Case: Outsourcing for the First Time

Cindy Anderson has just been hired as an MBA graduate from The Ohio State University. Her new employer, Red Mountain Lab, is an independent testing service that serves the pharmaceutical companies and the FDA. Red Mountain's business is to test pharmaceuticals for purity, following strict Food and Drug Administration (FDA) guidelines. Red Mountain is at the beginning of a process to analyze all of its activities and better understand its value proposition. It is counting on Cindy to use the tools she gained in her MBA program to help them structure their analysis, ask the right questions, gather data, and make changes. Based on the outcome of this analysis, it may decide to undergo a massive reorganization that includes outsourcing many of its activities.

Right now, Red Mountain Labs does most of its work internally. Its pharmaceutical company customers have numerous independent labs they can send their products to for testing. The FDA regulates Red Mountain's labs. Thus, the results of Red Mountain's tests go to both the pharmaceutical company and the FDA. The accuracy of its tests is critical to the lives of patients who are given prescriptions. Yet there is a great deal of pressure to turn the tests around on a timely basis so that the drug lots can be released and go to market. Red Mountain labs has a solid customer base and has built its reputation upon:

• Fast turnaround of tests
• Accurate test results
• Specialty in testing all types of antibiotics
• Excellent computer interfaces with customers, allowing rapid access to data
• Good working relationships with the FDA

Red Mountain is not known for being a low-cost service; indeed, its prices are higher than many of its competitors. However, there is currently a great deal of pressure on the FDA by the pharmaceutical companies to certify more labs for independent testing. The pharmaceutical companies argue that this would bring testing prices down through greater competition. More importantly, they argue that this would also speed the release of drug lots to the market. Faster testing would significantly reduce inventory levels and associated carrying cost of inventory, so the pharmaceutical companies could lower their prices to the industry.

Case Questions

1. If you were Cindy, where would you begin? Outline the key steps and questions to be asked in this process.
2. Who (functions, levels) should Cindy enlist on the cross-functional team to investigate the possible reorganization and outsourcing?
3. What is Red Mountain's core competency?