Outsourcing V/s Backward Integration

Outsourcing is a mantra today for development of business and it has definitely eased the nerves of the business heads. nowadays, the person who buys a photocopy machine for his office is called a fool and should be called so because the cost intensive industries needs less head breaking and more structuring. Outsourcing lets that happen and keep the operations' guys happy.

Backward Integration on the other hand is a buzzword attached to the most respected entrepreneur of the millennium - Dhirubhai Ambani. Reliance Industries integrated back to Petrochemicals, getting key material for its Rayon Business, and was immensely successful. Well now is he an exceptional fool or a magician?

Let us see. How did he do the magic then? Well, suppose, the office guy has a demand of 100 photocopies per day and to meet the demand, he wants to buy the machine. But he learns the nearby Pappu xerox-wala meets a daily demand of 1000 copies from nearby offices. He thinks that with the businesses growing, it will increase and Pappu is the only one in hte market to meet the demand. Using his clairvoyance, he bought two xerox machines and hired a guy. Now, he was in direct competition with Pappu and he had another business too which runs well with the photocopy machine around. He could keep costs lower than Pappu and he became an outsourcing centre.

Similarly, Mr. Ambani got a license for 25000 tpa when market requirement was only 15000 tpa. But he outsourced thereby keeping his main business running and getting raw material at very low costs. Magic was outsourcing and not backward integration. So next time you guys want to keep a non-core operation to your hearts, either outsource it or start an outsourcing centre.