Outsourcing (Logistics) Services and Supply Chain Efficiency – A Critical Review of Outsourcing Function in Mukwano Group of Companies
Kyambogo University, Kampala, Uganda
Volume (2016), Article ID 937323, Journal of Outsourcing and Organizational Information Management, 22 pages, DOI: 10.5171/2016.937323
Received date : 2 July 2015; Accepted date : 17 August 2015; Published date : 5 September 2016
Academic editor: Chinonye Moses
Cite this Article as: Charles Kalinzi (2016), “Outsourcing (Logistics) Services and Supply Chain Efficiency - A Critical Review of Outsourcing Function in Mukwano Group of Companies” Journal of Outsourcing & Organizational Information Management, Vol. 2016 (2016), Article ID 937323, DOI:10.5171/2016.937323
Copyright © 2016. Charles Kalinzi . Distributed under Creative Commons CC-BY 4.0
The paper is concerned with how outsourcing impacts overall organizational performance in general, without highlighting a specific sector or industry. The paper further examines the various approaches and terminologies used by organizations and explores possible options on adoption of such approaches. The current market is then analyzed and discussed regarding the impact of outsourcing decisions on organizations. A number of outsourced activities with selected sector-led organisations are investigated and presented, and offer guidelines on deciding what to and what not to outsource in developing countries; and this is compared with existing literature on outsourcing decisions in the developed world before recommendations are made. The paper concludes by projecting the likely future trends in the field of outsourcing in general and makes recommendations and conclusions on how organisations can move forward with the outsourcing function.
Keywords: Outsourcing; Logistics outsourcing; Supply chain efficiency; Organisational performance
In recent years outsourcing has become a major factor in organisations’ performance and can no longer be ignored (Tomas, 2010). Since the Industrial Revolution, companies have been concerned with how they can exploit their competitive advantage to increase their markets and their profits (Handfield, 2006). Firms have sought improved performance by outsourcing activities not considered a core competency of the business. The outsourcing of a number of services ranging from cleaning, logistics, and compound maintenance among others has become a significant force in global outsourcing trend services, yet there exists some questions about the degree to which outsourcing results in a positive outcome and the conditions supporting it. Although many firms outsource to reduce costs, they often fail to do so and may actually increase if not handled properly (Meixell, 2008).
Management of the outsourcing function and the role it plays in revolutionising increased performance of organizations are high-profile issues (Juettner et al., 2002). Most of Uganda’s vibrant sectors have been revolutionizing at a very fast rate over the past few decades due to the widespread introduction of the Internet where benchmarking reports have been explored on outstanding cases of best performing organizations profiles and how they achieved the progress. This has led to an increase in promoting outsourcing services not only in Uganda but in most developing economies.
Profit warnings and adjusted market forecasts have triggered massive restructuring programs, lay-offs, and reduced demand for having operational- and non-core functions in place in many organizations. According to Ernst & Young, 2011, firms have been evaluating repetitively a number of options to reduce costs while simultaneously improving their performance across the board. There is also a tendency at the leading edge of the industry to redefine core services away from those traditional functions to embrace only those that can define the firm’s existence into pure technology developmental ones and the non-core ones being re-designed or closed down completely (Agrell et al, 2004). Because of demand uncertainty in both level and timing, the roles and responsibilities in the supply chain are changing, often accelerated by outsourcing, thus leading to initially unclear interfaces (Ernst & Young 2011). The same author further notes that the strong growth and consolidation among suppliers leads to shifts in the power balance, and different business logic and clock speed among the players. This driving force has led to massive concentration of core competences and resort to outsourcing other functions in a bid to deliver different outputs and efficient service delivery.
At the theoretical level, the concept of outsourcing has been dealt with in many research works which have provided numerous definitions (Masson-Franzil, 2005, Troaca & Bodislav, 2012; Outsourcing Institute, 2002). The concept has often been mentioned as a synonym of other and older notions such as subcontracting, although they also refer to other situations. The decision of outsourcing has thus become a strategic action showing that firms attempt to refocus their core activities or seeking skills they do not possess outside the company.
Outsourcing was not formally identified as a business strategy until 1989 (Mullin, 1996). However, most organizations were not totally self-sufficient, so they outsourced those functions for which they had no competency internally. Although outsourcing, Mullin (1996) lays emphasis that Business Process Optimization (BPO), and shared services were not fully recognized as business strategies until the late 1980s, their history has roots in the Industrial Revolution.
The 19th century factory
Ever since the Industrial Revolution and the evolution of capitalism, businesses have sought new ways to exploit their competitive advantages to increase their markets and growth. This meant sourcing the right materials and components at the most cost effective price and managing the processes to deliver the final goods and services to the market. The 20th century experienced the emergence of large, integrated, and global corporations that controlled and owned their assets, requiring multiple divisions and departments with complex and multi-layered management structures. According to Handfield (2006), the model for most of the 20th century was a large integrated company that can “own, manage, and directly control” its assets.
In the 1950s and 1960s, the rallying cry was diversification to broaden corporate bases and take advantage of economies of scale. According to available literature by most authors for example Masson-Franzil, 2005, Troaca & Bodislav, 2012; Outsourcing Institute, 2002 among others, they assert that by diversifying, companies expected to protect profits, even though expansion required multiple layers of management. Subsequently, organizations attempting to compete globally in the 1970s and 1980s were handicapped by a lack of agility that resulted from bloated management structures. Handfield further adds that to increase their flexibility and creativity, many large companies developed a new strategy of focusing on their core business that required identifying critical processes and deciding which could be outsourced. Outsourcing, which started in the early 1990s as a revolutionary phenomenon of sending unskilled work from developed countries to developing countries, has experienced tremendous growth over the past 10 years.
These corporations became lumbering giants with rigid and over bloated management structures that lacked the agility to address challenges in their markets and to exploit emerging opportunities. Strategies emerged where companies focused on their core business which entailed identifying which processes were critical to the company and which ones could be outsourced. Organizations contracted with emerging service companies to deliver accounting, human resources, data processing, internal mail distribution, security, and plant maintenance. Outsourcing components to affect cost savings in key functions was another area in which to improve their finances.
Emergence of new business functions
The use of contact centers and telemarketing rose to prominence at roughly the same time as outsourcing. It made sense for companies in bringing on board a new business function or strategy to use outsourcing to deliver that functionality. For instance, most local Australian BPO providers such as UCMS Group Limited (now Aegis Australia Limited) and Salesforce started with voice work in the 1990s, managing call centers and a range of customer service functions for service organizations such as banks, airlines, and telecommunication providers. More recently, with the rise of Social Media and big data analytics, outsourcing and BPO providers were very quick in establishing practices to offer their clients services in these areas.
Other forms of Outsourcing
According to Manning, Massini, and Lewin (2008), offshoring is the process of sourcing any business task, process, or function from abroad (in particular from lower cost emerging economies). Technology is crucial in shaping the outsourcing, BPO, and shared services industries. Technology makes most of the work done by an organization “placeless”, and if the work can be done anywhere then it can be done by anyone. Typically Western firms off-shoring non-core activities to developing nations became practical due to lower labor costs. When off-shore outsourcing began, the outsourcer’s biggest focus was cost-saving; therefore, businesses outsourced their non-core activities and watched their processes being performed while saving phenomenal costs. This characterized BPO 1.0 or the “lift and shift” generation which was all about identifying low-cost locations and shifting the non-core processes to those areas.
What is Outsourcing?
Numerous definitions of outsourcing have been presented by various authors. Handfield (2006) writes that outsourcing can be defined as “the strategic use of outside resources to perform activities traditionally handled by internal staff and resources”. Sometimes known also as “facilities management”, outsourcing is a strategy by which an organization contracts out major functions to specialize and efficient service providers who become valued business partners. Outsourcing is, thus, the strategic use of outside resources to perform business functions traditionally managed by internal staff. Using an outsourced company which will help reduce costs and gain efficiencies by leveraging the talent, technology, and expertise of third party vendors.
Companies have always hired contractors for particular types of work or to level-off peaks and troughs in their workload, thus forming long-term relationships with firms whose capabilities complement or supplement their own. However, the difference between simply supplementing resources by “subcontracting” and actual outsourcing is that the latter involves substantial restructuring of particular business activities including the transfer of staff from a host company to a specialist firm (usually smaller) with the required core competencies.
Dave et al. define outsourcing as “the strategic use of outside resources to perform activities traditionally handled by internal staff and resources”. This definition is not different from other authors who presented it as the practice of handing over control of public services to for-profit corporations. Outsourcing includes both foreign and domestic contracting, and sometimes includes offshoring or relocating a business function to another country.
http://money.howstuffworks.com/outsourcing1.htm states that Outsourcing means just what it says; namely, going “out” to locate the “source” for what is needed. These days, many businesses outsource what they need to serve their internal and external customers. An external customer is the entity that ultimately purchases a company’s product or service, while an internal customer is the company’s own employees or shareholders. Nilakshi and Ghazali (2011) note that Outsourcing is simply the shifting of an internal process or activity to an external body and it involves at least two parties: buyer and supplier. Other authors have defined it as a transfer of control (Donada & Nogatchewsky, 2009) of internal business activities and processes to an external party (Kotabe & Mol, 2009; Lee, 2001; Li & Choi, 2009; Kroes & Ghosh, 2010). Different studies have developed different meanings for outsourcing and these are varied in terms of contract type holding by partners, the drives for outsourcing, the expected outcomes and the nature of businesses. However, Li and Choi (2009) viewed services outsourcing as a ‘choice of replacing internal service functions with the use of external agents to perform one or more services activities’.
Limited research has been conducted on outsourcing processes and how the function flows in outsourcing organizations. Zoran & Jørgen (2007) note that despite an impressive research intensity of the outsourcing process, there exist only few frameworks depicting the actual stages and layout of the overall outsourcing process They identify the key stages as: preparation, vendor(s) selection, transition, managing relationship, and reconsideration as illustrated in the figure below.
Figure 1: An overview of outsourcing reported frameworks: pp 3-4
Source: Zoran Perunović & Jørgen Lindgaard Pedersen (2007): The outsourcing process and theories; ©2007: “Zoran Perunović & Jørgen Lindgaard” Used with permission.
The preparation phase involves answering questions such as how, where, why, when, whether or not, among others. The next phase of vendor selection is plainly simple in addressing the key question of whom to pick and not to pick from an identified and qualifying pool of potential service providers. The subsequent stage addresses the transition stage of how to manage relationships with the approved service provider. The final stage examines the end result of the outcome of the entire process and focuses on “what now” issue.
Outsourcing in a Global Context
Outsourcing has become a megatrend in many industries, most particularly in logistics and supply chain management (Feeney et al., 2005). The overall scope of outsourcing is continuing to grow as companies focus on their core competencies and shed tasks perceived as noncore (Lindner, 2004). For example, recent data indicate that the outsourcing of human resources (HR) functions is pervasive with 94 percent of firms outsourcing at least one major HR activity, and the majority of firms planning for outsourcing expansion (Gurchiek, 2005). Research assessing the outsourcing of sales, marketing, and administrative functions provides parallel results, with at least portions of these functions now being outsourced in 15—50 percent of sampled firms (The Outsourcing Institute, 2005; GMA, 2006). Similarly, the third- and fourth-party logistics industries are booming, with between 65 percent and 80 percent of U.S. manufacturing firms contracting with or considering the use of a logistics service provider in the last year (Langley et al., 2006). Thus, managers are increasingly feeling pressure to make the right sourcing decision as the business consequences can be significant (McGovern & Quelch, 2005). Good outsourcing decisions can result in lowered costs and competitive advantage, whereas poorly made outsourcing decisions can lead to a variety of problems, such as increased costs, disrupted service and even business failure (Cross, 1995). Poor outsourcing practices can also lead to an unintended loss of operational level knowledge. Consider the case of Japan-based Toyota Motor Corporation which, by outsourcing the design and manufacture of electrical systems for its automobiles, surrendered its own capability to understand the processes required for this highly specialized work. As a result, Toyota is no longer able to leverage its own technological advantage with respect to these systems during product development (Lindner, 2004). Problems such as these and others related to the outsourcing of goods and services are prevalent when outsourcing arrangements are not well understood by managers in the contracting firms.
In the 1990s, outsourcing was the focus of many industrial manufacturers and firms considered outsourcing everything from the procurement function to production and manufacturing. Executives were focused on stock value, and huge pressure was placed on the organization to increase profits. Of course, one easy way to increase profit is by reducing costs through outsourcing. Indeed, in the mid-1990s there was a significant increase in purchasing volume as a percentage of the firm’s total sales. More recently, between 1998 and 2000, outsourcing in the electronics industry has increased from 15 percent of all components to 40 percent. Consider, for instance, the athletic shoe industry, a fashion industry with products that require significant investment in technology. No company in this industry has been as successful as Nike, a company that outsources almost all its manufacturing activities. Nike, the largest supplier of athletic shoes in the world, focuses mainly on research and development (R&D) on one hand and marketing, sales, and distribution on the other hand. Indeed, this strategy allowed Nike to grow in the 1990s at an annual rate of approximately 20 percent.
Cisco’s success story is even more striking. According to Cisco’s Chief Information Officer (CIO), Peter Solvik, the company’s Internet-based business model was instrumental in its ability to quadruple in size from 1994 to 1998 (US$1.3 billion to over US$8 billion), to hire approximately 1,000 new employees per quarter while increasing their productivity, and to save US$560 million annually in business expenses. Specializing in enterprise network solutions, Cisco used, according to CEO John Chambers, a global virtual manufacturing strategy. As he explained, “First, we have established manufacturing plants all over the world. We have also developed close arrangements with major suppliers. So, when we work together with our suppliers, and if we do our job right, the customer cannot tell the difference between my own plants and my suppliers in Taiwan and elsewhere”. This approach was enabled by Cisco’s single enterprise system which provides the backbone for all activities in the company, and connects not only customers and employees, but also chip manufacturers, component distributors, contract manufacturers, logistics companies, and systems’ integrators. These participants can perform like one company because they all rely on the same Web-based data sources. All its suppliers see the same demand and do not rely on their own forecasts based on information flowing from multiple points in the supply chain. Cisco also built a dynamic replenishment system to help reduce supplier inventory. Cisco’s average inventory turns in 1999 were 10 compared with an average of 4 for competitors. Inventory turns for commodity items are even more impressive; they reach 25 to 35 turns a year.
Apple Computers also outsources most of its manufacturing activities; in fact, the company outsources 70 percent of its components. Apple focused its internal resources on its own disk operating system and the supporting macro software to give Apple products their unique look and feel.
Making the right outsourcing decision requires a clear understanding of the broad array of potential engagement options, risks, and benefits, and the appropriateness of each potential arrangement for meeting business objectives. Many variations of outsourcing alternatives exist, resulting in a lexicon of terms, such as out-tasking, collocation, managed services and business process outsourcing. This has led to confusion for many managers who feel pressure to make the right decisions and often view outsourcing as an all or nothing proposition to offload and lower the costs of non-core activities. In fact, one of the biggest misconceptions about outsourcing is that it is a fixed event or a simple make-or-buy decision. In reality, outsourcing is an umbrella term that encompasses a spectrum of arrangements, each with unique advantages and risks. Understanding the relative risks and benefits of each of the potential alternatives is critical in making the right outsourcing decision.
Why organizations outsource?
In this section, overview of previous academic works on outsourcing is provided to identify reasons for outsourcing. However, according to Wilding (2004), consumer goods companies choose to outsource primarily in order to benefit from the competencies of 3PLs. Flexibility and cost objectives are also very important, but cost reduction is definitely not an uncontested leader. There are several reasons why so few firms outsource for cost reasons:
- Primary business focus is on service rather than cost. Of the four main drivers for outsourcing (3PL competencies, cost, flexibility and focus on core), only one is cost-related. The other ones are directly or indirectly service-related, showing that service considerations dominate over cost ones. It may be argued that outsourcing decisions in the consumer goods logistics tend to be less cost-driven than they are average over all industries.
- Costs are a qualifying, not a winning factor. Companies assume low costs from 3PLs and make outsourcing decisions on other grounds, such as service. Szymankiewicz (1994) even suggests that grocery retailers take both low cost and good service from 3PLs for granted.
- 3PLs’ ability to actually lower logistics costs. Our evidence suggests that consumer good companies are aware of the fact that not every outsourcing decision decreases costs and therefore they do not expect cost cuts in the first place. A profit margin charged by 3PLs is reflected in the price for the services and may mean that keeping logistics in-house is cheaper than outsourcing.
According to Wilding’s survey, some survey respondents outsourced for alternative reasons that had not been included in the list. Two firms outsourced to solve capacity problems. One company was motivated by a major organizational change (de-merger) and another one was looking to find synergy with the 3PL. Bendor and Samuel (1998) assert that outsourcing provides a certain power not available within an organization’s internal departments. This power can have many dimensions: economies of scale, process expertise, access to capital, access to expensive technology, etc. Another possible benefit is that outsourcing provides companies with greater capacity for flexibility, especially in the purchase of rapidly developing new technologies, fashion goods, or the myriad components of complex systems (Harrison 1994; Carlson 1989). As the world becomes more globally integrated and the boundaries between countries and cultures disappear, many developing countries such as Turkey are becoming attractive centers for international firms because of their geographical locations, low wages, and high potential for market extensions. However, the study shows that in Turkey, outsourcing is still solely based on transportation (Uluengin & Uluengin, 2003). According to Aktas and Uluengin (2005, p. 317), many Turkish firms understand logistics services as taking the transportation order from the manufacturer and delivering the goods to destination points without considering the warehouse design, the optimum location of the warehouse, or inventory management. Such ways of thinking are concerned only with one side of the subject and reduce logistics services to a narrow transportation perspective.
Forms/Types of Outsourcing
- Service Outsourcing: Refers to companies hiring outside businesses to provide specialized work and expertise.
- Procurement Outsourcing: According to Rich (2014), it is crucial that the purchasing staff ensure the company is receiving the best value, service, and products possible from every supplier in order to satisfy clients’ current demands and future requirements.
- Offshore outsourcing: This is the practice of hiring an external organization to perform some business functions in a country other than the one where the products or services are actually developed or manufactured. It can be contrasted with offshoring in which the functions are performed in a foreign country by a foreign subsidiary. There are four basic types of offshore outsourcing:
- ITO – Information Technology Outsourcing (Technology process outsourcing)
- BPO – Business Process Outsourcing
- Software R&D – offshore software development
- KPO – Knowledge Process Outsourcing.
BPO is considered the most popular, especially when considering that most companies outsource business processes to offshore locations such as India. It is important that organizations figure out what type of outsourcing works best and what a firm requires from the process.
- Legal Process Outsourcing: LPO is the practice of a law firm or corporation obtaining legal support services from an outside law firm or legal support services company. When the outsourced entity is based in another country, the practice is sometimes called offshoring
Benefits of Outsourcing
Rich (2014) notes that to remain competitive and relevant, many organizations will need to respond even more quickly, accurately, and thoroughly to future market changes, supply channel issues, client requirements, competitive challenges, global options, new opportunities, technological advances, and resource demands. With all this activity occurring within many companies simultaneously, it is imperative that corporate management accurately determines their procurement staff’s skill sets, effectiveness, resourcefulness, workload capacity and available talent pool. In other words, it may be necessary for some organizations to “think out of the box” regarding available resources and consider the potential benefits listed below for procurement outsourcing.
Outsourcing offers many advantages. For instance, outsourcing allows companies to find and hire the best experts for specialized work. Using outsourcing also helps companies keep more cash on hand, freeing resources for other purposes, such as capital improvements. It is also often cheaper in terms of salaries and benefits and reduces risks and costs. Outsourcing can also help a business focus on its core components without distractions from ancillary and support functions. Another advantage — such as that in the fictitious Smith & Company — involves speed and nimbleness. It is sometimes quicker and more efficient to hire a specialist to do something than it is to bring a company up to speed. Many large companies use outsourcing to fill roles in their organization that would be too expensive or inefficient to create themselves. Smaller companies also turn to outsourcing, though the cost savings is sometimes diminished. Rich (2014) outlines a number of benefits associated to outsourcing which include time, expertise of resources, speed and financial benefits.
Aberdeen Group (2007), while comparing expected results and results realized, where companies outsource with performance expectations in mind, outlined a number of these expected results in the table below:
Table 1: Outsourcing results: Expected and Achieved
Source: Abeerdeen Group (2007)
The future of outsourcing
It is projected that many companies are gradually adopting the outsourcing concept, with the majority of firms resorting to the concentration of core competencies and phasing out those activities that are considered non-core.
In order to understand the topic better, http://www.flatworldsolutions.com/ outlined a number of research questions thus: Will the advantages of outsourcing become overshadowed by governmental pressures and rising offshore outsourcing costs? Will outsourcing continue to grow or be curtailed by force in the years to come?
The Bloomburgbusinessweek magazine (2006) reports that:
“Then, two years ago, one of the company’s biggest customers told it to slash its machinery prices by 40% and urged it to move production to China. Last year, a St. Louis holding company, Barry-Wehmiller Cos., acquired the manufacturer and promptly cut workers and nonunion pay. In five years sales have plunged by 40%, to $170 million, and the workforce has shrunk from 2,000 to 1,100. Employees have been traumatized, says operations manager Craig Compton, a muscular former hockey player. “All you hear about is China and all these companies closing or taking their operations overseas.” As quoted from “The future of outsourcing” available at http://www.businessweek.com/stories/2006-01-29/the-future-of-outsourcing
By doing this, it is reported that most companies are slashing development costs and time among others and keep production in green bay. Offshoring is therefore boosting a lot of profits. The magazine quotes one CEO who noted “…Ever since the offshore shift of skilled work sparked widespread debate and a political firestorm three years ago, it has been portrayed as the killer of good-paying American jobs. “Benedict Arnold CEOs” hire software engineers, computer help staff, and credit-card bill collectors to exploit the low wages of poor nations. U.S. workers suddenly face a grave new threat, with even highly educated tech and service professionals having to compete against legions of hungry college grads in India, China, and the Philippines willing to work twice as hard for one-fifth the pay”. This view is not different from that of Allan (2013) who further stressed that long ago, we moved away from the attitude that it is possible to spend our way out of trouble and now, wherever you look, business leaders are constantly and consistently trying to drive down operating costs. He further went on to say that Political and economic gridlock in emerging markets and continuing uncertainty surrounding the global economy are forcing businesses to renew their cost-cutting programmes.
http://www.flatworldsolutions.com identified a number of core reasons that are shaping the future of outsourcing and after careful assessment of the various offshore outsourcing trends have revealed that outsourcing to India and other countries will continue to grow due to the following reasons:
- Cost savings will continue to be a major advantage of outsourcing
One of the major benefits of outsourcing in the early years was the vast difference in cost. Companies were able to reduce their overall expenditure considerably by paying less than half the usual amount in salaries to their offshore outsourcing partners.
In the late 90’s, many outsourcing experts predicted that cost savings would no longer be one of the main advantages of outsourcing due to the rising cost of living and technological advances. But the financial woes brought on by the 2008-2009 economic crisis has made the whole concept of cost saving even more important. With the economic recovery still unsure cost saving remains one of the major reasons for outsourcing to India.
- Outsourcing will focus more on core business activities
The latest trends in outsourcing point to the major change of focus from the outsourcing of non-core services to the outsourcing of core business functions. Most businesses, with a significant number of SMEs, consider fully outsourcing their IT department, not only to save money, but especially to gain better experienced and skilled specialists to produce high quality solutions.
Outsourcing to India, especially IT outsourcing, is on the rise due to the abundance of qualified professionals who have the skills, resources, and methodologies it takes to create superior results.
- Standardized outsourcing solutions will be favored over customization
Another trend that will affect the future of outsourcing is the move towards standardization of outsourcing solutions. The economic crisis of the recent years has led to companies favoring standardized outsourcing solutions over custom made solutions which are more expensive. Companies prefer to use their dollars saved to acquire new customers and to think out new business concepts. This has led to organizations outsourcing to India and other countries more willing to move to a standardized way of working for non-strategic processes. With the huge pressure to keep costs down, service providers will also rely more heavily on mass automation tools that will create additional opportunities and reduce the staff necessary to support critical business applications.
- Outsourcing of smaller projects will continue to be an important benefit of outsourcing
The future of outsourcing will witness an increase in the outsourcing of smaller projects. Although big corporate houses will continue to outsource huge projects to major service providers, there will be an increase in smaller buyers who will be looking for flexible and specialized smaller providers to support them in realizing new business concepts. This benefit of outsourcing will be even more applicable to entrepreneurs and individuals who spent years watching from the sidelines and who now want to benefit from a piece of the outsourcing action.
Outsourcing of smaller projects will help companies, especially those looking towards outsourcing as a way to resurrect their businesses as the economy rebounds. Outsourcing to India will also continue to rise due to a surge in smaller IT service deals from first-time buyers.
- Outsourcing and cloud sourcing will merge and grow exponentially
Industry experts who have been observing the benefits of outsourcing and cloud sourcing predict that cloud sourcing will soon merge with the existing outsourcing market and provide better opportunities for the entire outsourcing industry. With businesses in general pushing towards cloud solutions for different reasons like flexibility, scalability and cost savings, outsourced IT services will be required for migration of existing infrastructure and services to make them cloud enabled. This major advantage of outsourcing will benefit infrastructures supported by cloud resources and other smaller outsourcing providers.
On the whole, outsourcing is expected to increase dramatically in the years to come. This is because globalization which inextricably links the world’s economies leaves no room for individualism. Companies will not be able to meet the various challenges they face relying solely on their own internal resources but will have to look beyond for more cost-competitive and capable sources. This is where outsourcing and the many advantages it brings with it plays an extremely important role.
From the analysis above, it is therefore evident that the implication, at least for the outsourcing industry, is thus positive. In part this is because organizations are looking, once again, at redesigning and re-engineering core business processes. It is also because they intend to outsource business critical support services — with finance and HR heading the list. All this was further cemented and compounded by the KPMG Global Pulse survey that reported that almost two-thirds of providers anticipate customer demand for business and IT services to increase, and the indications were that outsourcing faces a healthy future.
Insourcing Vs Outsourcing
The two terminologies have generated a lot of debate on which one is the best or whether to use either of them or both. According to http://www.outsource2india.com, Insourcing is the opposite of outsourcing and defined as a business decision that is often made to maintain control of critical production or competencies. Insourcing is widely used in production to reduce costs of taxes, labor and transportation. The website asserts that In-sourcing is a recent concept that has been advocated as an alternative to outsourcing. Nancy Chen (2014) as quoted by http://www.business2community.com website argues that to outsource or not to outsource, that is the question parse, but for companies looking to cut costs, outsourcing can be attractive because third parties can often provide service for a cheaper price. Therefore defining whether insourcing or outsourcing is the best option is not easy. Outsource India Website clearly says that …”Before deciding whether insourcing or outsourcing is the best option, it is important to first define business goals. A poorly defined objective may result in neither insourcing nor outsourcing being beneficial”. Although many companies think insourcing is an easier option, such websites warn that organizations need to look closely to see how difficult it is to implement. In this article, the author has attempted to tabulate the differences between these two as below:
Differences between Insourcing and Outsourcing
Table 2: Differences between Insourcing and outsourcing
Source: Author’s primary data findings
Critical Success Factors of outsourcing
In order to ensure the success of using contract logistics, certain additional factors are to be considered during and after the implementation of the outsourcing process. The first and foremost is that decision to outsource must come from the top. Communication between logistics users and providers (Bowman 1995; Andel 1994; McKeon 1991; Trunick 1989), which is essential for the coordination of internal corporate functions and outsourced logistics, is also a very important factor in this respect. Firms need to specify clearly to service providers their role and responsibilities as well as their expectations and requirements.
Internal communication is also equally important. It has been asserted that managers must communicate exactly what they are outsourcing and why — then get the support of every department (Bowman 1995). Richardson (1990) and Maltz (1995) also emphasize the importance in educating management of the benefits of contract logistics.
Management needs to be convinced to try outsourcing and view it as a strategic activity. Success of outsourcing depends on a user-provider relationship based on mutual trust and faith (Bradley 1994). This does not imply that control measures are redundant, firms should mandate periodic reporting by the service providers (Distribution 1995; Richardson 1990). The need to select third parties wisely and maintain control while building trust is very important (Richardson 1994). Any deal must be tied to internal controls that link all payments to invoices, bills of lading, or purchase orders (Bradley 1994). A crucial aspect of successful outsourcing linking to trust is that users ought to be willing to part with proprietary information, which can help a capable third party to reduce total logistics costs (Bowman 1995). On the other hand, service providers have the responsibility and obligation to protect users’ sensitive data on products, shipments and customers (Distribution 1995).
According to Richardson (1990), there are several other critical factors that make outsourcing work. They include focus on the customer; establishing operating standards and monitoring performance against those standards; knowing the payback period, benefits expected by the firm, and the means to achieve those benefits. Factors, such as being aware that outsourcing may require a longer term of service than the firm is used to and building information systems that will allow the firm to make ongoing cost/value comparisons, are also critical. However, for McKeon (1991) understanding each other’s cultures and organizational structure to ensure a good match, and knowing logistics strategy, i.e., understanding the logistics’ function role in meeting the business objectives of the firm (e.g. differentiation or low cost) are the most important factors for successful outsourcing. The business objectives of the firm may dictate the extent to which it will use partners: outsource a single function or outsource all key functions. The importance of the human factor in outsourcing also cannot be undermined. The firm must involve the people currently providing the logistics service since their expertise enables them to facilitate the transition from in-house logistics to third-party logistics.
Furthermore, they must be given an opportunity to move with the function if outsourcing is implemented, proving how valuable they can be. However, there is the risk that the fear of getting retrenched due to outsourcing of a function may prompt current employees to sabotage the process (Maltz 1995).
The success criteria needed to establish sustainable partnerships in the area of contract logistics are the various relationships between the people involved. Open and honest environment, key management, coherent and effective internal measurement systems, mutual respect and empathy, commitment to investment, and financial and commercial arrangements are of particular importance in this aspect. For Razzaque (1998, p. 101), it is evident that, to make contract logistics work, a high level of commitment and resolution is needed on the part of the buying firms. Management must examine critically each of these success factors to determine how they can be put into practice. Only then firms can truly harness the benefits of outsourcing and to develop long-term partnerships that manifest the many advantages that are possible with the use of third-party logistics.
Advanced Workplace’s Andrew Mawson highlights the theoretical disadvantages of outsourcing as:
- Loss of management control: client and provider business objectives are different and this can lead to different management control objectives.
- Hidden costs: there are costs incurred in procurement and selection of outsourcing suppliers and in the mobilisation of the contracts.
- Threat to security and confidentiality: make sure your data are protected and the contract has a penalty clause if an incident occurs. Issues such as intellectual property rights need protection.
- Being tied to financial strength of another company – providers operate in different marketplaces to your core business. Your services are in their hands and this risk needs to be carefully evaluated.
- Bad publicity – outsourcing can lead to ill will and poor morale in the rest of your organisation.
- Different cultural approaches – businesses inevitably have different approaches so partnerships can be difficult.
A number of scholars like Dean (2012); Kathawala, Zhang, Shao (2005) among others have discussed a number of issues pertaining to how outsourcing can be misused and fail to attain the desired performance. The issues outlined by various scholars may include but not limited to:
- Lack of clear goals. Often, the overarching vision is not shared with the vendor. A shared vision along with an understanding of who is empowered to make things happen is key to success.
- Lack of clear definitions. A lack of clear definitions around responsibility, management support, measurable commitments, escalation procedures, project management, scheduled oversight, and communication protocol spell certain disaster for outsourcing arrangements
- Focus on cost reduction. When the pressure to reduce costs is the motivating principle, organizations often find that business objectives are not met through outsourcing arrangements.
- Inability to adopt cultural changes. Cultural change is necessary for successful outsourcing arrangements. Without it, organizations find it difficult to assess how changed processes are impacting business objectives. For instance, many organizations evaluate their operational effectiveness by evaluating the person performing a task; with out- sourcing , organizations must shift this assessment to consider what is being done, how it is being done, and how effectively it is being done
- Lack of details. A lack of details (i.e., metrics) regarding the currently delivered baseline service levels makes it nearly impossible for organizations to measure a change or consistency in service levels going forward.
Outsourcing does generate some problems. Dean (2003) notes that outsourcing usually reduces a company’s control over how certain services are delivered, which in turn may raise the company’s liability exposure. Another big problem with outsourcing comes from the workers themselves as they fear loss of jobs (Malhorta 1997) as quoted by Dean (2003).
Organizations were asked to identify the types of activities that they outsourced or were attempting to outsource. The top activities or functions identified were: information technology (such as application development, contract programming, data entry and simple processing), management services, manufacturing of components for the final product or the whole product, product design, engineering projects, distribution, and sales of products or services. According to Melinda (2013), small business owners need to think about regular activities that can be outsourced or subcontracted out. She adds that great leaders know it is more productive to outsource work that is not revenue generating, but essential to business operations. Common activities that are outsourced by firms are summarized below:
Table 3: Common Activities Outsourced
Supervision of outsourced functions in organizations
Mamdoub (2012) asserts that that the supervision of the delivery of the outsourced function is usually kept with the outsourcing organization. Representatives of the outsourcing organization always work hand in hand with the service providers to ensure maximum value for money in terms of quality, cost, delivery and performance specifications. In one of the interviews Mamdoub (2012) conducted in the airlines industry, he reports that the General Manager noted that “…..people forget that the contractors need to be managed”.
The issue of quality has received mixed reactions especially in the airlines industry where it was perceived that once you outsource customer service, quality standards may drop. Mamdoub (2012) reports that in this particular sector, quality levels on outsourced customer services received a 100% negative response, where several airlines companies reported declining standards in customer service levels, and preferred insourcing such services.
Outsourcing of freight forwarding services in Uganda in general and Mukwano Industries in particular does not seem to be delivering the highly publicized efficiency gains. Mukwano industries, like many manufacturing entities in Uganda is realizing that on entering the outsourcing engagement, they are still grappling with rising costs in port storage and demurrage charges (TradeMark S.Africa, 2011), unrelenting cargo delays, unprecedented loss of cargo to Kenya Revenue Authority auctions (Africa Financial Markets, 13th Jan, 2009) and poor service delivery characterized by cargo congestion in Mombasa port (8,000 and 800,000 containers in 2006 and 2012 respectively) (Africa Business Pages, 2012; Business Daily, 13th December 2012). Mukwano Industries in particular was faced by a pile up of more than 150 containers in Mombasa in 2007, stuck for more than 60 days (Africa Business Pages, 2007), which resulted in huge demurrage costs and port storage charges. Mukwano was selected because the company once performed the freight forwarding function in-house, but later decided to outsource the function to third party logistics companies.
Outsourcing of the freight forwarding function has taken centre stage in realizing cost savings for organizations; the Freight Forwarder’s transportation role has been recognized as a critical strategic element within the supply chain (Stank, 2010). Makumbi (2013) quotes Wilding and Juriado (2004) as having said that about 40% of global logistics functions, including freight forwarding, are outsourced.
Cost reduction has emerged as the topmost motivation for 48-76% of organizations seeking to outsource worldwide (Power et al, 2006; Aberdeen Group, 2008; Delloite, 2008; PWC, 2008). In Uganda’s case, freight transport accounts for up to 75% of the value of exports (Institute of Trade Development, 2011) and 30-40% of the CIF value of imports (Trademark East Africa, 2011); outsourcing the freight forwarding function in Uganda from this perspective would be seen to yield major significant cost savings. However, research developments indicate that over focusing on cost-reduction in outsourcing decisions does not deliver full value (Aberdeen Group, 2008; C.H Robinson, 2011; Xoriant Corp, 2011; Shaun, 2012) and many firms have not realized the savings envisaged at the time of entering the outsourcing engagement (Ikeda, 2004; Shaun 2012). Particularly, Shaun (2012) contends that outsourcing initiatives that are driven by the desire for cost saving without considering technical and strategic factors do not succeed.
This study being an academic research was conducted in a space of not more than 6 months. The study was completed by the 30th of September 2013.
The study used a self-administered questionnaire and an interview guide. These two research instruments provided valuable information upon which the findings of the study are based and discussed. The study targeted Mukwano Industries’ Managers who are more knowledgeable in the strategic aspects of the business; the Operations supervisors and personnel who are knowledgeable in the planning, operations and distribution functions of the study entity; the Procurement Officers who provided insight into supplier selection criteria, performance measurements and actual supplier performance over time; the Stores Managers and personnel who handle the inventory management function; and Sales and Marketing Executives who provided valuable information from the customer feedback mechanisms on outsourced commodities within Mukwano Industries. The questionnaire was piloted to ensure validity and reliability before the researcher administered it to the target population, and any necessary changes resulting from the pre-test were made. The data were collected starting with qualitative and quantitative data by questionnaire and then finally proceeded with semi-structured interviews
Main findings from the study
The level of importance of these outsourcing decision factors is varied, with diminishing importance values being registered in two technical factors- the human resource factor and the Health, Safety & Environment factor. The first objective of the study was to assess the extent to which freight forwarding outsourcing decision-making influences supply chain efficiency in Mukwano Industries Ltd. Respondents were asked a number of questions ranging from factual decisions to outsource the freight forwarding function, from financial ,technical and strategic factors. Respondents were also asked to rank their level of importance in taking decisions to outsource the services.
The findings revealed indicated that the financial drivers were dominant in the outsourcing decision-making, having registered a mean value of between 1.09 and 1.47, which is below 1.5. This was based on lower freight rates being offered by the service providers, hence precipitating the decision to outsource the services outside. Other drivers performed according to the table below:
Table 4: Driver’s impact on outsourcing decision making in Mukwano
It is therefore evident that the differences between these means are not so much, an indication that respondents had similar views on critical factors, but financial drivers greatly impacted on the decision to outsource, much more significant than other drivers.
The second objective of the study was to analyse the extent to which freight forwarding, outsourced planning and implementation influences Supply chain efficiency. The findings of the study revealed that freight forwarding and outsourcing planning and implementation yielded a highly significant positive influence on Supply chain efficiency in Mukwano Industries Ltd. These findings of registered mean figures of between 3.38 and 3.76, which is above 3.00 indicate that outsourcing planning positively influences the Supply chain efficiency of the organization
In summary, the respondents agreed that freight forwarding outsourcing planning has had a positive influence on supply chain efficiency in Mukwano Industries, having registered an average mean of 3.58 against all three efficiency constructs (Cost, Quality and Delivery Precision).
The third objective of the study was to examine the extent to which freight forwarding outsourcing administration influences Supply chain efficiency. The findings of the study revealed that the respondents agreed that freight forwarding outsourcing administration has enabled Mukwano Industries to reduce legal costs, information costs, idle time costs, overheads and rental costs, finance costs, procurement process time, time to market, shipment transit time, increased service quality, cost and precision expectations, product availability, complete delivery of orders, increased safety of orders in transit, with a mean of 3.4 , clearly indicating a highly positive significant relationship between freight forwarding outsourcing administration and Supply chain efficiency of the organization. The results from the correlational coefficients are summarized below:
Conclusions & Recommendations
The results of the study indicate that freight forwarding outsourcing decision-making has no influence on supply chain efficiency in Mukwano Industries Ltd, although outsourcing planning and outsourcing administration all have a positive influence on supply chain efficiency, with outsourcing administration being the dominant independent variable. The study revealed that after outsourcing the freight forwarding function, Mukwano Industries Ltd is paying more than it used to pay for the same service, and is yet receiving a lower level of service than it was getting when the freight forwarding function was performed in-house.
According to the findings, the freight forwarding service provider has not been able to manage the intervening (extraneous) factors like the non-tariff barriers, resulting in extra costs and delays for Mukwano Industries Ltd. The study also revealed that freight forwarding outsourcing has encountered administrative and technical challenges that have greatly impacted supply chain efficiency in Mukwano Industries; the organization is thinking of back-sourcing the function to mitigate the risks.
Basing on the above, the researcher therefore recommended that the company undertakes a thorough audit of the service provider to ensure that the organization has the necessary skilled human resource to handle the freight forwarding function, and understands the business needs of the client. In an effort to close the human resource gap and create synergy, the researcher recommends that the company institutes cross-posting of staff, on-site training of service provider’s staff and knowledge transfer.
The researcher also recommended having one service provider for freight forwarding, inventory management and distribution under one roof, so that the client concentrates on other core activities. This would ensure supply chain visibility, and promote Supply chain efficiency. However, this function should be managed jointly to ensure synergy and control, by performing an inter-organisational mapping to include qualities that not only compliment the processes and objectives, but also help create cohesion and synergy.
In the event that Mukwano Industries Ltd decides to back source the freight forwarding function, a lot of caution needs to be taken to ensure that the current human resource in Mukwano Industries Ltd is well trained and has the necessary skills, remuneration and job security to manage the freight forwarding function well and to avoid loss of morale usually associated with back sourcing. Proper planning needs to be done to ensure that the transition is as seamless and painless as possible.
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