scholarly literature concerning outsourcing in general and outsourcing at IBM in particular. The third section provides an analysis of the findings that emerged from the literature review and the penultimate section synthesizes these findings in view of the internal and external forces that drive IBM's outsourcing decisions. Finally, a summary of the research and important findings concerning the foregoing issues as they relate to IBM are provided in the memorandum's conclusion.

Literature Review

Over the past 3 decades, there has been a growing trend towards outsourcing various business functions to third-party providers in an effort to improve efficiencies, reduce costs and to develop and sustain a competitive advantage. For instance, according to Hira and Hira (2008), "Whether it's called 'outsourcing,' 'offshore outsourcing,' 'offshoring,' or some other term, it's a phenomenon that cannot be ignored. The media have started to highlight the devastating impacts on individuals and communities, and some politicians have begun to pay attention" (p. 2). Notwithstanding this increased attention from policymakers and others, there has been a dearth of timely and relevant studies concerning the degree to which this growth in offshoring can be explained in terms of manufacturing competitive factors such as flexibility, cost, and delivery (da Silveira, 2014). It is noteworthy that a study by da Silveira (2014) found that the rationale in support of outsourcing related primarily to reduced costs and improved flexibility rather than its effects on delivery.

These are important issues because effective strategic sourcing and source development have emerged as some of the most important challenges facing many companies today (Alfalla-Luque & Medina-Lopez, 2009). Identifying optimal outsourcing practices, though, is not a static affair but is rather an ongoing an iterative process that requires systematic and regular reevaluation to ensure they are achieving the desired outcomes. In this regard, Alfalla-Luque and Medina-Lopez (2009) add that, "[These] industry trends reflect an endless quest for a finish line that does not exist. Only continuous improvement is considered a sustainable philosophy today" (p. 214). Continuous improvement, of course, has been the overarching goal of IBM since its founding, and this has meant a divestment of those manufacturing requirements that can be performed at lower cost more efficiently by third-party providers.

On a positive note, many researchers believe that the eventual outcome of these outsourcing practices by IBM and other leading global enterprises will be an increase in the standard of living in developing nations that provide these services to the extent that over time they will enjoy the same purchasing power as their counterparts in developed nations (Kazmer, 2014). In many cases, this evolution relies on third world countries using manufacturing to achieve this eventual economic parity with the first world (Kazmer, 2014). Indeed, the results of a study by Kazmer (2014) found that by the year 2100, many developing nations will have leveraged their manufacturing capacity in this fashion by moving from raw material exporters to low-level value-added manufacturers to major global manufacturing concerns. As Kazmer puts it, "The good news is that manufacturing acts as a rising tide that raises all nations and our global quality of life" (2014, p. 463). On a less positive note, however, 84 years is a long time to wait for the fruition of these positive outcomes while many people in developing nations continue to subsist on less than $2 a day (Caan, 2015).

This thesis was put to the test in 2002 when IBM began its transformation into an outsourcing corporation following its $5 billion manufacturing outsourcing agreement with the electronics contract manufacturer Sanmina-SCI Corporation (Chung & Jackson, 2002). Although the decision to outsource its desktop personal computer (PC) manufacturing to Sanmina-SCI Corporation was a difficult one for IBM's management team, it became apparent that the agreement was in the best interests of both companies (Chung & Jackson, 2002). In this regard, Chung and Jackson (2002) advise that, "For IBM, outsourcing desktop PC manufacturing furthered its evolution from a purveyor of low-margin hardware to a high-margin services company" (para. 2). The internal forces that fueled this outsourcing decision in 2001 were based on the fact that hardware sales were generating less than 40% of the company's $87 billion in annual sales and the external factor that showed IBM's global services business unit was accounting for fully 50% of the company's profits, a staggering increase from just 12% in 1993 (Chung & Jackson, 2002).

The decision by IBM's management to outsource PC manufacturing requirements to Sanmina-SCI was based on strictly pragmatic considerations. Despite their increasing proliferation in businesses and households, desktop computer manufacturing had been an unprofitable area for the company for several years prior to outsourcing this requirement to Sanmina-SCI (Chung & Jackson, 2002). Outsourcing this requirement to Sanmina-SCI was also highly congruent with IBM's global strategy at the time. For example, Chung and Jackson (2002) point out that, "In fact, the outsourcing arrangement was deemed absolutely necessary to achieve greater cost competitiveness in support of IBM's overall business strategy" (para. 4). In sum, this outsourcing initiative was viewed as the optimal approach to reducing manufacturing costs, improving supply chain efficiencies, and focusing on core competencies, outcomes that drive many decisions to outsource today (Chung & Jackson, 2002).

These same forces have been responsible for much of the outsourcing activity that has taken place in recent years. In this regard, Mackenzie and Decusatis (2013) report that, "The past 2 decades have been characterized by a marked increase in outsourcing stimulated by the imperative of reducing costs or by the managerial maxim of specializing on distinctive capabilities" (p. 3). Taken together, it is clear that IBM has consistently sought viable alternatives to its existing manufacturing needs and has taken steps to reduce costs and improve efficiencies in its supply chain management practices by outsourcing selected manufacturing requirements to developing nations, most especially India as discussed further below.

Analysis

Over the years, IBM has been the resource that many other companies turned to for their IT outsourcing needs (Brooks & Miller, 2009). In fact, the company's profile specifically states that, "The company's Global Technology Services segment provides IT infrastructure services, such as IT outsourcing, integrated technology, cloud, and technology support services" (Company profile, 2016, para. 2). Besides the aforementioned outsourcing agreement with Sanmina-SCI, other major outsourcing agreements that IBM has entered into included a $400 million deal with Proctor & Gamble (P&G) that outsourced all of P&G's human resources requirements to IBM (Lilly & Gray, 2009). Today, though, the research was consistent in showing that although IBM remains a provider of outsourced services, it has also embraced outsourcing some of its own requirements as a viable solution to its supply chain management needs. For example, Hira and Hira (2008) note that, "By 2010, U.S.-based IBM [had] 100,000 workers in India, up from 6,000 in 2003" (p. 160).

Certainly, IBM has not been alone in trying to optimize its supply chain management practices through outsourcing and the company has based these decisions on many of the same reasons as other U.S.-based enterprises in recent years. For example, Vivek (2014) reports that, "A primary reason that vendors enter into outsourcing arrangements is that it provides them with a relatively long-term revenue stream. Long-term outsourcings arrangements help stabilize vendor business volume and revenue, making planning more predictable and increasing shareholder's comfort levels" (p. 34).

Although it is reasonable to suggest that given enough time, IT workers in other countries who have benefited from outsourcing practices in the United States will achieve earning parity with their counterparts in developed nations and the playing field will become more level. Notwithstanding this "rising tide raises all boats" perspective, though, the short-term effects of outsourcing on American IT workers will be severe. This means that companies such as IBM are faced with a dilemma in terms of maintaining positive brand image while balancing the need to eliminate waste and improve efficiencies all along their supply chain.

Beyond the foregoing issues, there has been increasing concern among policymakers and labor organizations concerning the manner in which the U.S.… [END OF PREVIEW]

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