OUTSOURCING ELEMENTS DEFINED AND THE DEVELOPMENT OF THE OUTSOURCING RISK MATRIX

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CHAPTER 3 OUTSOURCING ELEMENTS DEFINED AND THE DEVELOPMENT OF THE OUTSOURCING RISK MATRIX

INTRODUCTION

This chapter reflects a literature review undertaken with the aim to determine the mechanisms available in terms of collaboration and integrated planning systems (see Subsection 3.2.1), performance measurement systems (see Subsection 3.2.2) as well as B-BBEE (see Subsection 3.2.3). The discussion is thereafter focussed on supply chain risk (see Section 3.3) as part of the outsourcing venture. The ‘outsource risk matrix’ (see Subsection 3.3.1) is discussed as the second development of the strategic decision-making model. Chapter 3 aligns with the third and fourth secondary research objectives (see Subsection 1.3.2), i.e. to – explain the unit of analysis in terms of collaboration and integrated planning, performance measurement, and the South African specific of broad-based black economic empowerment (B-BBEE) (third secondary objective); and review risk in relation to outsourcing and the creation of an outsourcing risk matrix. The outsourcing risk matrix was termed development two (fourth secondary objective).

Overview of the unit of analysis

Qureshi et al. (2007) indicate that, in order for a shipper to outsource, there are two categories of elements of the outsourcing relationship: enabling elements and outcome elements. The enabling elements of logistics outsourcing are two-way information sharing, commitment and trust, top management support, direct assistance or participation, total quality management and just in time, supplier added value, evaluation of supplier performance, coordination, and long-term contracts. The outcome elements are customer satisfaction, dedicated resources, 75 customer service level, logistics costs savings, expanded outsourcing, enhanced value, productivity enhancement, and competitive advantage. Enabling and outcome elements, relating to the outsourcing relationship, are classified in terms of the unit of analysis (performance, collaboration and integrated planning and systems). The classification allowed for a systematic approach to the unit of analysis measurement discussion. Table 3.1 indicates the elements of the outsourcing relationship, coupled with the unit of measurement classification.
Adding to the elements of the outsourcing relationship in Table 3.1, Qureshi et al. (2008) indicate the following as being important elements with regard to outsourcing: quality of service, size and quality of fixed assets, quality of management, information technology capability, delivery performance, information sharing and trust, operational performance, compatibility, financial stability, geographical spread and range of services, the long-term relationship, reputation, optimum cost, surge capacity, flexibility in operation and delivery.
Arroyo et al. (2006) list the elements viewed as critical by Mexican, European and
American firms as being:
financial stability;
capacity to fulfil demand;
demonstrated ability to attend to customer’s request;
price charged for the service;
joint problem-solving ability;
general reputation;
compatibility with the buying firm’s culture;
international scope;
3PL provider has a continuous improvement policy;
technological compatibility with the buying firm;
wish to develop a reciprocal ‘gain-gain’ relationship; and
the 3PL provider has a quality certification and offers service guarantees.
Karrapan, Sishange, Swanepoel and Kilbourn (2017) list the elements viewed as critical by South African firms as being:
cost and pricing structure of 3PL provider;
service delivery of 3PL provider;
potential relationship with 3PL provider;
credentials of the 3PL provider;
scope of services offered by the 3PL provider;
quality of 3PL service provider; and
3PL resources technical capability.
The various elements deemed necessary by shippers are assigned to varying degrees of importance, based on the type of outsourcing required, i.e. transactional-, tactical- or strategic-level outsourcing.
The following subsections (3.2.1 to 3.2.3) review collaboration and integrated planning systems as well as performance management as unit of analysis.

Collaboration and integrated planning systems (outsourcing)

Outsourcing is determined by strategic, operational and/or financial motivation (Ordoobadi, 2009).
i. strategic motivation is found where the shipper focusses on the core value proposition or when the shipper wants to access new markets or technology;
ii. operational motivation is found when the shipper does not have the necessary skills or knowledge to manage the specific logistics activity; and
iii. financial motivation for the shipper implies avoiding capital investments, tapping into economies of scale and reducing operational expenditure (i.e. employee-based cost).
The elements of successful relationships are grounded in attachment, communication, dependence, investment, opportunistic behaviour, reciprocity, 78 reputation, satisfactory prior outcomes, and trust (Knemeyer and Murphy, 2005). Four relationship marketing elements are fundamental for the successful alignment of a shipper and a 3PL provider, and these elements are customer referrals, customer retention, performance improvements, and service recovery. The relationship marketing arena forms part of the process of attaining the outsourced business and forming a relationship with the shipper. This will culminate in understanding and managing the expectation with regard to performance management, and finally in ensuring business success for both the shipper and 3PL provider. Selviaridis and Spring (2007) confirm that the selection criteria of 3PL providers are constructed on a set of key business strategies. The authors also identify the strategies utilised by 3PL providers to attract and retain buyers as being differentiation, mergers, acquisitions, joint ventures, strategic alliances, and vertical and horizontal integration. The difference between non-integrated/transactional outsourcing and integrated outsourcing is explained by means of Figure 3.1.
Figure 3.1 indicates that a transactional 3PL provider service is provided in the form of warehousing or transportation. This is typically presented by a catalogue price for ‘services rendered’, i.e. a price is paid per specific transport route (distance/weight/volume). An integrated 3PL provider is indicated for managing all supply-chain-related activities, i.e. purchasing, warehousing, transport and distribution (not a catalogue price for services rendered). The 3PL provider is integrated into the shipper’s operation in the form of integrated planning and systems. Joint planning occurs by means of upstream and downstream logistics, to the point of close working relations.
Large et al. (2011) argue that an influence is exerted on the success of the outsourced venture by the shipper accepting the 3PL provider. Large et al. (2011) further highlighted the point that loyalty is positively influenced by the degree of customer-specific acceptance, as well as the level of satisfaction. Aguezzoul (2014) argues that it is becoming increasingly difficult to do business where there is no close collaboration between supply chain partners. Collaborative systems are deemed necessary for achieving outsourcing success as these systems enable the shipper and 3PL provider to conduct business transactions based on a single platform. Transport World Africa (2013) named this type of system as ‘Software as a System’ (SaaS) – Enterprise Resource Planning (ERP) System integration. Such a system has at its core the ability to be a single point of entry between shipper and 3PL provider for conducting transactional-type business, but also has the capability to do longer-term joint planning. This system also provides accurate and up-to-date information to the relevant parties.
In a South African study, it was found that convergence in planning and execution will lead to cost-efficiency (primarily) as well as improved planning and business simplification (secondly) (D’amato, Kgoedi, Swanepoel, Walters, Drotskie & Kilbourn, 2015). Strategic partnering organisations have to be aligned in terms of their strategic goals, relationships, service offerings and requirements. Strategic partnering leads to joint planning and collaboration in order to best serve market requirements. Given the various requirements in terms of collaboration and integrated planning systems, a list was compiled to indicate the elements required for this specific unit of analysis. The elements listed (see Table 3.2) indicate both enabling and outcome elements. The elements are to be reviewed in light of the undertaking of the outsourcing partnership, based on the type of outsourcing required, i.e. strategic, tactical or transactional. Table 3.2 displays the elements listed for collaboration and integrated planning systems.
Enabling elements, such as two-way information sharing and ERP system integration, are fundamental for ensuring seamless integration between shipper and 3PL provider when attempting to outsource. This will also be a barrier to success if access to the ERP system is limited. Commitment and trust, dependence and service recovery, top management support, reputation, customer referrals, direct assistance, opportunistic behaviour, total quality management, just in time, investment, customer retention, coordination, system platform integration, long-term contracts, and satisfactory prior outcomes are enablers to the outsourcing venture. Should any of these aspects not be aligned, the outsourcing venture is at risk of failing. The outcomes of the outsourcing venture, based on collaboration and integrated planning systems, are dedicated resources, appropriate investment, possible expanded outsourcing and, at the core, trust between shipper and 3PL provider.
The benefits of outsourcing are to enable the shipper organisation “to concentrate 81 on the core competence, increase the efficiency, improve the service, reduce the transportation cost, restructuring the supply chains, and establish the marketplace legitimacy” (Datta et al., 2013: 538). The enabling elements function to assist in achieving outsourcing success for the shipper and 3PL provider. The elements listed are utilised in the study and link directly with the level of outsourcing required, i.e. SCSI1 through to SCSI16. These elements represent the detail of investment and integration required, i.e. for SCSI1 outsourcing, there would be transactional system integration (processing a goods receipt on the system); however, for SCSI16 outsourcing, there would be strategic-level integration (sales forecast planning).

Performance measurement

Outsourcing supports positive shipper-organisation performance, as outsourcing prompts the shipper to focus its full attention on the core value proposition (Gilley and Rasheed, 2000; Rodriguez and Robaina, 2006; Thompson, 2007). These authors argue that outsourcing supports increased performance for the shipper as it keeps the shipper focussed on its core value proposition activities, while the 3PL provider focusses on the shipper’s non-core activities. In a Kenyan study, Awino and Mutua (2014) focussed on business process outsourcing performance. In that study, it was confirmed that the traditional method to outsource, i.e. secondary activities outsourcing, is beneficial to the shipper. However, the study also found that it is beneficial to outsource non-critical primary activities to the benefit of the shipper and 3PL provider (Awino and Mutua, 2014).
Performance measurement is done in accordance with a set of key performance indicators (KPIs). KPIs are built on the foundation of measures that are deemed essential for the outsourcing relationship. Rossi, Colicchia, Cozzolino and Christopher (2013) indicate the logistics and learning capabilities of Esper, Fugate and Davis-Sramek (2007) as comprising a scientific underscore to a measurement system. These capabilities are displayed in Table 3.3, together with the description of each capability.
Table 3.3 indicates five logistics and four learning capabilities. Together, these nine capabilities form a measurement system. Depending on the type of outsourcing opted for, according to the services continuum, the effect and the importance of the different elements are measured differently. The role that the 3PL provider has to fulfil is encapsulated by the value proposition of the 3PL provider, namely service variety, information availability, timeliness and continuous improvement – as displayed in Figure 3.2.
Service variety would not be deemed imperative to a shipper who solely wants to procure a standard warehouse service for short, peak volume compensation. A shipper who values service variety is a shipper who would collaborate on a long-term strategic venture, capitalising on the skills and scope of the 3PL provider. Availability of information is important for all types of shipper. Availability of information also speaks to real-time information sharing. The typical measurement would be the updating of transactional information immediately or within 24 hours. A key measurement in the outsourced relationship is timeliness in order transacting, which is closely aligned to the aspect of availability of information, and execution of transactions, within agreed parameters.
To varying degrees, continual improvement is present in any type of outsourcing, i.e. in transactional type relationships, it might not seem apparent at first; however, to stay competitive from a catalogue service point of view, continual improvement creates the cornerstone for profitability in the marketplace. This would typically not be a KPI for a short-term transactional type of outsourcing relationship; however, it is a qualifier to obtain the shipper’s business.
Jothimani and Sarmah (2014) used the supply chain operations reference (SCOR) model to identify KPIs for a 3PL provider. The measurement perspective is taken from a shipper’s point of view in order to establish the KPIs as the measuring basis for the service delivery by the 3PL provider. Jothimani and Sarmah (2014) explain their model by means of five performance attributes: reliability, responsiveness, flexibility, cost measures, and asset management efficiency.
Each of the performance attributes is summarised in Table 3.4 by means of a description and the level 1 metrics.
A system has been developed in the United Kingdom to indicate performance measurement based on levels as first-, second- and third-generation performance measurements (Neely, Mills, Platts, Gregory & Richards, 1994). The scope and comprehensiveness progress from the first to the second and third generations of measurement systems. Different measurement systems are deployed, based on the type of outsourcing decided upon, i.e. a first-generation measurement is applicable to an apprentice service, whereas a third-generation performance measurement system would be deployed with an advanced service offering.
The development services continuum, as discussed in Chapter 2, enables the classification of model application, following through to enabling and outcome elements. Table 3.5 indicates the performance measurement systems, coupled with an overview of the key features applicable to each performance measurement system, as well as the services continuum application.
The applicable measurement system needs, at its core, to ensure business success, and to ensure that no effort is wasted, i.e. deploying a second-generation measurement on an apprentice service delivery. Measurement system and services continuum alignment is vital for successful outsourcing and for guaranteed continual thriving relationships.
An estimated path model, which indicates that both cost and service performance are drivers for achieving financial performance, has been developed in Hong Kong (Huo et al., 2008). This estimated path model (see Subsection 2.4.8) indicates how a business undertakes to go about its activities, i.e. low cost vs differentiation. The crux of the model is to ensure that the strategic intent of an organisation is known. Based on the strategic intent, the supply chain partners are able to be measured accurately to increase the opportunity of optimal alignment. Table 3.6 indicates the elements for performance measurement. While these elements are to be reviewed with the undertaking of the outsourcing partnership, the level of detail is determined by the type of outsourcing required, i.e. SCSI1, SCSI6, SCSI11 or SCSI16.
The enabler element of the outsourcing venture is the evaluation of supplier performance. The outcome elements of the outsourcing venture culminate in customer satisfaction, customer service level, logistics costs saving, expanded outsourcing, enhanced value, productivity enhancement and competitive advantage, service variety, availability of information, timelines, continuous improvement, operational challenges experienced, degree of local completion, low costs, differentiation, cost performance, service performance, and financial performance. Both enabling and outcome elements are of importance to the outsourcing venture for measuring success. The level of alignment and the definition of the enabling and outcome elements will progressively increase in the success required with the progression of SCSI1 through to SCSI16 classifications based on the services continuum.

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Broad-based black economic empowerment (South Africa-specific)

Broad-based black economic empowerment (B-BBEE) is an overarching element to the development of a strategic decision-making model for optimal alignment between shipper and 3PL provider in South Africa. B-BBEE has the potential to be a motivational factor, aside from cost reduction, capital investment reduction and enhanced operational flexibility due to the socio-economic climate of South Africa. The B-BBEE Act 53 of 2003 is legislation – [T]o establish a legislative framework for the promotion of black economic empowerment; to empower the Minister to issue codes of good practice and to publish transformation charters; to establish the Black Economic Empowerment Advisory Council; and to provide for matters connected therewith (Republic of South Africa [RSA], 2003).
Business Partners Ltd. (2016) explains that B-BBEE constitutes a code of good practice, gazetted in February 2007, which stipulates and measures all organisations operating within South Africa’s B-BBEE compliance levels. There are three types of organisation classifications for the purpose of measuring B-BBEE compliance, namely:
i. Exempted micro-enterprise
An organisation with an annual turnover of less than R5 000 000.00, including any organisation starting up, i.e. in its first year of formation.
ii. Qualifying small enterprise
An organisation with an annual turnover between R5 000 000.00 and R35 000 000.00.
iii. Generic enterprise
An organisation with an annual turnover of more than R35 000 000.00.
Measurement takes place based on either of the two available scorecards, depending on categorisation of the organisation as generic and adjusted qualifying small enterprise scorecard. The score achieved is converted into a B-BBEE status, i.e. from a level one contributor to a non-contributor. Each status has a B-BBEE recognition level percentage, ranging from 135% to 0%. The B-BBEE status and recognition level percentages, coupled with the specific score, are displayed in Table 3.7.
The recognition level percentage translates into the preferential procurement spent calculation, i.e. a level one contributor at 135% renders every R1 spent at R1.35 calculated value on the preferential procurement calculation. B-BBEE is an element for consideration by South African businesses for both shippers and 3PL providers. A 3PL provider with a high B-BBEE status will increase the shipper’s preferential procurement spent, in a South African context, to a favourable position and will assist with the overall organisation positioning as it relates to B-BBEE status.
The outsourcing decision carries an inherent risk, which requires to be managed appropriately (Rousseau et al., 2015). Managing the risk is deemed to be among the most important process by Manotas-Duque, Osorio-Gomez and Rivera (2016). The elements discussed (see Subsection 3.2.1 – 3.2.3) comprise the risk to which consideration is required when deciding on the outsourcing venture. Risk is in various forms, i.e. monetary value, environment, community, sales and marketing (customers), government relations (B-BBEE recognition), reputation, legislative measures, human resources, operations and information management (Husdal, 2011; Adelante SCM, 2016; Marttonen and Karri, 2012). Section 3.3 follows with a review of supply chain risk with the objective to establish development two, namely the outsource risk matrix.

TABLE OF CONTENTS
ABSTRACT
KGUTSUFATSO
ABSTRAK
ACKNOWLEDGEMENTS
DECLARATION (45274061)
ABBREVIATIONS AND ACRONYMS
TABLE OF CONTENTS
LIST OF FIGURES
LIST OF TABLES
LIST OF TABLES IN APPENDICES
CHAPTER 1 INTRODUCTION TO THE STUDY
1.1 BACKGROUND
1.2 PROBLEM STATEMENT
1.3 AIM AND OBJECTIVES OF STUDY
1.4 RESEARCH METHODOLOGY
1.5 DEFINITION OF TERMS
1.6 STUDY DELIMITATIONS
1.7 ORGANISATION OF STUDY
CHAPTER 2 REVIEW AND CLASSIFICATION OF 3PL PROVIDER OUTSOURCING MODELS VIA THE SERVICES CONTINUUM
2.1 INTRODUCTION
2.2 3PL PROVIDER CONCEPT
2.3 SERVICES CONTINUUM OVERVIEW
2.4 REVIEW AND CLASSIFICATION OF 3PL PROVIDER OUTSOURCING MODELS
2.5 CONCLUSION
CHAPTER 3 OUTSOURCING ELEMENTS DEFINED AND THE DEVELOPMENT OF THE OUTSOURCING RISK MATRIX
3.1 INTRODUCTION
3.2 Overview of the unit of analysis
3.3 SUPPLY CHAIN RISK
3.3.1 Outsource risk matrix
3.4 CONCLUSION
CHAPTER 4 APPLICATION OF THE UNIVERSAL STRATEGIC DECISION-MAKING MODEL
4.1 INTRODUCTION
4.2 SERVICES CONTINUUM APPLICATION
4.3 STRATEGIC DECISION-MAKING METHODOLOGY PROCESS PATH
4.4 APPLICATION OF THE UNIVERSAL STRATEGIC DECISION-MAKING MODEL
4.5 CONCLUSION
CHAPTER 5 RESEARCH METHODOLOGY AND FINDINGS
5.1 INTRODUCTION
5.2 DEVELOPING THE SAMPLE PLAN
5.3 DESIGN OF THE RESEARCH INSTRUMENT
5.4 RESEARCH INSTRUMENT FINDINGS
5.5 CONCLUSION
CHAPTER 6 STRATEGIC DECISION-MAKING MODEL FOR SASOL
6.1 INTRODUCTION
6.2 SCOPE OF STRATEGIC DECISION-MAKING MODEL
6.3 APPLICATION OF THE STRATEGIC DECISION-MAKING MODEL
6.4 CONCLUSION
CHAPTER 7 CONCLUSIONS AND RECOMMENDATIONS
7.1 INTRODUCTION
7.2 SUMMARY OF STUDY
7.3 CONCLUSIONS REGARDING THE APPLICATION OF THE STRATEGIC DECISION-MAKING MODEL FOR SASOL
7.4 CONTRIBUTIONS, CONFIRMATIONS AND LIMITATIONS OF THE STUDY
7.5 FUTURE RESEARCH
7.6 RECOMMENDATIONS
7.7 CONCLUSION
LIST OF REFERENCES
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