What Five Great Economists Can Tell Us about Outsourcing

This is an excerpt of the original article. It was written for the July-August 2012 edition of Supply Chain Management Review. The full article is available to current subscribers.

July-August 2012

Managers sometimes don’t understand the importance of the information provided by supply chain metrics—or even the need for metrics in the first place. But according to researchers from Penn State, having timely and accurate metrics in place leads directly to superior business performance. They make a strong case for why supply chain metrics really do matter.

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In the early 1990s, business gurus such as Peter Drucker and Tom Peters challenged companies to “do what you do best and outsource the rest.” Business leaders took their advice, and the late 1990s and first decade of the twenty-first century saw a rapid increase in outsourcing. Though the rise in outsourcing is a relatively new phenomenon, the concept itself is anything but new. In many ways outsourcing is as old as commerce itself. As early as the thirteenth century, forms of commercial activities conducted under the “putting out system” linked artisans, merchants, and manufacturers as employers and service providers in what was essentially an outsourcing network.

Starting more than 200 years ago economists and academics began sharing their collective wisdom on ideas that would form the theoretical—and in some instances the practical—underpinnings of modern outsourcing. In this article we focus specifically on five “Big Thinkers” in the world of economics and explains how their insights can help improve your outsourcing efforts. Four of the five have received Nobel Prizes; the fifth, who lived before Nobel Prizes were awarded, is widely considered to be the Father of Modern Economics.

What mystifies us is not how prescient these thinkers were, but how slow businesses have been to understand and apply their concepts and principles. Part of the reason, we believe, relates to the old real estate adage about location, location, location. The “location” of these great economists’ works has been mainly scholarly journals and books written for and read by fellow academics. In these realms, the advancement of ideas and theory far outweigh the actual implementation of the concepts.

Our goal here is to show how these breakthrough economic theories relate to supply chain outsourcing in practice. To put this discussion in sharper context, for each great thinker we share our favorite examples of companies that have successfully implemented these ideas in their businesses. Finally, we offer supply chain practitioners a series of “lessons learned” that are applicable directly to their outsourcing initiatives. Our spotlight shines on these five great economists: Adam Smith, Ronald Coase, Robert Solow, John Nash, and Oliver Williamson.

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