20th International Conference on Production Research

OUTSOURCING DECISION MAKING WITH INCONSUMMATE AND INCOMPLETE INFORMATION: A FRAMEWORK

S. Shishank, R. Dekkers Business School, The University of the West of Scotland, Paisley, Scotland Abstract The decision to outsource an activity or a part of an activity is one of the most complex decisions facing todays managers. It is characteristic of the stages of design; engineering and manufacturing that these stages encircle different levels of details at different levels of aggregation and reliability. Several models have been developed to assist outsourcing decision making assuming that information is rigid and available at the initial stage. The primary purpose of the paper is to review and analyse some of these models and propose a new outsourcing decision making framework incorporating the role incomplete and inaccurate transformation of information during different stages might play in outsourcing decisions. Keywords: Design, Engineering, Manufacturing, Strategic, Tactical, Operations.

1 INTRODUCTION Outsourcing, de facto a key component of strategy for companies to be a form of predetermined external provision with another enterprise for production of goods, components and parts that would previously have been manufactured in-house [1][2][3][4]. Outsourcing has been aptly summarized by [5] as some kind of substitute for conglomeration, horizontal integration, vertical integration, and internal integration. As [2] suggest outsourcing is a fashionable way of solving some business problems and there are numerous reports of its increased use by companies. Outsourcing can also be considered as a strategically important activity that enables an enterprise to achieve both short and long term benefits [6]. All available frameworks on outsourcing decision making assume that all information required for decision making is available at all levels (strategic, tactical and operational) and at all stages of design, engineering and manufacturing [7]. It seems from literature that many approaches on outsourcing rely on the deployment of criteria derived from the traditional make-or-buy decisions [8]. Strategic outsourcing in terms of sustaining long term performance [6], the transaction cost theory [10], the resource based view [11] and the core competency model [1] are well discussed by academia. This paper will review the criteria and present a framework, which supports decision-making during different stages of design, engineering and manufacturing [12][7] incorporating the assumption that information available to the managers and engineers during the different stages of design, engineering and manufacturing might be inaccurate and incomplete and hence, not all desirable information for decision-making is available [13]. Before embarking on the issue of inconsummate and inaccurate information across the different stages of design, engineering and manufacturing engineering, it is necessary to understand the transparency of information across these different stages in context of outsourcing. To accommodate decision making on outsourcing at strategic, tactical and operational levels the continuous decision making model (Figure 1) defined by [7] for outsourcing forms the basis of this research. This is the evident choice as this model ranges from early supplier involvement during the design and engineering phases to operational decisions during manufacturing.

Figure 1: Continuous Outsourcing Decision Making Model; Dekkers, 2000. 2 SCOPE OF PAPER The framework will expand on continuous decision making model on outsourcing by [7] and will incorporate the inconsummate and incomplete information. The criteria for choice of the specific models on outsourcing decision making and linking outsourcing to primary process are discussed in section three and four. Section four is further subdivided in three sections and discusses outsourcing at strategic, tactical and operational level. Section five discusses decision making on outsourcing and section six presents a framework on outsourcing decision making. In the last section of this paper conclusions are drawn; this paper establishes that inconsummate and incomplete information has a significant affect on outsourcing decision making during different stages of design, engineering and manufacturing. 3 MODELS AND FRAMEWORKS FOR OUTSOURCING In this section models and frameworks from literature on outsourcing are classified based on decision making during different stages of design/product development,

Pre-selection of suppliers

Development of manufacturing process

Defining Manufacturing strategy and strategic decision making on outsourcing Tactical Decision making on outsourcing Pre-Design Design Engineering Purchasing and Contracting Suppliers Manufacturing Engineering Manufacturing and Assembly

Table 1: Models and Frameworks for design, engineering and manufacturing outsourcing decision making Pre -Design/ Author/Year Design/ Product development X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X Engineering Manufacturing Strategic Tactical Operational Incompl ete Informati on X

Dekkers, 2000 Prahalad and Hamel, 1990 Momme, 2002 Boer et al., 2006 Quinn and Hilmer 1994 Tayles and Drury, 2001 Nellore and Soderquist, 2000 McIvor, 2000 Canez et al., 2000 Wu et 2005 Fan 2000 al., Ying,

Platts et al., 2000 Brannemo, 2005 Alexander and Young 1996 Teixeira and Almeida, 2006 Eck et 2004 al.,

X X X X X X X X X X X X X

X X X X X

Talluri and Narasimhan, 2001 Arnold, 2000 Wheelwright, 1984 Anagnostou and McCarthy, 2003

Note: Because of the space restrictions the references cited in the text are mentioned in the reference list. Those in this table have been omitted from the reference list. engineering, manufacturing and at strategic, tactical and framework(s) were keyed in Google Scholar to search operational level. The focus of this exercise was to referred articles on outsourcing. A total of 31 articles on extract articles on outsourcing decision making models or outsourcing decision making models and/or frameworks frameworks from the vast array of literature available on were collated. The models and/or frameworks presented outsourcing. Different combinations of the word in Table 1 discuss the decision making process in detail outsourc(e)(ing) with the words decision making, but not all coherently bind the decision making criteria strategic, tactical, operations, operational, design, and explain the continuity of decision making on engineering, manufacturing, supply chain, model(s) and outsourcing during different stages of design, engineering

20th International Conference on Production Research

and manufacturing at strategic, tactical and operation level. The limitation of the paper style restricts in tabulating only a total of 20 models and framework. From this table it is established that existing outsourcing decision models do not take into account inconsummate and incomplete information. The table helps establish that [7] model on continuous outsourcing decision making is the only model that addresses the issue of inconsummate and incomplete information during the stages of design. There are other articles [13] [6] which touch on the issue but do explain the issue in detail. 4 OUTSOURCING AS A PART OF PRIMARY PROCESS Primary process for the purpose of this paper is identified to comprise of the stages of pre-design, design, manufacturing engineering and manufacturing. Decision making on outsourcing takes place at strategic [14] [15] [1] [13] [12] [17], tactical [15] [18] [20] [21] [22] and operational level [22] [23] [13] within an organisation. The models considered are differentiated on the basis that they all address strategic, tactical or operational level decision making on outsourcing. A brief review of some of the models follows to prove that incomplete and inconsummate information does not form a part of these models of decision making on outsourcing. The framework from [13] focuses on the development of strategic sourcing model by integrating cross-functional activities to ensure that the decisions relating to make or buy are made in line with the strategic direction of the company. The framework from [18] identifies four areas to cluster relevant factors for make or buy decisions: technology and manufacturing process, cost, supply chain management and logistics and support systems. [19] conducted research in packaging industry concluding that as with any other strategic decision, outsourcing decisions must be evaluated by their effects upon the competitive advantage and the decisions consonance with changes in organizations environment with the need to revise the decisions at regular intervals. The model for outsourcing from [22] brings together four major elements outsourcing subject, outsourcing object, outsourcing partner, and outsourcing design. All the models tabulated and a few that are described have similar stages, but differ in the detailed steps they recognise within the outsourcing decision making process at the strategic, tactical or operational level. The scope of the research does not require detailed comparison of these frameworks. All these models recognise the importance of specific characteristics of outsourcing decision making at the strategic, tactical or operational level. Most of the reviewed literature on outsourcing decision making is dominated by cost perspective [26] and core competencies (Arnold, 2000), an indirect indicator that authors have mentioned the importance incomplete and inaccurate information [22] but have not elaborated on the issue. The choice to refer to the model from [7], has the basis in the characteristics of the models of the outsourcing decision making referred in this paper, the scope of the model, and the emphasis on continuous evaluation of outsourcing decision making. The continuous Decision-making model on Outsourcing encompasses strategic, tactical and operational decision making; this makes this model more suitable than the others to serve as a basis for this particular research. Additionally, this model 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 (Figure 2), processes are mapped and compared to technological and performance criteria indicating the need to incorporate incomplete information available during the decision making process. For each level of the product configuration processes should be available to evaluate product proposals with the manufacturing aspects. Descending the product structure results in greater detail for descriptions of the products as well as the processes. The mapping of the processes per level of the product structure with the subsequent evaluation of the processes against technological and performance criteria creates transparency and improves interaction between engineering and manufacturing. Product

Assembly 1

Assembly 2 Increase in Detail Sub-Assembly

Component

Part Figure 2: Product Structure. To summarize, reviewed literature suggests that 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 inconsummate and incomplete information across the stages of pre-design/design/product development, engineering and manufacturing engineering. 4.1 Outsourcing at strategic level Strategy as propagated here refers to objective setting, acquiring resources, the utilisation of these resources and linking them [37] Strategic decisions on outsourcing in an organisation are based on business environment, costs, supplies relationships, technology and capability [19] [21]. Outsourcing at strategic level links the capabilities to availability of resources as part of a network, extending beyond current performance capability of an organisation itself [19] [27] [7] [28]. The strategic approach to outsourcing provides the firm with information about main activities that can potentially be outsourced [29]. Indeed there is evidence that outsourcing contributes positively to market value of an organisation [30] [31]. There are, however, potential pitfalls when outsourcing for strategic reasons. As quoted by [32] organisations may give away the crown jewels if they are not careful [33]. If companies outsource the wrong functions they may develop gaps in their learning or knowledge base which may preclude them from future opportunities [33] [14].

Table 2: Decision making on outsourcing Core Competency X X X X X X X X X X X Transaction Cost Economies X X Satisficing Incomplete Information

Author/Year Arnold 2000 Dekkers 2000 Quinn and Hilmer 1994 Prahalad and Hamel Zhu, hsu and Lillie 2001 Dhawan, Srinivasan, Rajib and Bidanda, 2008 Boer, 2006 Ngwenyama and Bryson 1999 Heikkila and Cordon 2004 Howells 1999

Note: Because of the space restrictions the references cited in the text are mentioned in the reference list. Those in this table have been omitted from the reference list. Specifically, in highly integrated and evolutionary decisions on outsourcing, whether it concerns suppliers, technologies, applying the traditional core competencies alliances or partnerships, provides an opportunity to tests may result in outsourcing too many or the wrong adapt more flexibly to the changing market demands functions. Literature also suggests that in industries with imposed on the industrial firms. complex technologies and systems, internal synergies 5 DECISION MAKING ON OUTSOURCING may be lost when some functions are outsourced [1]. Available studies on outsourcing decision making were Decision making on outsourcing at the strategic level is reviewed and analysed, pointing the multiple-criteria dictated by the customers and internal performance character of outsourcing and make-or-buy decisions [12]. criteria for sustained strategic health of the companies. Table 2 categorises the core of decision making criteria 4.2 Outsourcing at tactical level on outsourcing. Most of the reviewed papers fell into the category of core competency and transaction cost At tactical level the combined capabilities of engineering economies. Only a few research papers have indicated and manufacturing determine the performance of the what role inconsummate and incomplete information [13] overall process [35]. To achieve the integration, [7] might play in the outsourcing decision making manufacturing management should participate actively in process. But both the engineers and managers will need product development [36] [23] [38]. Therefore, product to make decisions on sourcing of subsystems, development should address issues for manufacturing components and parts at all stages of design, strategy including outsourcing to gain competitive engineering and manufacturing engineering, a systematic advantages and achieving acceptable levels of set of criteria and a model for outsourcing decision performance [38]. This implies firstly, that if the making during the stages of design, engineering and manufacturing aspects were to be addressed they need manufacturing at strategic level, tactical level and to be compared with decision making at product level. operational level is imperative even when information Secondly, proper decision making on outsourcing during available is incomplete and inaccurate. all stages of design, engineering and manufacturing is available. This decision-making is also found in Quality 6 INTEGRATED FRAMEWORK FOR OUTSOURCING Function deployment. Only that this method does allow DECISION MAKING direct comparison on product level to include The framework intended to be developed will use inputs manufacturing aspects directly, at which product from theory and enhance on the continuous outsourcing development aims. Therefore, the manufacturing aspect decision making model by [7] as described above. This should include outsourcing [7], production planning [39] framework will assist the management in strategic, [40], materials management [41], technological criteria tactical and operational level decision making on [7], performance requirements [41] and process outsourcing by during the phases of design and development [35]. engineering and improve production planning by integrating detailed information. The information and 4.3 Outsourcing at operational level decisions differ during each stage of product Outsourcing decision-making at operational level focuses development; during pre-design it mostly concerns subon capacity utilization [42] for optimizing performance systems and during later stages it turns to detailed levels [35] seen from the point of view of managing production planning. Product subsystems may be outsourcing. At this level process mapping will reveal defined either by the customer, through tender which operational decisions on outsourcing will improve specifications, or by engineering design. During initial overall performance. This highlights that strategic, phases of product development, estimates only and not tactical and operational outsourcing activities must be complete specifications are available. [17] address the viewed as the derivates of decision categories that define role of specifications in outsourcing decision making. The manufacturing strategy [23] and be integrated into the framework will suggest close co-operation between primary process. Manufacturing forms part of the primary engineering and manufacturing, including procurement. process of companies as shown in Figure 1. The new Procurement decisions take place at different stages of competitive landscape in many industries is one of product development. The level of detail in specifications ongoing and heightened levels of competition, which is an important issue that determines the effectiveness of demand flexibility, delivery speed, and innovation. the procurement [42] function. Therefore, it is axiomatic that manufacturing is connected to the overall primary process by making explicit

20th International Conference on Production Research

This framework will involve decision making on supplier involvement at early stage of design and engineering ranging to operational decision making during manufacturing assisting in preliminary development of conceptual design and definition of major components and systems [42]. Such decision making will help companies to concentrate on its core competencies as well as the capabilities of the suppliers to the company. This implies that only those activities for which the firm do not have any special capabilities or those for which the firm do not have a strategic need are outsourced [43]. Adoption of resource based view [17] i.e. firms concentration on its own set of core competencies [14] and providing unique value for the customers is a direct consequence of outsourcing decision making. This leads to a strong need for the companies to clearly identify and maintain its core competencies. In the past, the application of core competency theory has not led to a clearly defined manufacturing strategy for global manufacturing, outsourcing and resource management [7]. Further this framework will facilitate the principle of Engineering-to-Order by encompassing control mechanisms on lead-time, product flexibility, volume flexibility and emphasis on efficiency and stock control. The execution of the outsourcing decision making process should support the management of the overall business process, thereby aiming to meet these performance requirements. At this stage incomplete and inaccurate information is available for outsourcing decision making. This framework will allow the manufacturing strategy including outsourcing to relate to the market strategy and the strategy for developing new products. Here process mapping will be combined with decision-making. At each level of the product structure, processes will be mapped and compared to technological and performance criteria, a recurrent process at every stage of the pre-design, design, engineering, manufacturing engineering and manufacturing. Outsourcing decision making at all the strategic, tactical and operational level might utilise the same method but the information at all stages (predesign, engineering and manufacturing) will differ and decisions will be different. In contrast with the existing approaches, this research, intends to derive a holistic and multi criteria decision making framework on outsourcing decision making and capture in structured manner inconsummate and inaccurate information whilst making such decisions. In this section, the motive and the necessity to develop such framework were discussed. This is a research in progress and the next stage in development of this framework is to confirm what approaches (for e.g. satisficing, multiattribute decision-making, neuro-dynamic programming approach, fuzzy logic, set based concurrent engineering) are to be mapped at what level of outsourcing decision making for all strategic, tactical and operational levels and for all stages of pre-design, design, engineering and manufacturing engineering. 7 CONCLUSIONS This paper aims to contribute to both theory and practice. The intended outsourcing decision-making framework addresses the gap identified in the literature on implications of inconsummate and incomplete information during outsourcing decision making. Traditionally, the study of outsourcing and its determinants has focuses on reasons for outsourcing, pros and cons of outsourcing, critical success factors and on the activities primarily outsourced in certain industries. This paper has highlighted the importance of inaccurate and inconsummate information on outsourcing decision making at all the strategic, tactical and operational levels

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