Outsourcing and cutting staff can lead to disaster!

In tough times, many companies slash staff and turn to outsourcing, yet that strategy may doom their products says a new US study

And, in good times, as with Toyota, losing control over critical components can contribute to failure, according to the study led by Lyda Bigelow, strategy professor in the University of Utah's David Eccles School of Business
Bigelow’s team found that companies were more likely to fail when they outsourced components critical to their competitive position.
"Across the board, we find statistically significant increases in the failure rate for firms that don't consider transaction costs in their outsourcing decisions," she said. "Firms need to look beyond production costs to other costs such as poor quality, delivery delays and risk of price increases by suppliers."
One of their previous studies shows that failure rate increased between 5% and 70%, depending on the risk associated with making technological changes, product type and company market share. 
Two modern examples with outsourcing problems are Toyota and Boeing.
"This is a critical strategic choice that firms make," Bigelow said. "Companies need to retain adequate control over specialized components that differentiate their products or have unique interdependencies, or they are more likely to fail."
For Toyota, those components were the electrical system and the accelerator. For Boeing, the attachment of the Dreamliner's wing to the fuselage was crucial. For other companies, success or failure might hinge on something such as customer service.
For Toyota, their research suggests that outsourcing amid its strategy of accelerated growth may have led to the company's current woes.
"In this situation, it's no surprise when things break down," Bigelow said. "In 2004 and 2005, Toyota's premier goal was to overtake GM. This desire for rapid expansion, combined with increased complexity in its designs, left Toyota with few supply options, as generating an in-house infrastructure to accommodate increased production would've taken years."
Consequently, Toyota had to increase exposure among suppliers who often had weaker incentives to maintain and improve quality.