OUTSOURCING VALUE CREATION ACTIVITIES: ACHIEVING OVERALL OPTIMAL PERFORMANCE
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Transcript of OUTSOURCING VALUE CREATION ACTIVITIES: ACHIEVING OVERALL OPTIMAL PERFORMANCE
OUTSOURCING VALUE CREATION ACTIVITIES: ACHIEVING OVERALL
OPTIMAL PERFORMANCE
Shishank Shishank
1
Dr. Rob Dekkers
2
1Research Student, University of the West of Scotland, Paisley Campus, High Street, Paisley, Scotland,
PA1 2BE.
Telephone: +44 141 848 3664 - Email: [email protected]
2Division Management & Business Economics, University of the West of Scotland, Paisley Campus,
High Street, Paisley, Scotland, PA1 2BE.
Telephone: +44 141 848 3876 - Email: [email protected]
ABSTRACT
Decision-making on outsourcing takes place at different levels of strategic, tactical and operations
within a company. Distinguishing these levels will help assigning specific frameworks and
requirements for each of these three processes and simultaneously assist in free and continuous flow of
information from one framework to another. During the stages the decisions differ; during pre-design it
concerns mostly of subsystems or equipment and during later stages it turns to detailed production
planning and is based on the availability of information and different levels of aggregation. In stages
information is transformed according to specific requirements of the individual process hence,
probability of distortion of this information during change remains high. In light of the significant
impact outsourcing has on the overall performance of the organisation, the development of an
integrated multi decision making criteria and a framework on different aspects of outsourcing
incorporating the accurate transformation of information during different stages.
Keywords: Manufacturing, Decision-making, Strategy
INTRODUCTION Over the many years outsourcing has played a vital role in the overall performance of the organisation.
Outsourcing has been viewed as a form of predetermined external provision with another enterprise for
the delivery of goods and/or services that would previously have been offered in-house (Quinn &
Hilmer, 1994; Beaumont & Sohal, 2004; Finlay & King, 1999; Elfring & Baven, 1994). This is
especially true in light of recent managerial trends that advocate focusing on core competencies to gain
competitive advantage in the industry (Quinn & Hilmer 1994). The prospective of outsourcing has now
shifted from activities like ICT to outsourcing value creation activities such as design, engineering and
manufacturing engineering. However, organisations do not have a set criteria and a model, which
supports the decision-making during different stages of the value creation activities in terms of
outsourcing (McIvor 2000; Dekkers 2000). The information available to the managers and engineers
during the different stages of these value creation activities of design, product development and
engineering is incomplete and hence, not all desirable information for decision-making is available. But
both the engineers and managers will need to make decisions on sourcing of subsystems, components
and parts at all stages of design, engineering and manufacturing engineering.
The current literature, as will be demonstrated later, calls for the development of an integrated
decision making model criteria and a framework on different aspects of outsourcing incorporating the
accurate transformation of information during the different stages of these value creation activities and
the criterion adapted by the engineers and the management in the industry.
BACKGROUND
Industrial companies face a challenging environment. The global market affects industrial companies
by the competitive environment and the possibilities for outsourcing. This is discussed by Dekkers
2000, where he presents how globalization affects manufacturing with the development in data and
telecommunications, in information technology and the diminished trade barriers. This leads to the
possibility of manufacturing and assembling of parts and products at the most suitable place anywhere
in the world. Boeing for its new 787 Dreamliner outsourced its manufacturing process to 70 suppliers
across the globe. Boeing increasingly focuses on its core competencies in high-end design, engineering
and systems integration, outsource to suppliers that are highly focused on their own core competencies,
continually striving to create additional value in everything they do while achieving optimal
performance of operations. By specializing on a limited activity structure, outsourcing companies have
been able to improve the performance of their in-house activities (Quinn & Hilmer, 1994; Ellram and
Billington, 2001). Baxter et al. (1996) suggest that companies shift away from vertical integration to
strategic dualism and clustered control. Hence, outsourcing becomes not only an issue for decision-
making (Dekkers 2006) but also demands for continuous and free flow of information during the
different stages of value creation activities. The state-of-the art communications technology enables the
organisations to control activities at great physical distances without the necessity of meeting or
traveling around the world. Due to increased competition, companies face the choice of either
specialization or differentiation. Both choices provide opportunities for cost-reduction, improving lead-
time and meeting customer demands. The challenges handling the varying lot sizes, reduced lead times
and increased product variety have left the manufacturing industries with no other alternative than to
modify their strategies as per the contemporary market environment (Chan et. al, 2006). Outsourcing
decisions (Baden-Fuller and Hunt, 2000) play a vital role in the overall performance of an organisation.
According to Quinn and Hilmer (1994), a major strategic concept in outsourcing decisions is core
competencies. Outsourcing raises the key issues which areas of the manufacturing are needed to
maintain the value-added chain and on which key area’s the company should concentrate for achieving
optimal performance. Beaumont et. al 2004 emphasis that the decision on outsourcing depends on
whether to insource or outsource the activities based on the objective to achieve long term competitive
advantage and optimal performance (Klier 1994). However, to address contemporary issues of
manufacturing, industrial companies need an integral approach to bridge strategy and operations.
SCOPE OF PAPER History of outsourcing is aptly summarized by Lonsdale and Cox (2000) as some kind of substitute for
conglomeration, horizontal integration, vertical integration, and internal integration. As Beaumont and
Sohal (2004) suggest outsourcing is a fashionable way of solving some business problems and there are
numerous reports of its increased use. On the other hand, outsourcing is a strategically important
activity that enables an enterprise to achieve both short and long term benefits (Wu et al., 2005).
Strategic outsourcing in terms of sustaining long term performance (Wu et al., 2005), the transaction
cost theory (Williamson 1979) and the core competency model (Quinn, 1994) are well discussed by
academia. The literature available on outsourcing decision making models suggests that none of these
models take into account the criteria of free flow of information during the different stages of value
creation activities (Dekkers, 2000). In light of the significant impact outsourcing has on the overall
performance of the organisation, the motivation for developing an integrated multi decision model and
framework on different aspects of outsourcing incorporating the accurate transformation of information
during the different stages of these value creation activities and the criterion adapted by the engineers
and managers in the industry is evident.
This paper addresses this issue from the point of view of the non availability of complete and
undistorted data for decision making during the different stages of the value creation activities i.e.
design, engineering and manufacturing engineering.
OUTLINE OF PAPER
The first part of this paper reviews the current literature in this area from a strategic, tactical and
operational level. The paper reviews the mechanism beginning with an overview of a process model
(Dekkers, 2002) for outsourcing. The second part of this paper looks at the requirements for an
outsourcing decision making model framework(s) with continuous information flow. Finally a
conclusion is provided.
LITERATURE REVIEW
There are, of course, many reasons for outsourcing, the main one being the ability to purchase
components, sub-assemblies, finished products or services from outside suppliers when internal
production capacity is limited. An enterprise will also outsource its business when it does not possess
the crucial technology, but still wants to seize the business opportunities presented (Wu et.al, 2005;
Julka et. al., 2006; Klier 1994). Outsourcing enables an organisation to better marshal its own resources
and those of external agents who have the required expertise and specific technologies to accomplish
all the tasks involved (Wu et. al 2003). Effective use of outsourcing will, therefore, allow an
organisation to focus on a limited set of strategically important tasks and will in turn lead to continuous
development of core competencies (Quinn 1992; Kotable 1990; Venkatraman 1989). For many years
companies have been encouraged to pursue strategies of identifying and focusing on core competencies
– the skills, knowledge and technologies that a company must own in order to compete effectively
(Hamel and Prahalad 1994). Over time, the perceived potential for outsourcing has expanded to include
critical areas of activity such as design, manufacture, marketing, distribution, and information
technology with almost the entire value chain open to the use of outside supply (Jennings 1997).
However, this does not lead directly to a clearly defined manufacturing strategy for global
manufacturing (Dekkers 2002).
Before embarking on the issue of undistorted and free flow of information across the different stages
of design, engineering and manufacturing engineering, it is necessary to understand the requirement of
transformation of information across these different stages in context of outsourcing. For this purpose
the process model (Figure 1) defined by Dekkers (2000) for outsourcing is used in this paper.
Figure 1: Process Model for Outsourcing at strategic, tactical and operational level.
(Source: Dekkers 2000)
The model ranges from early supplier involvement during the design and engineering phases to
operational decisions during manufacturing. This model takes into account both the market strategy and
manufacturing strategy to achieve the optimal performance levels. A transparency is required with
regards to outsourcing, relating products to processes, performance requirements and core
competencies whilst making decisions.
Outsourcing at strategic, tactical and operational level
In an organisation decision-making on outsourcing takes place at strategic, tactical and operational
levels (Dekkers 2000). Figure 1 represents this notion, showing the breakdown of overall strategy into
its components. It is important to distinguish these three levels to help assigning specific frameworks
and requirements for each of these three processes.
Outsourcing at strategic level
Strategy here refers to a set of co-ordinated objectives, action programmes applied to the firms
manufacturing function, acquiring resources, the utilization of these resources and linking them.
Strategy suggests how the resources should work together to achieve objectives (Brown et. al, 2003)
including the achievement of the performance levels at optimal level (Haberberg et al 2008). Hayes
and Pisano (1994) assert that a successful manufacturing strategy is not simply manufacturing – by, for
example, adopting JIT, JIS, TQM, or some other three-letter acronym – it is a strategy for using
manufacturing to achieve competitive advantage and optimal performance levels. The manufacturing
strategy ensures a match, or congruence, between the company’s markets and the existing and future
possibilities of enhancing performance levels of an organization (Brannemo, 2005). Outsourcing is one
of the many notions like supply chain management, vertical alliances, lean supply and industrial
Defining Manufacturing strategy and strategic decision making on outsourcing
Engineering
Tactical Decision making on outsourcing
Pre-Design
Manufacturing Engineering
Suppliers
Design
Purchasing and Contracting
Manufacturing and Assembly
Pre-
select
ion of
Suppl
iers
Deve
lopm
ent of
Manu
factur
ing
Proce
ss
networks that have emerged from the extensive amount of literature produced in the last two decades in
relation to manufacturing management. Outsourcing links capabilities to the availability of resources as
part of a network, extending beyond current performance capability of the organizational itself (Bock
2007; Jennings 1997; Philpott et al., 2004; Dekkers 2000; Wang and Chen, 2008). Indeed there is
evidence that outsourcing contributes positively to market value of an organisation (Rappaport, 1986;
Hayes et. al. 2000). Furthermore, for outsourcing to be meaningful, both value creation and value
appropriation processes must be appraised (Auguste et al., 2002).
For many activities, outsourcing has been adopted on a simple value-for-money basis (Alexander and
Young, 1996). This is supported by the research conducted by Lonsdale and Cox (1997) which
suggests that outsourcing decisions are rarely taken within a thoroughly strategic perspective, with
many firms adopting a short-term perspective and being motivated primarily by the search for short-
term cost reductions. The strategic approach to outsourcing provides the firm with information about
main activities that can potentially be outsourced (Quelin and Duhamel, 2003). When considering
outsourcing at strategic level, the value chain expresses the necessary processes and order flows for
delivering goods and services to customers (Dekkers 2000). Furthermore, with the advent of e-
commerce and the relative ease with which suppliers across the world can be identified (Momme 2002)
leads to the supply chain being wide open (Jennings 1997) to the use of outside supply. Analyzing the
firm’s value chain reveals the value created by the various activities in its chain (Heikkila and Cordon,
2002). It also reveals the activities are linked to each other and to other activities in the whole value
system. The management of the linkages among activities in the system is essential to creating and
sustaining competitive advantage. Porter’s concept of value chain (Porter 1985) supports that
optimization over the whole value chain aims at meeting the customer needs and achieving overall
performance requirements. Because of intense competition, organizations are forced to reassess and
redirect scarce resources (Jennings, 2002; Ketler and Walstrom, 1993; Kriss, 1996; Razzaque and Chen
1998; Dritna 1994; Ketler and Walstrom 1993; Leavy 1996; Quinn 1999) via different forms of co-
operation like acquisition, alliances, joint ventures, consortia, and networks which depends on overall
control mechanisms with their supportive information systems needed to kept up–to-date with the
changing environment (Johnson et al., 2008 page 358).
Strategic decisions in an organisation are based on business environment, costs, supplier
relationships, technology and capability (Jennings 1997; Talluri and Narasimhan 2002). Understanding
the clients as well as business needs is the requirement for setting the performance criteria to achieve
optimal performance levels. As the subsystems are in a continual state of interplay the feasibility of
course of action for each of these set criterions is important for achieving the set goals.
There are, however, potential pitfalls when outsourcing for strategic reasons. As quoted by Kremic
et al., 2006 organizations may “give away the crown jewels” if they are not careful (Gillett, 1994). If
companies outsource the wrong functions they may develop gaps in their learning or knowledge base
which may preclude them from future opportunities (Earl, 1996; Prahalad and Hamel, 1990).
Specifically, in highly integrated and evolutionary technologies, applying the traditional core
competencies tests may result in outsourcing too many or the wrong functions. Literature also suggests
that in industries with complex technologies and systems, internal synergies may be lost when some
functions are outsourced (Quinn and Hilmer, 1994).
Outsourcing at tactical level When a customer orders a product for delivery and engineering has to start, the combined capabilities
of engineering and manufacturing determine performance of the overall process (Dekkers2002). To
achieve the integration, manufacturing management should participate actively in product development
(Bock 2008; Hayes and Wheelright 1984; Welch and Nayak 1992). Therefore, product development
should address issues for manufacturing strategy to gain competitive advantages and achieving
acceptable levels of performance (Fogarty et al., 1989). As Dekkers 2000 points, the issues that need to
be addressed to gain competitive advantage are:
• Managing the value chain. This includes decision-making on alliances and networking to
supply new products to the markets.
• Improving the core competencies and exploiting outsourcing for optimization of manufacturing
processes.
• Paying attention to process innovation for meeting performance requirements.
A strong co-operation and communication between product development and manufacturing leads to
growth of these issues. Erlandson and Yxkull (1993), mentions product development concentrates
mostly on the products and its aspects, so if manufacturing aspects were to be addressed, they need to
be compared with decision-making on product level. Furthermore, Dekkers 2002 suggest that the use of
stage/gate methodologies prove important for managing product development, at each gate assessment
of manufacturing aspects allows linking the manufacturing strategy to product development. The
manufacturing aspect should include outsourcing (Dekkers 2000, Tsai et al., 2005), production
planning (Malhotra et al., 2001; Julka et al., 2006), materials management (Brown et al., 2003),
technological criteria (Dekkers 2000), performance requirements (Brown et al., 2003) and process
development (Dekkers 2002). Process development refers (Dekkers 2002) to improving the existing
manufacturing methods, the sourcing of new processes and the assessment and acquisition of new
manufacturing technologies. Descending the product structure results in greater detail both for
descriptions of the product and processes (Figure 2).
Figure 2: Product Structure (Source Dekkers 2000)
Product
Assembly 2 Assembly 1
Part
Component
Sub-Assembly
Increase in Detail
The decision-making while descending the product structure should be transparent in terms of
outsourcing, relating product to processes, performance requirements and core competencies during
different stages of these value creation activities such as design, product development, engineering and
manufacturing engineering.
Outsourcing at operational level Outsourcing decision-making at operational level takes into account capacity utilization in view of
optimizing performance levels (Dekkers 2002) and competitive analysis (Momme 2002). Laudon and
Laudon 1998 refer to the focus on capacity utilization, seen from the point of view of managing
outsourcing. Wang and Chen 2008 suggest process mapping by information systems will reveal which
operational decisions (Probert et al. 1999; Ashford , Dyson and Hodges 1999) on outsourcing improve
overall performance. This reflects the interrelationships of existing activities and resources as well as
the interdependencies of the decision-making during the different processes (Philpott et al, 2004).
The strategic, tactical and operational outsourcing activities must be viewed as derivatives of the
competitive priorities and decision categories that define the manufacturing strategy (Hayes and
Wheelwright, 1984; Miltenberg, 1995) and to achieve the optimal performance levels (Dekkers 2000;
Johnson, 1997).
MANUFACTURING AS PART OF THE PRIMARY PROCESS
Since manufacturing is a part of the total primary process, strategy is too. Figure 3 shows the
breakdown of the overall strategy into its components: marketing strategy, product development
strategy and manufacturing strategy. Although each strategy will generate in depth details, these
strategies should have a strong common link but the factual direction of the separate strategies diverges
(Wheelwright 1984, Dekkers 2002) during the implementation of decision-making in each field, thus
reducing the total efficacy from strategy formulation and implementation.
Figure 3. Components of Strategy
Figure 4 depicts manufacturing as a part of the total primary process. Manufacturing provides the
marketplace with products by being a subsystem on its own, as well as connecting the processes of
product development and engineering to the market. The new competitive landscape in many industries
Overall
strategy
Marketing
strategy Product
development
strategy
Manufacturing
strategy
is one of ongoing and heightened levels of competition, which demands flexibility, delivery speed, and
innovation. However, firms remain highly dependent on an elite strategy-making group at the top of the
organisations hierarchy (Hayes and Wheelwright, 1984; Brown, 1998a).As a result of this, a state of
strategic dissonance (Brown, 2000) occurs not only in firms chosen markets but also within the firm
itself; in the mismatch between strategic intent (Hamel and Prahalad, 1989) and operations capabilities
(Canez et al., 2000; Seeley et al., 2001). The firms need to integrate their strategies to achieve the
overall optimal performance levels (Dekkers, 2000; Jiang and Qureshi, 2005).
Figure 4: Total Primary Process (Source: Dekkers 2002) Manufacturing management is confronted with increasing pressure on overall performance (Nellore
and Soderquist, 2000; Howells, 1999; Murray and Kotabe, 1999) and reducing costs (McCarthy and
Anagnostou, 2003; Koszewska, 2004). The issues for management relate to the set-up of the primary
process and control, leading to increased competitiveness in today’s global market. Schroeder et al.
(2002) argue that managing resources and creating competitive advantage by meeting performance
requirement does not suffice, since creating unique proprietary processes and assets contributes
strongly to profitability and long term competitiveness. In effect, this notion links to research
undertaken in to the adaptation of organizations to the dynamic changes of the environment (Dekkers,
2000). This point to major issues within the manufacturing strategy: capabilities relate to outsourcing
and process innovation, and capabilities relate to strategic and tactical resource management. The
strategy should eventually define performance requirements (Teece, 1987; Anderson and Weitz, 1986)
and the criteria to meets the strategic objectives. In other words strategy has two components: the
exploitation of the competitive advantage and the acquisition plus utilization of resources to create
advantage (Dekkers, 2002; Doh, 2005). Therefore, it is axiomatic that manufacturing should be
connected to the overall primary process to improve the overall performance of the resources and
structure the utilization of resources by making explicit decisions on outsourcing, whether it concerns
suppliers, alliances or partnerships, provides an opportunity to achieve optimal performance levels and
adapt more flexibly to the changing market demands imposed on the industrial firms. This is backed up
Engineering
Pre-Design
Manufacturing Engineering
Suppliers
Design
Purchasing and
Contracting
Sub-assembly & Assembly
Manufacturing
Domain of Manufacturing
Domain of engineering
Domain of sales
by Wheelwright (1984), Mole et al. (2001), Taps (2001) who suggest that the manufacturing strategy
should be incorporated in to the overall corporate strategy to achieve long term competitiveness.
As an important aspect of the strategy, outsourcing provides the opportunity for acquiring
manufacturing technologies to expand capabilities (Kogut and Zander, 1992; Teece et al., 1997; Levy,
2005, Momme, 2001). At the same time it enhances the focus on the firms own capabilities to achieve
leveraging of the performance of its manufacturing system (Friedrich, 2000).
Thus outsourcing evolves from both technological demands and performance requirements. The
recognition of competencies creates insight into the load on the available resources, and the remaining
capacity of resources is available for optimizing the performance of manufacturing through in- and
outsourcing.
EXISTING OUTSOURCING DECISION MODELS
The outsourcing decision making models discussed in the literature take into account the concept of
core competencies (Prahalad and Hamel, 1990), control of component knowledge (Quinn and Hilmer,
1994), long-term performance (Wu et al., 2005), strategic decision making and core competencies
(Dekkers 2000), combination of transaction cost economies and the core competencies concept (Arnold
2000).
The major ideas of the outsourcing decision models proposed by Prahalad and Hamel (1990), Quinn
and Hilmer (1994), Olsen (1997) and Dekkers (2000) are summarized in Table 1.
Table 1: Comparison of outsourcing decision models by Prahalad and Hamel, Quinn and Hilmer, Olsen and
Dekkers
Approaches to
outsourcing
Prahalad and
Hamel (1990)
Quinn & Hilmer
(1994)
Olsen (1997) Dekkers 2000
In – house manufacture Critical effect
on feature of
final product
(core
component)
High potential
competitive edge;
high strategic
vulnerability (high
control
component)
Nil Critical effect on
the final product
(core
component)
Collaboration Nil Medium potential
competitive edge;
medium strategic
vulnerability
(medium control
component)
High strategic
importance of
purchasing;
difficult to mange
the purchasing
situation.
High strategic
importance of
purchasing;
difficult to
mange the
purchasing
situation.
Transformation of
information during
different stages
Nil Nil Nil Nil
Source: Derived from Wu et al., 2005 and Dekkers, 2000
The core competency model by Prahalad and Hamel, 1990 is based on the identification and
strengthening of core competencies within an organisation. They identified access to wide variety of
markets, a significant contribution to the perceived customer benefits of the end product and difficult
for competitors to imitate. A ‘core’ competency is one which is critical to the functioning of the
product; a ‘non-core’ component denotes otherwise. In practice it may be difficult to judge with
certainty whether a product or process should be categorized as core or non-core (Murray and Kotabe,
1999; Hibbert 1993; McIvor, 2000).The application of concept of core competencies in outsourcing
became very popular among researchers. The concept has been predominantly used to develop and test
various outsourcing decision frameworks arguing that the core activities shall remain in house.
Quinn and Hilmer’s model (1994) focuses on the control of component knowledge. The properties
of components including the potential competitive advantage and strategic vulnerability form the basis
of this model. Here, Vulnerability denotes the degree to which the technological content of a particular
component can be deciphered and captured by a competitor.
Olsen’s model (1997) seems to place an emphasis on the effect of outsourcing on production with
the aim to avoid disruption. As Wu et al, 2005 suggest this model employs two indices: one to indicate
difficulty of sourcing a component, and the other the criticality or relative importance of that
component. Olsen’s model emphasis on the effect of outsourcing on production with the aim to avoid
disruption. It’s main line of thought still seems to be dictated by the traditional outsourcing, ignoring
the important issue of long-term performance.
Dekkers model (2000) assists management in strategic decision-making, supports the phases of
development and engineering, and improves production planning. It combines technological aspects
and performance criteria, allowing co-operation between development, engineering and manufacturing.
This model combines process mapping with decision-making. At each level of the product structure,
processes are mapped and compared to technological and performance criteria. This model includes
decision-making on outsourcing during the stages of product development.
On summarizing the contents of Table 1, it is clear that in literature little or no research has been
undertaken on the development of an integrated concept of outsourcing decision making model during
the different stages of design, engineering and manufacturing engineering incorporating the free flow
of information across the stages of these value creation activities. Furthermore, figure 2 depicts that
information is transformed and becomes more complex as it descends the product structure. In which
case outsourcing decision making during the different stages of the value creation activities should be
transparent while undertaking process innovation and manufacturing management.
OUTSOURCING AND FLOW OF INFORMATION
In most theories about outsourcing processes the perspective has been focused on exploring certain
issues emerging within the phases of the process (Perunovic and Pedersen, 2007). It has been admitted
that the information is not perfect and new economical models emerged to explain situations where two
parties possess unequal or none quantity of information. Application of the economy of information in
manufacturing management is associated with outsourcing decision-making during the different stages
of the value creation activities such as design, engineering and manufacturing engineering (Figure 4).
Undistorted and free flow of information is necessary to facilitate the managers and engineers in
outsourcing decision-making. However, the economy of information hasn’t been explicitly used in the
studies of the outsourcing decision-making process (Perunovic and Pedersen, 2007).
FUTURE RESEARCH
The research so far led to the review of the literature on outsourcing decision-making models. During
further research a decision-making model will be designed to incorporate the economies of information
during the different stages of the value creation activities. Secondly, the prototype will be tested via
multiple case studies in the manufacturing industry across Scotland. The prototype will be developed in
stages and development of each stage will be influenced by the performance of previous designs or
deficiencies in the decision making criteria will be corrected to meet the functionality, robustness and
the desired goal. Thirdly, the intension exists to transfer the method into a tool for use by professionals
in manufacturing management. The method as such will provide guidelines for the development of this
tool.
CONCLUSION This paper is the first in series of the overall exploratory study to be conducted as a valuable means of
searching the literature; to seek insights; to ask questions and to assess phenomenon in a new light on
outsourcing and related subjects. Traditionally, the study of outsourcing and its determinants has
focuses on economics approaches, such as from the perspective of transactional costs theory, which has
received much empirical support in outsourcing decision making analysis (Walker and Weber 1984;
Murray et al., 1995). Furthermore, Tomas and Vicor (2005) analyzed outsourcing with a strategic
approach using resource-based view of the firm as the reference point. Quinn and Hilmer (1995)
suggested that firms concentrate on resources and capabilities where they can achieve pre-eminence
and provide unique value for customers. As Dekkers (2002) identifies that strategic resource and
capabilities are hard to detect in practice (Tsai et al., 2005) and also, the bulk of literature seems to
focus on reasons for outsourcing, pro’s and con’s of outsourcing, critical success factors and on which
activities primarily are outsourced in certain industries (Tayles and Drury, 2001; Ettlie and Sethuraman
2002).
On reviewing the literature it is evident that to achieve optimal performance levels outsourcing
should be carried out from the strategic perspective and integrated in to the overall strategy of the
organisation (Dekkers 2002; Philpott et al., 2004). Further more the literature identifies the gap in
academic literature on strategic aspects of outsourcing for industrial companies and the criteria adopted
by the engineers and management in the industry. In an age where management weighs the costs and
benefits of investment, finding evidence of the decision making criteria for outsourcing is critical. As
summarized in Figure1, by defining a manufacturing strategy, the systematic decision-making on
outsourcing strategic, tactical and operational levels becomes possible. During all the stages of
manufacturing process the decisions differ; during pre-design it concerns mostly subsystems or
equipment and during later stages it turns to detailed production planning. During all these stages
information is transformed according to specific requirements of the individual process hence,
probability of distortion of this information during transformation remains high.
In light of the significant impact outsourcing has on the overall performance (Dekkers 2000, Talluri
and Narasimhan 2001; Gadde and Jonsson, 2007; Jennings 1997) of the organisation, the motivation
for developing an integrated multi decision making criteria and a framework on different aspects of
outsourcing incorporating the accurate transformation of information during different stages of these
value creation activities and the criterion adapted by the engineers and management in the industry is
evident.
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