Outsourcing of Production:The Valuation of Volume Flexibility in Decision-Making

Background: Outsourcing remains a central mechanism for improving manufacturing supply chains, with volume flexibility being a frequently targeted objective. However, outsourcing decision-making remains focused on static cost estimations, while the value of volume flexibility is subject to managerial valuation, thus imposing a risk of estimation errors. This paper tests whether decision-makers systematically under- or overvalue volume flexibility when deciding on outsourcing. Methods: Four outsourcing decision made by an OEM operating with seasonality and boom and bust cycles are analyzed to assess if decision-makers' intrinsic valuation of volume flexibility is biased. This was done by utilizing a previously developed mixed integer linear programming model for tactical planning. The model jointly considers production planning, workforce adjustments and capital investment, while respecting upstream supplier constraints, thereby encompassing both positive and negative effects of production outsourcing on volume flexibility. Combining the model with detailed knowledge of how the production system would be impacted, enabled a quantification of the value from volume flexibility, which could then be compared to the decisions made. Results: Augmenting existing static cost estimations with the value of flexibility did not reveal systematic estimation errors. However, the results suggest that the value of volume flexibility is situational, and on average comparable to direct labor cost. Conclusions: The results emphasize the importance of accurately and case-specific valuation of volume flexibility in cost-driven production outsourcing.Wstęp: Outsourcing pozostaje głównym mechanizmem poprawy funkcjonowania łańcucha dostaw, przy szacowaniu elastyczności jako głównym mierniku oceny. Niemniej, proces podejmowania decyzji odnośnie outsourcingu jest głównie skupiony na estymacjach kosztów statycznym, podczas gdy szacowanie elastyczności podlega ocenie wartości zarządzania, a co jest z tym związane, ryzykiem estymacji błędów. Prezentowana praca przedstawia ocenę wyceny elastyczności procesu podejmowania decyzji w sprawach dotyczących outsourcingu. Metody: Poddano analizie cztery decyzji podjęte prze OEM przy występującej sezonowości, wzrostu oraz spadu w celu określenia istotności oszacowania podejmowanych decyzji z punktu widzenia elastyczności. Analizę tą wykonano przy zastosowaniu połączenia modelu zintegrowanego programowania liniowego dla planowania taktycznego. Model ten obejmuje planowanie produkcji, zarządzanie zasobami oraz inwestowania kapitałem przy uwzględnieniu ograniczeń w łańcuchu dostaw, co oznacza uwzględnianie wpływu zarówno pozytywnych jak i negatywnych efektów outsourcingu produkcji na oszacowanie elastyczności. Połączenie tego modelu z wiedzą dotyczącą prawidłowego funkcjonowania procesu produkcyjnego pozwoliło na skwantyfikowanie elastyczności. Otrzymane wyniki posłużyły do analizy porównawczej podjętych decyzji. Wyniki: Zwiększanie estymacji istniejących kosztów statycznych z wartością elastyczności nie wyjaśnia błędów systematycznych estymacji. Niemniej jednak wyniki sugerują, że wartość elastyczności ilości jest zależna od sytuacji i średnio porównywalna z kosztem bezpośrednim robocizny. Wnioski: Otrzymane wyniki wskazują na istotność dokładnej i precyzyjnej wyceny wartościowej elastyczności ilości w outsourcingowej produkcji w ujęciu kosztowym

Analisis Pengambilan Keputusan Penyediaan Bahan Baku untuk Produk X dengan Metode Analytic Network Process (Studi Kasus: PT Xyz)

In a production system precision in planning and scheduling are needed. The impact of improper planning is delayed or impeded production as a result the company will lose the chance and lost the confidence of consumers. Two alternatives are owned by PT XYZ in the fulfillment of orders related to the purchase of raw materials, namely buy raw materials or not. Alternative "buy or not" is based on the company's financial condition, corporate strategy and so forth. However, the selection between these two alternatives have consequences including loss of business opportunities (oportunity lost), increased inventory costs and waste occur at sources owned. In this case the decision makers are faced with a fairly difficult choice, because in addition to the financial condition there are many criteria that must be considered. Analytic Network Process or ANP is a tool that can be used to help make decisions. With this method facilitated the decision makers get priority value so that no difficulty in determining the appropriate decision Keyword : Order, Order Fulfillment, ANP, Main Criterion, Benefit, Opportunity, Cost, Risk, Priority Value Daftar PustakaArnold, T., Chapman, S. N., & Clive, L. M. (2008). Introduction to Materials Management (6th ed.). U.S.A: Pearson . Attari, M. Y. (2012). A Decision Making Model For Outsourcing of Manufaturing Activities by ANP and DEMTEAL under Fuzzy Environment. Journal of Decisions Making, Balakrishnan, N., Render, B., & Stair, R. M. (2007). Managerial Decision Modelling with Spreadsheets (2nd ed.). U.S.A: Pearson International Edition . Chai, J. d. Application of Decision-Making Techniques in Supplier Selection : A Systematic Review of Literatur. Journal of Decisions Making. Cytheria, R. (2006). PERENCANAAN PERSEDIAAN BAHAN BAKU PIPA PVC SNI S12,5 63 DAN PIPA PVC ABU AW 1 DENGAN METODE MATERIAL REQUIREMENT PLANNING.(Skripsi) Jakarta : Universitas Bina Nusantara . Desi, A. S. (2013). ANALISIS PENYUSUNAN STRUKTUR GAJI PT XYZ TBK.(Skripsi) Jakarta : Universitas Bakrie . Donald W. Fogarty, J. H. (1991). Production & Inventory Management. America: South-Western Publishing. Gaspers, V. (2001). Production Planning and Inventory Control. Jakarta: Gramedia Pustaka Tama. Hut, P. M. (2009). The Project Management Hut. Dipetik Juli 8, 2015, dari http://www.Pmhut.com/demand-management Ishak, A. (2010). Manajemen Operasi. Yogyakarta: Graha Ilmu. Liker, J. K. (2006). The Toyota Way. Jakarta: Erlangga. Lind, D. d. (2008). Statictical Techniques in Business and Economy. London: Mcgraw hill. Roehrich, J., & Parry, G. a. (2011).Implementing Build to Order Strategies. Dipetik Juli 08, 2015, dari INDERSCIENCE PUBLISHER: http://www.inderscience.com/info/inarticle.php?artid=40869 Saaty, T. L. (2013). Outsourcing a Firms Application Development Group,. Decision Making with Analytic Network Process. 93-117. Saaty, T. L. (1996). Decision Making with Dependence and Feedback : The Analaytic Network Process. Pittsburg: RWS Publications. Saaty, T. L. (2001). How to Make andJustify Decision : The Analytic Hierarchy Prcess (AHP). Jakarta: prosidhing INSAHP 2000 PPM. Taylor, R. (2011). Operations Management (7th ed.). New Jersey : John Wiley & Sons

Planning of outsourced operations in pharmaceutical supply chains

In this dissertation, we focus on the planning and control of supply chains where part of the supply chain is outsourced to a contract manufacturer(s). Supply Chain Management deals with the integration of business processes from end-customers through original suppliers that provide products, services and information that add value for customers (Cooper et al., 1997). In a narrow sense, a supply chain can be ‘owned’ by one large company with several sites, often located in different countries. Planning and coordinating the materials and information flows within such a worldwide operating company can be a challenging task. However, the decision making is easier than in case more companies are involved in a supply chain, since the sites are part of one organization with one board and it is likely that the decision makers have full access to information needed for the supply chain planning. Outsourcing is an ‘act of moving some of a firm’s internal activities and decision responsibilities to outside providers’ (Chase et al., 2004) and it has been studied extensively in the literature.Outsourcing is developing in many industries, but in this dissertation, we focus on outsourcing in the pharmaceutical industry, where outsourced supply chain structures are rapidly developing. Recent studies show that the global pharmaceutical outsourcing market has doubled from 2001 to 2007 and it is expected to further increase in the upcoming years. In the pharmaceutical industry, the outsourcing relationship is typically long-term and customers often require high service levels. Due to high setup costs, production is conducted in fixed large batch sizes and campaign sizes. The cumulative lead time within the supply chain is more than one year, whereas the customer lead time is about two months. In this industry, production activities are outsourced for three main reasons. First, intellectual property legislation requires outsourcing the production activities to a contract manufacturer that owns the patent for specific technologies that are needed to perform the production activities. Second, expensive technologies or tight (internal) capacity restrictions also result in outsourcing. Third, to limit the supply uncertainty, companies outsource to have an external source producing the same product next to an internal source. This dissertation deals with the planning and control of outsourced supply chains, which are supply chains where part of the supply chain is outsourced to a contract manufacturer. Most supply chain operations planning models from the literature assume that the supply chain is planned at some level of aggregation and that further coordination is conducted at a more detailed level by lower planning levels. These concepts implicitly assume that the lower planning level and the operations are conducted within the same company with full information availability and full control over the operations, which is not case when part of the supply chain is outsourced. Hence, the objective of this dissertation is to obtain insights into the implications of outsourcing on the supply chain planning models. First, we review the literature on outsourcing research and we find that little is known on the operational planning decisions in an outsourced supply chain and on the implications of outsourcing on the operations planning. The literature on outsourcing at the operational level uses outsourcing purely as a secondary source to control performances such as the delivery reliability. Consequently, we discuss two case studies that we conducted into outsourced supply chains to understand the implications of outsourcing on the supply chain operations planning function, where the contract manufacturer is the only source of supply. The main implications of the planning and control of outsourced supply chains can be summarized in three categories: limited information transparency, limited control over the detailed planning and priorities at the contract manufacturer, and contractual obligations. Below, we discuss these in more detail. In order to decide on the release of materials and resources in a supply chain, it is required that the decision maker is able to frequently monitor the status of the supply chain. In an outsourced supply chain, the outsourcer does not have access to all relevant information of the entire supply chain, especially not to the available capacity in each period, also because the contract manufacturer serves a number of different (and sometimes even competing) outsourcers on the same production line. Moreover, the contract manufacturer plans and controls its part of the supply chain based on rules and priorities that are unknown to the outsourcer. This results in facing an uncertain capacity allocation by the outsourcer. Another implication is that the contract manufacturer requires by contract to reserve capacity slots prior to ordering. These reservations are subject to an acceptation decision, which means that part of the reservation quantity can be rejected. The accepted reservation quantity bounds the order quantity that follows later on. Therefore, another main insight from the case study is that in an outsourcing relationship, the order process consists of different (hierarchically connected) decisions in time. In the ordering process, the uncertain capacity allocation of the contract manufacturer should be incorporated. Hence, the order release mechanism requires a richer and more developed communication and ordering pattern than commonly assumed in practice. In a subsequent study, we build on this insight and we design three different order release mechanisms to investigate to what extent a more complicated order release function improves (or deteriorates) the performance of the supply chain operations planning models. The order release mechanisms differ in the number of decision levels and they incorporate the probabilistic behaviour of the contract manufacturer. Based on a simulation study, we show that a more advanced order release strategy that captures the characteristics of outsourcing performs significantly better than a simple order release strategy that is commonly used in practice. We also discuss the conditions for a successful implementation of the more advanced order release strategy. In another study, we study the case where the contract manufacturer is a second source next to an internal manufacturing source for the same product and where the outsourcer faces inaccurate demand forecasts. The two sources are constraining the supply quantities in different ways. Its own manufacturing source is more rigid, cheaper and tightly capacitated, whereas the contract manufacturer is more flexible but more expensive. In that study, we compare the performance of two different allocation strategies by a simulation study in which we solve the model in a rolling horizon setting. The results show that the rigid allocation strategy (the cheaper source supplies each period a constant quantity) performs substantially better than the dynamic allocation strategy (each period the allocation quantities are dynamic) if the parameters are chosen properly. In another study, we study the outsourcer’s problem of deciding on the optimal reservation quantity under capacity uncertainty, i.e., without knowing what part of the reservation will be accepted. In that study, we develop a stochastic dynamic programming model for the problem and we characterize the optimal reservation and order policies. We conduct a numerical study where we also consider the case where the capacity allocation is dependent on the demand distribution. For that case, we show the structure of the optimal policies based on the numerical study. Further, the numerical results reveal several interesting managerial insights, such as that the optimal reservation policy is little sensitive to the uncertainty of the capacity allocation from the contract manufacturer. In that case, the optimal reservation quantities hardly increase, but the optimal policy suggests increasing the utilization of the allocated capacity. We also study the outsourced supply chain from the contract manufacturer’s perspective. In that study, we consider the case where the contract manufacturer serves a number of outsourcers with different levels of uncertainty. The contract manufacturer faces the question of how to allocate the contractual capacity flexibility in an optimal way. More precisely, we focus on the contract manufacturer’s decision to make the acceptation decision under uncertainty. The more the contract manufacturer accepts from an outsourcer, the more risk is taken by the contract manufacturer, as the outsourcer might not fully utilize the accepted reservation quantity. However, we assume that the outsourcer is willing to pay an additional amount to compensate the contract manufacturer for that risk. We develop a mixed-integer programming model, which optimizes the allocation of capacity flexibility by maximizing the expected profit. Offering more flexibility to the more risky outsourcer generates higher revenue, but also increases the penalty costs. The allocated capacity flexibilities are input (parameters) to the lower decision level, where the operational planning decisions are made and demands are observed. The simulation results reveal interesting managerial insights, such that the more uncertain outsourcer gets at least the same capacity flexibility allocated as the less uncertain outsourcer. Moreover, we have seen that when the acceptation decision is made, priority is given to the less uncertain outsourcer, because that information is the most valuable. However, we see the opposite effect when orders are placed, namely that priority is given to the more uncertain outsourcer, i.e., the most paying outsourcer, as no uncertainty is involved anymore. These insights are helpful for managers of contract manufacturers when having contract negotiations with the outsourcers. We believe that the results and insights that we obtained in the various research studies of this dissertation can contribute to solving the broader real-life problems related to the planning and control of outsourced supply chains. We also discuss potential managerial implications of our findings explicitly addressing the management decisions that may be affected by using the insights from our studies. Considering the operational implications of outsourcing when taking the strategic outsourcing decision will lead to a different and a better estimate of the transaction costs and probably to a different strategic outsourcing decision. Based on our research, we think that the transaction cost estimate will be higher if the outsourcer and the contract manufacturer do not agree on operational issues, such as the multi-level order release mechanism. From a tactical point of view, the outsourcer may include the options of postponement and cancellation in the contract, even if the contract manufacturer would charge little extra for these options. The results show that the benefits of including these options are substantial. Moreover, we showed that controlling a contract manufacturer operationally in the same way as an internal manufacturing source leads to a nervous ordering behaviour with a lot of changes and a lot of panicky communication between the outsourcer and the contract manufacturer. Combining the insights from different studies, one can also conclude that including little reservation cost is beneficial to both parties; it leads to a win-win situation. The outsourcer with a high level of demand uncertainty secures sufficient capacity allocation from the contract manufacturer and avoids more expensive penalty costs. For the outsourcer with less demand uncertainty, it is wise to set the contract such that the reservation costs are subtracted from the total paid amount. Moreover, this outsourcer may gain competitive advantage if his competitors operate in the same market by securing sufficient capacity allocation (by paying little reservation costs). For the contract manufacturer, including reservation cost is also beneficial, as it leads to a better match between the outsourcer’s reservation and ordering behaviour

The relevance of outsourcing and leagile strategies in performance optimization of an integrated process planning and scheduling

Over the past few years growing global competition has forced the manufacturing industries to upgrade their old production strategies with the modern day approaches. As a result, recent interest has been developed towards finding an appropriate policy that could enable them to compete with others, and facilitate them to emerge as a market winner. Keeping in mind the abovementioned facts, in this paper the authors have proposed an integrated process planning and scheduling model inheriting the salient features of outsourcing, and leagile principles to compete in the existing market scenario. The paper also proposes a model based on leagile principles, where the integrated planning management has been practiced. In the present work a scheduling problem has been considered and overall minimization of makespan has been aimed. The paper shows the relevance of both the strategies in performance enhancement of the industries, in terms of their reduced makespan. The authors have also proposed a new hybrid Enhanced Swift Converging Simulated Annealing (ESCSA) algorithm, to solve the complex real-time scheduling problems. The proposed algorithm inherits the prominent features of the Genetic Algorithm (GA), Simulated Annealing (SA), and the Fuzzy Logic Controller (FLC). The ESCSA algorithm reduces the makespan significantly in less computational time and number of iterations. The efficacy of the proposed algorithm has been shown by comparing the results with GA, SA, Tabu, and hybrid Tabu-SA optimization methods

A decision-making approach for investigating the potential effects of near sourcing on supply chain

Purpose - Near sourcing is starting to be regarded as a valid alternative to global sourcing in order to leverage supply chain (SC) responsiveness and economic efficiency. The present work proposes a decision-making approach developed in collaboration with a leading Italian retailer that was willing to turn the global store furniture procurement process into near sourcing. Design/methodology/approach - Action research is employed. The limitations of the traditional SC organisation and purchasing process of the company are first identified. On such basis, an inventory management model is applied to run spreadsheet estimates where different purchasing and SC management strategies are adopted to determine the solution providing the lowest cost performance. Finally, a risk analysis of the selected best SC arrangement is conducted and results are discussed. Findings - Switching from East Asian suppliers to continental vendors enables a SC reengineering that increases flexibility and responsiveness to demand uncertainty which, together with decreased transportation costs, assures economic viability, thus proving the benefits of near sourcing. Research limitations/implications - The decision-making framework provides a methodological roadmap to address the comparison between near and global sourcing policies and to calculate the savings of the former against the latter. The approach could include additional organisational aspects and cost categories impacting on near sourcing and could be adapted to investigate different products, services, and business sectors. Originality/value - The work provides SC researchers and practitioners with a structured approach for understanding what drives companies to adopt near sourcing and for quantitatively assessing its advantage

Outsourcing and acquisition models comparison related to IT supplier selection decision analysis

This paper presents a comparison of acquisition models related to decision analysis of IT supplier selection. The main standards are: Capability Maturity Model Integration for Acquisition (CMMI-ACQ), ISO / IEC 12207 Information Technology / Software Life Cycle Processes, IEEE 1062 Recommended Practice for Software Acquisition, the IT Infrastructure Library (ITIL) and the Project Management Body of Knowledge (PMBOK) guide. The objective of this paper is to compare the previous models to find the advantages and disadvantages of them for the future development of a decision model for IT supplier selection

Outsourcing the Human Resource Function: Environmental and Organizational Characteristics that Affect HR Performance

A theoretical model is presented that identifies environmental and organizational characteristics that affect human resource (HR) performance in an organization. Specifically, we address the issue of when and under what circumstances does HR outsourcing contribute value to the firm by attempting to identify environmental and organizational characteristics that affect HR department performance and how HR outsourcing mediates that relationship. We propose that supplier competition in the HR provider market has a direct effect on the amount of HR outsourcing which in turn has a direct effect on HR performance. Environmental uncertainty (primary, competitive, and supplier) is proposed to moderate the relationship between amount of HR outsourcing and HR performance while asset specificity is proposed to moderate the relationship between supplier competition and amount of HR outsourcing. An earlier version of this paper was presented at the Southwest Academy of Management meeting in Houston, Texas, March, 2003, and received the 2003 Irwin/McGraw-Hill Distinguished Paper Awar

A Conceptual Framework of Reverse Logistics Impact on Firm Performance

This study aims to examine the reverse logistics factors that impact upon firm performance. We review reverse logistics factors under three research streams: (a) resource-based view of the firm, including: Firm strategy, Operations management, and Customer loyalty (b) relational theory, including: Supply chain efficiency, Supply chain collaboration, and institutional theory, including: Government support and Cultural alignment. We measured firm performance with 5 measures: profitability, cost, innovativeness, perceived competitive advantage, and perceived customer satisfaction. We discuss implications for research, policy and practice

What Turkey expects from logistics outsourcing ?

Copyright @ 2011 Yasar UniversityThe economies of the world have become increasingly interdependent, and organizations have come under tremendous pressure to maximize productivity and profitability. Creating value through outsourcing has emerged as a popular competitive strategy for firms of all sizes in all types of industries. The aim of this research is to investigate the use of third party logistics in Turkish companies from the users’ perspective to identify the types of logistics services outsourced, problems encountered in outsourcing these services, logistics costs, decision makers in outsourcing logistics activities, and information sources used in the decision-making process. A structured survey was selected as the tool for data collection. The field study involved face-to-face interviews with 204 companies out of top 500 companies ranked in terms of turnover that are registered with industrial associations and chambers of commerce in Turkey. Moreover, a decision support system based on Bayesian Causal Map is proposed for 3PLs in order to assist them in their service proposals for different sectors. This study is a first attempt to reveal and compare the outsourcing perception of the companies in different sectors, to expose the firms’ underlying motives as well as the respective importance of these motives for outsourcing logistics activities in Turkey. The use of Bayesian Causal Map based on the survey results provides an important guide to the 3PL providers to pick a suitable strategy and to prioritize their operational activities in different sectors in such a way to achieve a competitive advantage

The Role of Maintenance and Facility Management in Logistics: A Literature Review

Purpose - The purpose of this paper is to provide a literature review on the different ways of carrying out Facility Management and related topics in order to uncover that there is limited research regarding the impact of Facility Management on the logistics and operational performance of warehouses. Design/methodology/approach - Four different focus areas have been identified and for each one different methodologies and streams of research have been studied. Findings - The study underlines the importance of Facility Management for the logistics operations; therefore it supports the notion that investments aiming at preserving the status of the building and service components of warehouses are crucial. Originality/value - This paper aims to suggest to Facility Management managers that they can contribute to enhance business performance by designing effective Facility Management strategie