Example: Outsourcing vs$.$ In$-$House Catering for a Corporate Client

Compass Group, a global leader in foodservice, often faces the decision of whether to provide catering services in$-$house or outsource them to third$-$party vendors. This decision can significantly impact profitability and operational efficiency. $$

Relevant Cost Analysis:

To make an informed decision, Compass Group can utilize a relevant cost analysis, focusing on costs that differ between the two options.

In$-$House Catering Costs:

Direct Materials: Food, beverages, and other consumables. $$

Direct Labor: Wages and benefits for chefs, kitchen staff, and servers. $$

Variable Overhead: Costs that vary with the level of production, such as utilities, cleaning supplies, and disposable items.

Outsourcing Costs:

Purchase Price: The cost of purchasing the catering services from the third$-$party vendor.

Relevant Costs:

Direct Materials and Labor: These costs are relevant because they will be eliminated if the service is outsourced.

Variable Overhead: A portion of variable overhead costs may be avoided if the service is outsourced, depending on the specific circumstances.

Fixed Costs: Fixed costs, such as rent and property taxes, are generally irrelevant in short$-$term decisions, as they will not change significantly regardless of the decision. $$

Decision$-$Making:

Calculate Total Relevant Costs:

In$-$House: Sum of direct materials, direct labor, and relevant variable overhead costs. Outsourcing: Purchase price from the third$-$party vendor.

Compare Total Relevant Costs:

If the total relevant cost of in$-$house catering is lower than outsourcing, it may be more cost$-$effective to continue providing the service in$-$house. If the total relevant cost of outsourcing is lower, it may be more cost$-$effective to outsource the service.

Additional Considerations:

Quality Control: In$-$house catering may offer better control over food quality and service standards.

Flexibility: Outsourcing can provide more flexibility in terms of menu options and staffing levels. $$

Risk Management: Outsourcing can transfer some operational risks to the third$-$party vendor. $$

Conclusion

By carefully analyzing relevant costs and considering qualitative factors, Compass Group can make informed decisions about whether to provide catering services in$-$house or outsource them. This approach can help optimize resource allocation, improve profitability, and enhance customer satisfaction.