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P. Bajec, I. Jakomin: A Make-or-Buy Decision Process For Outsourcing
P. Bajec, I. Jakomin: A Make-or-Buy Decision Process For Outsourcing
profitability are maximised (Council for Logistics Man- 1. In-house logistics, or insourcing logistics means
agement, various) [3]. that the company operates its logistics activities in-
Sourcing is the act of transferring work from one house. The company owns transport, warehouses,
entity to another. Outsourcing is the act of transferring handling equipment, and others including staff to
work to an external party. Whether or not to outsource process the logistics functions.
is the decision of whether to make or buy. Organisa- 2. Logistics service provider (LSP), or asset-based lo-
tions are continuously facing the decision of whether gistics (2PL) is the management of traditional lo-
to expand resources to create an asset, resource, gistics functions such as transport and warehouse.
product or service internally or to buy it from external The company who does not own or have enough
party. If the organisation chooses to buy, it is engag- facilities and infrastructure may hire an LSP to pro-
ing in outsourcing. An outsourcing initiative calls for vide the vehicles or the basic service. The major
the transfer of factors of production, the resources reason is to reduce the cost or capital investment.
used to perform the work and the decision rights, or 3. Third party logistics (3PL/TPL), or contract logis-
responsibilities for making decisions. The organization tics. TPL in the original term means using of exter-
transferring these is referred to as a client, the organi- nal organisations to perform the logistics functions
sation that conducts the work and makes decisions is that can be the entire logistics process or selected
the vendor, and the scope of the work is captured in a activities. A relationship is characterized by a lon-
project [7]. ger-term, more mutually beneficial relationship.
With respect to logistics outsourcing specifically, 4. Fourth party logistics, or supply chain logistics is an
Lynch (2000) provides the following summary: Logis- evolution of supply chain outsourcing. It manages
tics outsourcing is an arrangement whereby a logistics and integrates all kinds of resources and oversees
service provider performs services for a company that 3PL functions throughout the supply chain with the
could be, or have been, provided in-house. Logistics sense of global market, strategic advantages and
outsourcing is about subcontracting logistics activities long-term relationship [2].
to companies that are equipped to provide the ser-
vices. According to Rabinovich, Windle, Dresner and Consultancy
Corsi (1999), logistics outsourcing can be defined as
long- and short-term contracts or alliances between Business Process
Management
manufacturing and service companies and third-party
logistics providers (3PLs). Ravi (2001) points out that Client 3PLs
the outsourcing of logistics functions is a business dy-
namic of great importance for many shippers and that Client 4PL Technology
4PL
it involves the use of external companies (i.e. third par- 1990-2000 Client Financial engineering
ties) to perform logistics functions that have tradition-
ally been performed within an organisation [3]. Outsourcing Client 3PLs
1980-1990
Project
Insourcing
Client Internal Logistics Operation
1970s-1990s
13,00 € 12,300
12,00 €
10,700
11,00 € 10,100
Revenues (Million Euros)
10,00 €
9,00 € 8,500
8,100
8,00 €
7,00 € 6,200 6,500
6,00 €
4,800
5,00 € 4,200
4,00 €
3,00 €
2,00 €
1,00 €
0,00 €
2002 2003 2004 2005 2006 2007 2008 2009 2010
Year
(4PL) participates in supply chain coordination instead Outsourcing provides companies with the freedom
of just providing operational logistics and fulfillment to concentrate their energies on key activities that are
services, like a traditional third party logistics provider critical to maintaining their competitive edge. This re-
(3PL) would. The 4PL model essentialy elevates the sults in improvement of industrial relations and rising
3PL to a coordination of the flow of goods, rather than labour productivity.
just an operator in the physical movement of goods. For activities eligible for outsourcing, the key stra-
This is seen by 3PLs as a method for not only increas- tegic question is whether the firm can perform those
ing revenues but also, more importantly, as a method service activities on a level that is comparable with
to contribute to offering higher value added activities the best organisations in the world. If a service activity
in the supply chain than the warehousing and trans- meets several criteria, the next step is deciding wheth-
port services traditionally did [9]. The idea of using a er the service is central to the firm’s core strategic ac-
4PL was slow in gaining traction. Now, as a result of tivities. Moreover, to make the best make-or-buy de-
globalization, 4PLs are fast gaining momentum and cision, companies must determine how that decision
there is a considerable potential for growth in this sec- will affect the final product quality and the company’s
tor. technology [4].
The following are the suggested stages to success-
ful make-or-buy decision:
2. FOUR STAGES PROCESS –– building incentive for outsourcing,
MAKE-OR-BUY-DECISION –– exploring strategic implications,
–– analyzing costs/performance,
The decision of whether to make or to buy is a prob- –– selecting providers.
lem that is frequently encountered by higher manag-
ers who want to reveal and exploit every competency
2.1 Planning stage
within the links of the supply chain. Make or buy is a
decision not to be made only on the basis of economic As with any significant new planning activities also
considerations, since acquisition or loss of core com- by planning initiative team member selection, the
petencies may also be involved. leader selection and outside adviser come into play.
Decisions regarding outsourcing significant functi The project team assesses the risk and the resources,
ons are among the most strategic that can be made by information and management skills needed to miti-
an organisation. They address the basic organisational gate those risks, while the outsourcing adviser levels
choice of the functions for which internal expertise is the playing field with the outsourcing providers [6].
developed and nurtured and those for which such ex- The feasibility of outsourcing is determined by a series
pertise is purchased. Even an individual make-or-buy of screenings that every outsourcing initiative should
decision can affect company’s production methods, pass before further, detailed evaluation:
working capital, cost of borrowing or competitive posi- 1. Senior management and employee announce-
tion. ment: Because outsourcing involves a number of
strategic issues, as well as significant risks and re- following: (1) motivation to participate, (2) a record
wards, senior management’s clear and unequivo- of delivering on promises, (3) strong communica-
cal stated support is prerequisite. For larger out- tion skills, (4) ability to think creatively and strategi-
sourcing initiatives top management must play a cally, (5) solid performance evolutions, (6) relevant
role. For smaller initiatives, middle-level managers specialization within the organization, (7) wide ex-
might do the heavy lifting with the support of se- perience from outside the organization. The team
nior management. The team usually needs a mix members should be objective. They should repre-
of managerial and technical talent and representa- sent a cross-section of the organization’s functions
tives from user areas whose services will be direct- and should have access to and full cooperation of
ly impacted by outsourcing. User perspectives and the individuals in the areas to be considered for
objectives are essential for setting the scope and outsourcing [6]. The size of the customer’s team
assessing the risks. Before selecting the project depends on the scope and size of the project, but
team and advisers the organisation must inform smaller teams are generally more effective. The
also the employees about the outsourcing initia- team can be quite small in the planning phase and
tive, explain why outsourcing should be explored expanded when the analysis begins. Teams with
and indicate that this is only a test to determine full-time members are often more focused and ef-
if outsourcing is a viable tool. If they do not know fective than teams composed of people who work
what is happening, they may react very negatively part-time, although full-time allocation may only
to outsourcing. make sense for large outsourcing projects. It helps
2. Choosing the project leader: Early in the outsourc- tremendously to have persons experienced in out-
ing evaluation process, the customer must identify sourcing on the team for the insight they bring to
who will take the leadership responsibility, perform the issues and the realism they bring to cost and
the analysis, and make the decisions. The role of the benefit estimates.
outsourcing project leader is complex and challeng- 4. Choosing an independent advisor: Independent
ing. It runs from managing the project, the team, outsourcing advisors can help avoid failures. They
and the individual team members to gathering tech- will have seen different situations first hand and
nical support, facilitating discussions, and drawing can help the client avoid the same pitfalls. Lack of
out consensus to drafting reports, making presen planning, lack of follow-up in execution, miscom-
tations and so on [6]. In selecting the individuals munication, not understanding cultural differenc-
for this position, the following characteristics should es, poor process, etc., are just a few of the areas
be considered: (1) ability to embrace and champion that an outside advisor can help with. If a client
change, (2) earned credibility across the organiza- has not established an offshore outsourcing rela-
tion, (3) a desire to manage, not to do, (4) the abil- tionship, having an independent advisor can help
ity to build trust, (5) strong communication skills, formulate clearly articulated objectives and bring
(6) strong negotiation skills, (7) strategic planning their expertise to the table with regard to process,
skills, (8) project and team management skills, (9) selection, contract negotiations, and getting the
marketing skills, (10) process expertise [5]. transition going in an accelerated manner. An-
3. Appoint process implementation team: Choosing other benefit of an outside advisor is to help the
team members is a critical step in successful out- client understand if they are getting a good deal
sourcing. Characteristics and skills that the out- (compared with the industry and other clients do-
sourcing team members should possess are the ing similar work with a similar type of outsourcer).
This removes one potential area of mistrust in the reduction, (3) restructuring of the supply chain, (4)
relationship. Also, advisors who have people with cost reduction and service improvements. Specify-
good understanding of the outsourcer’s national ing outsourcing objectives that are more specific
culture can explain the cultural differences. There than the motives provides a basis for developing
are steps one can take to avoid these problems. selection criteria for the provider and guides the
Independent advisors can most certainly help in requirements and conditions in the RFP and pro-
establishing, repairing, maintaining, and improving vides a common understanding for the persons
client/provider relationships. who write the RFP, evaluate the proposals, and rec-
ommend the selected supplier(s). Objectives also
provide the basis for evaluating provider propos-
2.2 Evaluation stage
als. The last important thing to be defined is the
scope. Outsourcing can be divided into two general
If the outsourcing idea has passed the initial
categories: total and selective. Total outsourcing
screenings, planning can proceed to a detailed out-
involves contracting out 80% or more of the func-
sourcing evaluation:
tion. Selective outsourcing involves outsourcing a
1. Outsourcing implication on organizational vision few functions that total less than 80% of the whole.
and structure: Early in the outsourcing evaluation Methods for identifying functions that might be
process, the customer must find out and under- selectively outsourced include opportunistic, prob-
stand how outsourcing can fit within the organisa- lem-focused approaches and more methodical
tion’s strategies (organizational structure and vi- planning approaches.
sion) and how its implementation will affect those
strategies.
2. Determining core competences: Core competen- 2.3 Internal costs and performance analysis
cies are the source of competitive advantage and
arise from the integration of multiple technologies The goals of this phase are to develop detailed
and the coordination of diverse production skills. cost analysis of the target function. When consider-
To achieve long-term growth, companies need to ing outsourcing part or all of any business process
develop, protect, and leverage their core compe- the following associated costs need to be taken into
tencies and consider outsourcing any activities account: salaries, benefits, training/education, spe-
that do not confer a competitive advantage. If the cialised software, travel, phone charges, depreciation/
function or functions to be outsourced contribute amortisation, mail costs and postage, office supplies,
in central ways to the organization’s competitive equipment, management time, information costs, oc-
success (core competencies) then those core func- cupancy charges.
tions are probably not strong candidates for out- It is essential that the project team conducts activ-
sourcing. Identifying which resources and capabili- ity-based analyses in order to understand the current
ties to preserve and which activities to outsource, costs of the activities that might be outsourced and
requires careful consideration and planning. those that are staying. To this are added the costs of
3. Defining the motive, objectives and scope: Before invested capital and the estimated costs of poor per-
serious analysis of cost and performance can take formance [6]. The biggest challenge is to develop both
place, the company should know the objectives of costs and service requirements in light of expected
outsourcing and know the scope of what is to be technological and business change (which may be
considered for outsourcing. If the company does interrelated) over the expected life of the outsourcing
not know what it is trying to accomplish, any alter- arrangement. Forecasting the future is always difficult
native can look good or bad. Companies that rush and often inaccurate, but still necessary. The project
into outsourcing without fully understanding what team must estimate which costs do not disappear
they hope to gain soon find themselves in a mire of with outsourcing and what new costs will be incurred
contractual battle or not receiving improved servic- as result of outsourcing. Without a good idea of future
es. Sensible reasons to consider outsourcing are needs and the costs of meeting these needs, it is dif-
both strategic and tactical. It is essential to know ficult to outsource effectively and efficiently.
and clearly define the objectives of the company There are also financial benefits resulting from out-
and to document what the company expects from sourcing and they are other than cost-related. These are
outsourcing. Clear objectives help lead to a sound estimated and used in the make-or-buy decision [6].
decision on what to outsource and what not to out- Current performance should also be measured and
source. The objectives for outsourcing are often de- analyzed, since performance improvement is often a
rived directly from the motives for outsourcing that reason for outsourcing. The project team estimates
can be grouped into a few summarised categories: the financial impact of the internal poor performance
(1) concentration on core business, (2) investment and projects future performance. Understanding the
Make Buy
Labour Overheads + +
Figure 5 – Financial element of “make-it” decision Figure 6 – Financial element of “buy-it” decision
Source: M. F. Greaver [6] Source: M. F. Greaver [6]
existing performance is fundamental to setting provid- tions are made to determine their qualification. Their
er performance standards and monitoring their perfor- qualifications are then compared to the criteria and a
mance [6]. decision is made on whether they should be invited
Once a company has estimated all the costs, it de- to submit proposals. Requests for proposal are pre-
termines its position on who will bear each cost – the pared and delivered to the targeted providers list and
organization or the outsourcing provider, as shown in should include the reasons for outsourcing, scope of
Figures 5 and 6. outsourcing, qualifications of providers, pricing mod-
els, performance measures. When the proposals are
2.4 Selecting service provider returned, they are evaluated and compared to the
other proposals and further discussions are held with
This process of first defining organisations needs, the providers on the short list. From this short list the
then engaging the marketplace of providers, preparing prime provider is selected [6].
and delivering request of proposal (RFP) and ultimate-
ly selecting the right provider requires a good interplay 2.5 Decision time
of internal assessment, coupled with an effective and
practical interaction with the marketplace of potential This is the step where the oversight of the project
providers [5]. team and top management comes into active play.
Once a decision has been made on which areas to The goal here is to review the information gathered till
consider for outsourcing, the project team should begin this phase and to consider the recommendation on
researching the providers. Following are a number of whether the service should be made internally or out-
ways how to proceed in identifying potential providers: sourced. If the decision is to buy the part family from
–– open a dialogue with outside organizations the
an outside source (or sources), then the four steps
company is already doing business with,
shown in Figure 7 should be undertaken.
–– use the organization’s professional network,
–– direct research,
–– use consultants [5]. 3. CONCLUSION
The project team lists the criteria for “qualified”
providers based on the reasons for outsourcing. Po- The recent times have witnessed an increased
tential providers are identified and further investiga- global interest in outsourcing of logistics functions.
The outsourcing process is very complex and has to ali kupi« je ena izmed najbolj kritičnih strateških odločitev v
be planned, well organised, calculated and performed okviru logističnega outsourcinga, zato mora biti izpeljana na
in the best possible way to gain the expected success. strukturiran in dosleden način. Eden izmed praktičnih post-
Determination whether to produce logistics servic- opkov, ki podpira tak način izpeljave odločitve je izvedba ko-
rak za korakom. Najpomembnejši koraki v okviru te izvedbe
es internally or to buy them from an outside logistics
so sledeči:
provider involves both qualitative and quantitative fac- –– Ovrednotiti ali je outsourcing primeren za podjetje.
tors. Qualitative considerations include service quality –– Natančno določiti funkcije, ki jih podjetje namerava
and the necessity for long-run business relationships izločiti v zunanje izvajanje ter pričakovanja podjetja glede
with subcontractors. Quantitative factors deal with same izvedbe.
cost. –– Uporabiti dobro definiran strokoven proces, ki bo poma-
The steps of the make-or-buy decision should be gal ovrednotiti pravo izbiro zunanjega izvajalca.
modified to fit the specific organization and outsourc-
ing situation. These decisions are always individual KLJUČNE BESEDE
decisions, which have to take into consideration the
logistika, logistični outsourcing, odločitev »naredi sam ali
specific characteristics of each company. The estab-
kupi«, metodologija outsourcinga
lishment process depends on the type of industrial
sector, complexity and scope of activities. This means
that the establishment of a general model, which will LITERATURE
be useful for all organisations makes no sense.
[1] J. Gattorna, W. Selen, R. Ogulin: ˝Characteristics,
Mag. PATRICIJA BAJEC strategies and trends for 3PL/4PL in Australia, Alpha
E-mail: patricija.bajec@fpp.uni-lj.si Research Consortium, Sydney, Australia, March 2004
Dr. IGOR JAKOMIN [2] J. Ge, L. Ding, N. Bussayadilokskul, L. Zhang, B. Han, Z.
E-mail: igor.jakomin@fpp.edu Cai: Outsourcing Logistics Services Including 4PL, Lo-
Univerza v Ljubljani, Fakulteta za pomorstvo in promet gistics & Supply Chain Management Summer School,
Pot pomorščakov 4, 6320 Portorož, Republika Slovenija Sydney, Australia, May 2004
[3] J. K. Beverly: An investigation into logistics outsourcing
POVZETEK practices, trends and issues within the manufacturing
sector in South Africa, Ph. D. thesis, Rand Afrikaans
POSTOPEK ODLOČITVE »NAREDI SAM ALI University, Johannesburg, South Africa, 2003
KUPI« V PROCESU OUTSOURCINGA [4] L. G. Laios, S. J. Moschuris: ˝Make-or-buy Decisions
– Major Factors to Consider˝, Journal of Supply Chain
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kupijo od logističnih izvajalcev? Dandanašnje globalno [5] M. F. Corbett: ˝The Outsourcing Revolution: Why it
konkurenčno okolje sili podjetja v ponovno ovrednotenje makes sense and how to do it right˝, Dearborn Trade
svojih obstoječih logističnih procesov, tehnologij in storitev Publishing, Chicago, 2004
znotraj podjetja, z namenom osredotočenja na strateške [6] M. F. Greaver: ˝Strategic Outsourcing: A Structured Ap-
aktivnosti. Outsourcing se tako pospešeno uporablja kot proach to Outsourcing Decisions and Initiatives˝ AMA
konkurenčno orožje v današnji ekonomiji, saj lahko zunanji Publications, New York, 1999
izvajalci pogosto opravijo delo hitreje, ceneje in bolj kvalitet- [7] M. J. Power, K. Desouza, C. Bonifazi: “The Outsourcing
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