Computers in Industry 49 (2002) 59–75

Framework for outsourcing manufacturing:

strategic and operational implications
Jesper Momme
Department of Production, Aalborg University, Fibigerstraede 16, 9220 Aalborg East, Denmark

Abstract

Over the last decade, outsourcing has proved to be a relevant strategic option for companies narrowing their operations to
focus on core competencies. This paper analyses the process of outsourcing manufacturing to cost-efficient and innovative
suppliers in support of internal resources and capabilities. A scientific reference model founded on manufacturing strategy is
proposed to help choose the right level of analysis and steer the research process. From this, a system model is developed to
enable identification of the production system elements and internal support functions. Finally, a framework that links the phases
of the entire outsourcing process to strategic planning is synthesised. The framework includes a logical sequence of key activities
with built-in performance measures and expected output for each of the phases. The research methodology combines theory
study with case study and action research in Aalborg Industries, which operates in the heavy industry. Thereby, the research
pursues both academic and industrial application.
# 2002 Elsevier Science B.V. All rights reserved.

Keywords: Outsourcing framework; Manufacturing strategy; Competencies; Open systems theory; Case study; Action research

1. Introduction ing [2]. Globalisation and technological innovation

Entering the third millennium, most industrial sec-
tors face intensified conditions both in the marketplace
and within the corporate boundaries. The customers
are putting higher demands and constraints on their
upstream linkages. Formerly, the customers focused
mainly on low total systems cost, high quality and
good delivery performance. Presently, they also expect
short product life cycles and time-to-market, innova-
tiveness and customisation [1]. The companies and
their suppliers are experiencing the emergence of a
global economy and rapidly changing markets. At the
same time, the complexity of products and technolo-
gies is increasing and their functionalities are expand-
E-mail address: i9jmo@iprod.auc.dk (J. Momme).
appear to be common denominators of these market-
ing and corporate business challenges. From a corpo-
rate strategy point of view, they add new competitors
and markets and put strong pressure on companies’
competitiveness and profitability. From a combined
business and functional strategy viewpoint, they call
for improved organisational adaptability and more
flexible and advanced systems relative to manufactur-
ing, logistics, engineering, information and process
technology and the like [3,4].
Table 1 specifies the wide range of trends in the
industry and their implications. Besides, the table
includes examples of initiatives that may be taken
to proactively meeting the trends and implications.
It is noticed that the trends, implications and initia-
tives are not fully consistent in the sense that certain
interdependencies and overlaps exist in practice.

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60
Table 1
The wide range of industrial trends and implications that represent the problem context of the paper
Trends
Information and process technology—
including the Internet, electronic data
interchange, e-commerce, supply chain
planning systems, robotics, etc.—is
gaining an all-important influence
on the industry structure
Customers are extending
their requirements
Companies are reducing the
total supplier portfolio
Resources are concentrated on
core businesses rather than on
diversification
The complexity of products and
technologies is increasing and their
functionalities are expanding
J. Momme / Computers in Industry 49 (2002) 59–75
Implications
Facilitates integration of operations of
separate companies into a cohesive
whole, which is a strong incentive to
establish buyer–supplier relationships
Enables rapid deployment and
sharing of information between
buyer and supplier
Makes interorganisational interfaces
less transparent in the sense that people
communicate via electronic media
instead of face-to-face
Implies that fewer workers can handle
more tasks
Reduces the need for several layers of
middle management, thus, strengthening
organisational competitiveness by
providing flexibility and overall
operating cost savings (i.e. downsizing)
Means that companies must meet short
product life cycles and time-to-market,
innovativeness and customisation in
addition to low total systems cost, high
quality and good delivery performance
Involves single sourcing, strategic
partnerships, etc. to obtain cost
reductions, improve planning and
control of supplier base and better
exploit competencies and innovation
ability of individual suppliers
Requires a new approach to the
strategic planning process in which
value creation is perceived from an
inside-out perspective compared with
an outside-in perspective
Calls for flexible and advanced systems,
including manufacturing, logistics,
engineering, IT, etc.
Initiatives
Moving from traditional arms’ length
relationships to partnering relationships
in which both parties work within ‘‘the spirit
of the contract’’
Obtaining a win–win situation while
ensuring that savings, delivery performance,
innovativeness and other collaborative ob-
jectives comply with the baseline agreement
Creating an extended enterprise in which
the company is considered as an integral
part of a supply and distribution network
Optimising all supply chain activities,
including manufacturing, engineering, pro-
curement, logistics, sales, marketing, etc.
Incorporating engineering activities and
administrative routines into the planning of
customer orders
Integrating engineering and manufacturing
processes, planning and control, purchasing
and quality
Developing a technical management system
to determine the criticality of supplied
products or services and to segment and
risk-assess the supplier base
Establishing framework agreements, system
deliveries, e-portals, continuous perfor-
mance assessments, joint development
projects, etc.
Integrating production and operations man-
agement and industrial marketing with
strategic planning in order to meet the
objectives of organisational adaptation and
quick response to changes in customer
demands
Implementing a manufacturing strategy
based on modularisation and mass customi-
sation
 J. Momme / Computers in Industry 49 (2002) 59–75 61

Table 1 (Continued )

Trends Implications Initiatives

Markets are changing rapidly
A global economy is emerging
Adapted from [6,46,47].
Requires a strategic preparedness that
can sense and map the market trends in
time to ensure proper response
Increases the risk of investment in
new technology, machinery and other
equipment, because of the exposure to
obsolescence
Adds new competitors and forces
organisations to re-examine and challenge
every aspect of their operations
Developing ‘‘flatter’’ organisations that
pursue the market dynamics by reducing the
time lag between decision and action
Changing organisations across the supply
chain from the traditional one-dimensional
structure (high hierarchy) to a multi-dimen-
sional structure (no or flat hierarchy)
Implementing an outsourcing strategy that
combines short-term production and logis-
tics criteria with long-term competence and
market criteria

Nevertheless, they represent the problem context of
the paper.
As indicated in the table, globalisation and techno-
logical innovation present a particular paradox.
Technology facilitates the integration of business
operations between separate companies while the
rapid market changes on a global scale increase the
investment risk in new technology, because it might
become obsolete within the payback period [5]. In the
table, I take a step further by arguing that the rapid
development of information and process technology
may reduce the need for middle management based on
the rationale that some operating procedures may be
automated. This contributes to obtaining flexibility
and cost savings, and links to the trend of downsizing.
Lewin and Johnston [6] support this point stating that
while downsizing initiatives were initially aiming
merely at increasing profitability by reducing costs,
they now also reflect the search for more flexibility (cf.
automation). The advances of information and process
technology, thus, largely prompt the gradual change
within the corporate boundaries.
In consequence of the internal and external condi-
tions given above, companies must be able to change
their organisation, operations, product portfolios, cus-
tomer segments, etc. rapidly and efficiently as well as
on a continual basis. This may involve a new approach
to the strategic planning process in which production
and operations management and industrial marketing
are seen as integral parts. There is evidence to suggest
that the success of outsourcing depends largely on
such inside-out perspective which assigns produc-
tion strategic considerations the same importance as
market strategic considerations [7–9]. Hence, the
frequently used term ‘‘paradigm shift’’ is highly legit-
imate at present, not only for the industry, but also for
the scientific problem addressed in this paper.
2. Literature review
Over the last decade, there has been an increasing
emphasis on buyer–supplier relationships in the inter-
national business and in the academic community.
This is reflected in the extensive amount of literature
produced in this period, from which a wide range of
affiliated notions like supply chain management, ver-
tical alliances, lean supply, industrial networks and
outsourcing has occurred [10–12]. Collectively, these
notions propose different strategies, tools and tech-
niques for how to select the right partner, establish
the proper relationship and adapt adequately to the
internal and external changes in view of improving
competitiveness and profitability of corporations.
The importance of investigating the impact of
buyer–supplier relationships on corporate efficiency
is seen from the fact that the typical industrial com-
pany spends 50–85% of its turnover on purchased
goods such as raw materials, components and semi-
manufactures [13]. For the individual sectors, this
percentage has been increasing with the recent moves
towards downsizing and outsourcing [14]. Considering
the significant financial potentials of efficient inter-
company collaboration, companies are seeking to radi-
cally reduce the total supplier portfolio through single
sourcing, strategic partnerships or other appropriate
62 J. Momme / Computers in Industry 49 (2002) 59–75
relationships with few selected key suppliers. The aim
is mainly to obtain total cost reductions in the supply
agreements, to improve planning and control of the
supplier base and to better exploit the complementary
competencies and innovation ability of the individual
suppliers [15].
Wasner [12] presents a state-of-the-art view on the
outsourcing process by combining a thorough litera-
ture review with two independent case studies of the
Swedish aircraft industry (Saab AB) and the electro-
nics industry (Ericsson Radio Systems AB and one
key supplier Swedform Metall AB). The first case
concentrates on outsourcing of aircraft sub-systems
and subsequent insourcing of related software activ-
ities, whereas the second case deals with outsourcing
of radio base station production. Contrary to most
authors within the field, Wasner claims that current
academic research and part of industrial practice are
bringing mainly strategic outsourcing considerations
(i.e. what? and why?) into focus. However, he argues
that the process of carrying out the transfer of an
activity from being internally controlled to becoming
externally managed (i.e. how?) is equally difficult
because of interdependencies at the operational level.
The effects of outsourcing are far reaching in terms of
physical, temporal and organisational reach. Physi-
cally, because there is an inherent complication of
losing control as an activity is turned over to an
external supplier. Temporally, because it is difficult
to estimate how conditions will change over time.
Organisationally, because outsourcing involves con-
verting decisions at the strategic level into actions at
the operational level and transferring functions from
one organisation to another. Wasner’s challenging
emphasis on this relatively neglected domain of out-
sourcing provides one of the main building blocks of
this paper.
In Denmark, ‘‘Den Danske Logistikanalyse’’ edited
by KPMG Consulting has been published once a year
since 1998 [15]. In 2000, 85 companies with a wide
variation in number of employees, sectoral affiliation
and turnover participated in this domestic logistics
survey. As for outsourcing, the trend tends to be
upward. On an average, 21% of the collective produc-
tion activities were outsourced in 2000, which corre-
sponds to an increase of 6% compared to 1999. Thus,
production is most subject to outsourcing followed by
transport control and IT operations (both 18%). Inter-
estingly, 53% of the companies expect outsourcing of
production to increase in the future, which is more
than double what it was the year before. In general,
outsourcing is supported by framework or collabora-
tion agreements with the selected supplier/partner.
Those collaboration criteria given the highest priority
by the company are price regulations during the con-
tract period, time/reliability of delivery, contract ter-
mination, quality and exchange of information [15].
The proviso as to price regulations and contract
termination is typical for the Western approach to
outsourcing that has traditionally been rooted in an
‘‘arms’ length mentality’’. This is opposed to the
mutual-trust and long-term buyer–supplier relation-
ships usually practised in the Far East and in Japan in
particular [16,14,17].
3. Methodology
The research is founded on an in-depth theory
study of literature on outsourcing and related sub-
jects. Parallel with the theory study, a longitudinal
case study of Aalborg Industries is carried out, using
the resource-based perspective [18] and the systems
approach [19] as the main theory bases. This com-
bination of theory testing (deductive literature study)
and theory generating (inductive case study)
research is referred to as exploratory integration
[20]. The single case study formally commenced
in October 1997 and finished by February 2001,
thus, spanning a period of approximately 3 years
and 5 months. Moreover, action research [21] plays a
important part in the empirical inquiry. The action
research was gradually adopted in connection with
my general project participation. However, systemic
action research formally commenced in January
1999 and, like the case study, finished by February
2001 (approximately 2 years and 2 months). The
empirical elements of the methodology are, hence-
forth, referred to as the case study and action
research programme.
3.1. Case study design
The case study applies an embedded approach
where the Aalborg Industries Group (Aalborg Indus-
tries), principally the headquarters in Denmark (Head
 J. Momme / Computers in Industry 49 (2002) 59–75
Office), defines the larger unit of analysis. The Danish
production plant (Aalborg Production) and the US
subsidiary (US Company) define the main sub-units
of analysis. Aalborg Production and US Company
partly operate within the same business area, although
their individual product portfolios differ significantly
in size and capacity. The two business units represent
distinct evolutionary perspectives on outsourcing and
opposing extremes as to the degree of vertical inte-
gration. This diversity at the sub-unit level makes it
reasonable to use the embedded approach on the single
case [22].
3.2. Towards action research
After 13 months of research, when I was in the US to
perform the US Company case study, it was announced
that two corporate development projects of vital impor-
tance to the Ph.D. project were about to start at Head
Office. This new situation stimulated me to apply for
part-time employment as a project engineer. The key
stakeholders approved the application whereupon the
original construction of the project with 80% affiliation
to Department of Production and 20% to Aalborg
Industries (80–20) was changed to 50–50 over a 1-year
period from 1999 to 2000. In line with this further
integration, the project was purposely directed towards
action research, with me having an intervening effect on
the study object. The combination of case study and
action research was found to be the most appropriate
way of aiding the scientific progress, provided it was
possible to (1) distinguish between the two approaches
during research and development, and (2) document and
reflect on the project intervention relative to the study
object.
3.3. How to apply the resource-based and open
systems theories in practice
The resource-based perspective defines the com-
pany as a unique bundle of resources and capabilities
that largely determines what assignments and decision
rights should be outsourced and how the relationship
should be established and managed. Thus, the research
views outsourcing and the related processes of value
creation from an inside-out perspective, which chal-
lenges the outside-in perspective applied by most
marketing researchers [23,24]. In other words, the
63
research applies a buyer perspective and is rooted
in core competence thinking [25,26]. Besides, atten-
tion is concentrated on single buyer–supplier relation-
ships (i.e. the dyad) inspired by the preliminary studies
of Håkansson [27]. This means that the potential
collaboration and competence development between
the individual suppliers, the company and the custo-
mers in the industrial network are beyond the scope of
research. The philosophy of this important delimita-
tion is that any company needs a thorough knowledge
about its internal system and sub-system interfaces
before it can successfully hand over complementary
assets to an external partner or to the supply network
as a whole. This knowledge development is a key
success criterion of the research.
The systems approach argues that wholes in reality
are always seen to differ from the sum of their parts
due to synergistic effects. In order to understand or
explain an individual component, it is not sufficient to
study that component in isolation; it must be placed in
its proper context. This means studying components
that are inevitably interrelated rather than searching
for unique cause-effect relations using statistical
generalisation or viewing reality as a social construc-
tion based on the individual behaviour and networking
of the members in an organisation. Accordingly, Arb-
nor and Bjerke [19] position the systems approach in
between two extremes: the analytical approach and the
actors approach. Traditionally, the systems approach
distinguishes between closed systems and open sys-
tems. This research is informed by the open systems
theory that views the study objects in the context of
their environment. In practical terms, the outsourcing
process is examined in the context of a scale-intensive
company with emphasis on the internal production
system and cross-functional interdependencies (study
object). In addition, the company’s external interfaces
and interdependencies specific to the outsourcing
partners and its strategic direction in the marketplace
in general are investigated (environment). Being
scale-intensive implies that Aalborg Industries needs
access to a cost-efficient and innovative supplier base,
which complements the company’s internal core com-
petencies. Besides, Aalborg Industries is moving
towards an evolving market in which process re-
engineering, a stable product line, low cost and
value-added services are predominant attributes
[28]. Finally, the research seeks to identify a number
64 J. Momme / Computers in Industry 49 (2002) 59–75
of generic phases that can be said to constitute the
entire process.
4. Frame of reference
In order to be able to choose the right level of analysis
and steer the research process, a frame of reference is
called upon. Ford [29] provides a detailed framework
which supports this initial target. The framework con-
tains seven layers: general environment (i.e. system),
specific environment (i.e. stakeholder), organisation
(i.e. macro), plant/division (i.e. meso), department/shop
(i.e. micro), work unit (i.e. group) and worker (i.e.
individual). However, Ford states that whether a given
study object is micro or macro depends upon the ‘‘school
of thought’’ that one represents. For example, in orga-
nisation theory, studies of the overall organisation are
considered macro. In business economics, studies of the
organisation are considered micro whereas studies of a
nation’s economy are macro oriented. In accordance
with this diversity, Olsen [30] develops a five-level
framework as the starting point for analysing integration
mechanisms between an industrial company and its
suppliers. The five levels are society, network, dyad,
company and activity/task. Fig. 1 synthesises the frame-
works of Ford [29] and Olsen [30] with the aim of
establishing the scientific reference model of the paper.
The pyramidal model shows five levels of analysis that
span macro, meso and micro environments. The com-
pany level is the key to the research with main interfaces
to the activity level and the dyadic level.
The model implicitly points to two coherent
research objectives. The first objective is to clarify
Fig. 1. The scientific reference model. Adapted from [29] (p. 5) and [30] (p. 13).
how to expediently link operational and tactical
activities to the strategic planning process in an
outsourcing context. Present research suggests that
such activities should be particularly concerned
with how to establish and manage the outsourcing
relationship on the basis of criteria like quality
consciousness, cost potential, time/reliability of
delivery, innovativeness and geographical location.
That is, criteria which relate mainly to manufactur-
ing performance, logistics and market strategy. This
agrees with the fact that the research applies the
resource-based perspective on the outsourcing
process, and investigates the single relationship
between company and supplier. The second objec-
tive is to explore which decision variables and
performance measures are particularly important
to consider when outsourcing elements of the pro-
duction system that are not within the core compe-
tencies of the company. Core competencies are the
building blocks of the company, i.e. those with the
highest impact on the competitive position and
profitability, and should never be outsourced [31].
Thereby, established and valid knowledge about the
core competencies forms the basis of successful
outsourcing.
Motivated by the theory of transaction cost ana-
lysis [32], one might argue that core competencies
are those with the highest asset specificity for the
company. Asset specificity refers to the unique
association of particular competencies and assets
to one transaction. Some are visible (i.e. technical
resources, buildings and equipment) while many are
intangible but possibly more important (i.e.
knowledge bases and operating procedures). The
 J. Momme / Computers in Industry 49 (2002) 59–75
transaction involves high investments that are spe-
cific to the requirements of a particular exchange
relationship. The non-core competence areas
involved in the outsourcing projects are referred
to as complementary competencies, i.e. those with
medium asset specificity. By contrast, those compe-
tencies with low asset specificity (i.e. residual com-
petencies) should be accessed through traditional
arms’ length exchange contracts [33].
The strategic, tactical and operational outsourcing
activities must be viewed as derivatives of the com-
petitive priorities and decision categories that tradi-
tionally define manufacturing strategy [34,35]. Ever
since the seminal articles of Skinner [36,37] in
Harvard Business Review, manufacturing strategy
has largely been characterised by a top–down
approach. This approach is hierarchical in nature
implying that corporate strategy drives the business
strategy which then drives the functional strategies,
including manufacturing strategy [38]. Hayes [39]
refers to this traditional strategic planning process as
an ‘‘ends-ways-means’’ model: establish corporate
objectives (ends); given those objectives, develop a
strategy (ways) for attaining them; then allocate the
resources (means) necessary to implement this strat-
egy. Referring to the terminology in Fig. 1, the scope
of outsourcing activities is determined by the con-
figuration of the meso and micro environments as
Fig. 2. The seminal system model ([3], p. 268; [9]).
65
well as by the stimuli received from the macro
environment.
5. System modelling
The research focuses on outsourcing within the
settings of the production system and relevant support
functions. Specifically, it investigates the process of
outsourcing fabrication parts to capacity suppliers
with the potential to become system suppliers. The
suppliers are viewed as independent entities employed
by the focal company. This means that the suppliers
will typically hold the ownership and decision rights
of the outsourced production assets, but will be inte-
grated into the company’s production system and
support functions from a collaborative standpoint.
Fig. 2 shows the overall system addressed.
The model seeks to emphasise the delimitation of
the research by incorporating the ideas of the resource-
based and open systems theories. Hence, the model
defines the following basic elements of the production
system by:
 Physical assets—inputs (i.e. personnel, machinery
and materials).
 Planning and manufacturing—transformation pro-
cess (i.e. materials management, planning and con-
66 J. Momme / Computers in Industry 49 (2002) 59–75
trol, technology development, manufacturing pro-
cesses and inspection and testing).
 The generated outputs (i.e. products and services).
In addition, the model contains 10 internal support
functions that span a wide range of operations. These
support functions have a major cross-functional impact
on the production system. Likewise, the total number of
outsourcing operations in the company interact with
those of the supplier. The internal and external workflow
interfaces determine these interdependencies. A key
point of the model is that outsourcing of manufacturing
to a supplier in the network involves knowledge transfer
to gain access to competencies that are complementary
to those of the company. Put differently, the company
typically needs to train the supplier, especially in the
initial phase of the collaboration where the supplier may
be unfamiliar with the company’s way of doing busi-
ness. This training could include introduction to strate-
gic issues like corporate goals for product design/
development or to technical issues like how to read
the new drawing basis/technical specifications and oper-
ate/maintain the machinery (if physical transfer takes
place). Without such training, the company is not likely
to profit by the supplier’s performance incentives.
The system elements and workflow interfaces may
vary in number and in processual influence depending
on the specific organisational set-up and business
environment subjected to investigation. Accordingly,
the development of the production system and the 10
support functions is rooted in the manufacturing set-up
and internal workflow interfaces at Head Office. In
line with the theoretical pursuit of this part of the
paper, however, Fig. 2 has gone through minor adap-
tations in order to facilitate general understanding and
applicability. This implies that generic elements of
manufacturing strategy, value chain modelling, stra-
tegic management and buyer–supplier relationships
identified throughout the research have been incorpo-
rated. For a detailed analysis of the fields of respon-
sibility of the production system/support functions, I
refer to Momme [4] and Momme and Hvolby [9].
6. Case study and action research programme
Aalborg Industries A/S is a global enterprise
engaged in energy, steam and heat generation for
land-based as well as maritime purposes. Its compe-
tence is concentrated on developing and marketing
standardised equipment based on boiler plant and
related combustion, heat transmission and process
technologies. A scale-intensive production system
and a full range of other internal business operations
support this competence profile. The business opera-
tions are defined as support functions to the production
system (see Fig. 2). Besides, an after-sales network
and a complementary supplier base (including out-
sourcing partners) form an integral part of the com-
petence profile. Thus, Aalborg Industries is an
international group of companies operating in the
heavy industry. The company has production plants,
product centres, sales offices and after-sales offices
located in Western Europe, North America, South
America, the Far East and the Middle East. Many
of these business units use a global network of sup-
pliers to complement their internal manufacturing
resources and capabilities and/or support functions.
Aalborg Industries has about 1700 employees of
whom about 600 are employed in Denmark. From a
corporate point of view, Aalborg Industries, hence,
seeks to exploit the advantages of globalisation in spite
of its relatively limited size measured by number of
employees and financial strength.
6.1. Strategic revitalisation
In October 2000, Aalborg Industries’ management
launched a new vision in support of a new corporate
strategy. The strategy involves central re-engineering
and downsizing initiatives for the majority of Aalborg
Industries’ business units to increase focus on the core
businesses. These initiatives relate to organisation,
product portfolio, information and process technol-
ogy, manufacturing set-up and supply chain manage-
ment, and they also have a major impact on how
Aalborg Industries will approach outsourcing in the
years to come. As for the two sub-units of analysis,
Aalborg Production aims to obtain a high degree of in-
house production (high vertical integration) while US
Company continues to pursue its all-important out-
sourcing strategy with great success (low vertical
integration). The main reason for these contrasting
business strategies is that Aalborg Production and US
Company have different objectives of product stan-
dardisation and production volume. In addition, the
 J. Momme / Computers in Industry 49 (2002) 59–75
two units in the future will focus on land-based
products and process technologies that represent dif-
ferent degrees of innovation and life cycle stages seen
from a combined corporate and temporal perspective.
6.2. The Danish sub-unit of analysis
Aalborg Production has excelled in boiler manu-
facturing and related equipment/services since the
early foundation of Aalborg Industries. Traditionally,
Aalborg Production has competed against low-cost
manufacturers located in Europe and to a lesser extent
in distant regions like the Far East and South America,
including Aalborg Industries’ other production plants
in China, Indonesia and Brasil. The land-based boilers
manufactured by Aalborg Production during the 1990s
were characterised by large tailor-made units where
even the specific bill of materials was typically repro-
duced from one project to another (i.e. total systems
solutions with low standardisation). Therefore, the
Danish boilers involved relatively high unit costs
and were usually sold either at a higher average price
or at a lower profit than the Aalborg Industries off-
shore boilers and some of the competitors’ boilers. At
the same time, the skill sets of Aalborg Industries’
blue-collar workers in the low-wage countries China,
Indonesia and Brasil are gradually catching up on
those of the Western workers, reinforced by the basic
workmanship required to manufacture the boilers. The
manufacturing processes consist of such operations as
cutting, bending, welding and assembly of which the
related resources and capabilities can be acquired
globally through proper transfer of technology and
training between the business units. Enhanced by this
in-house technology transfer and training, the quality
of the finished boilers is equalising across borders and
cultures.
In consequence, future attention will be concentrated
mainly on how to manufacture small standardised
boilers. The inherent paradigm shift is seen from the
fact that the aim is to reduce the number of engineering
hours per boiler to max 200. The former customised
land-based boilers required 8000–10,000 h, hence,
tying up a huge amount of capital, impeding a quick
response time in order processing, causing unstable
capacity utilisation, etc. The main rationale is to
increase earnings through rationalisation and high pro-
duction volume (i.e. large-scale production) supported
67
by information and process technology that allows for
configurable products with a certain range of variations
(i.e. flexible product architecture and bill of materials
structure). This makes it essential to keep most of the
production in-house since the profit margin now arises
from manufacturing of standardised products in large
numbers and not as earlier from design of few highly
customised products (i.e. total systems solutions). Put
differently, Aalborg Production has initiated a change
process in which products and technologies are being
upgraded from a ‘‘base level’’ to a ‘‘differentiation
level’’. Specifically, state-of-the-art robots with laser
welding equipment are being installed in the plant
in order to obtain a high degree of automation and
efficiency, thus, reducing unit costs (i.e. repeat effect).
In addition, Aalborg Production is implementing a
new factory layout in which the blue-collar workers
(i.e. foremen, welders, blacksmiths, fitters, etc.) are
arranged in self-appointed and self-managed produc-
tion teams with full responsibility for the whole man-
ufacturing process (‘‘empowerment’’). This secures a
better planning basis, creates flexibility and synergy
across operations and enhances the creativity of the
individual employees (‘‘join hands’’). Finally, Aalborg
Production works on incorporating innovative ideas
into the new product portfolio based on modularisa-
tion and mass customisation [28]. Product configura-
tion applications are being developed to facilitate
the workflow interfaces between six highly inter-
connected operations; production, sales, engineering,
project management, materials supply and after-sales
(cf. Fig. 2). This reduces the time and resources
allocated to order processing, and provides a platform
for future e-commerce.
Collectively, these initiatives point towards the
legitimacy of high vertical integration, using outsour-
cing only when it is obvious that it will increase the
earnings capacity and corporate flexibility or facilitate
closer customer relations.
6.3. The US sub-unit of analysis
US Company was acquired by Aalborg Industries in
1997 to strengthen the company’s market position
within stationary plants behind combustion turbines.
US Company is the only business unit not included in
the new corporate strategy as the size and capacity of
its product portfolio are too large to comply with the
68 J. Momme / Computers in Industry 49 (2002) 59–75
fabrication scope of Aalborg Industries’ production
plants. US Company mainly approaches the active
North American market in which the subsidiary faces
keen competition from other providers of stationary
plants (some of which have more capital resources). In
1994, US Company’s management made the strategic
decision to close down production and apply full-scale
outsourcing. The main incentives were better link
between business and market strategy, reduced risk
profile, economic savings, lack of capacity and accel-
erated re-engineering benefits. This major initiative
implies that US Company from an in-house point of
view now attends merely to the support functions (cf.
Fig. 2) while functioning as a networked organisation
within the production and logistics area. Hence, the
integrated supplier network consists of external inde-
pendent entities. Specifically, US Company collabo-
rates with approved outsourcing partners in the US and
other system suppliers located in the Pacific Rim
region (e.g. Canada, South Korea and Australia).
The collaboration is established and managed on
the basis of certain customer related demands and
criteria such as quality consciousness, performance
level, cost potential, time/reliability of delivery, inno-
vativeness and geographical location.
By using a supplier network to manufacture and
deliver the stationary plants to the customer premises,
the procurement function in US Company has changed
from providing goods and services for in-house pro-
duction to supporting global sourcing and product
supply. In other words, the procurement function
plays a central role in the co-ordination of the net-
worked organisation as its fields of responsibility
have expanded to include strategic outsourcing. In
order to support this ‘‘new’’ type of organisational
structure, US Company has merged key activities
relating to internal and external product schedul-
ing, component/material estimating, expediting and
transportation. These activities secure cost-effective
and timely purchases and deliveries, and are defined
under the umbrella of materials management which
basically includes four interrelated operations; pur-
chasing, capacity planning, inventory management
and logistics.
Contrary to Aalborg Production, US Company
chose to outsource its fabrication competence at the
time when the stationary plants and the manufacturing
processes had reached stable phases in their life cycle.
Using the above-mentioned terminology, they had
moved from the differentiation level towards the base
level in the sense that other manufacturers in the
marketplace could offer products and services of an
equivalent quality (i.e. none-core competencies). By
implementing the outsourcing strategy, the responsi-
bility for optimising the manufacturing set-up is
handed over to the strategically selected outsourcing
partners. At the same time, all internal resources and
capabilities are successfully concentrated on develop-
ing the strategic preparedness and the cross-functional
competencies necessary to manage the ‘‘extended
enterprise’’. These initiatives legitimate low vertical
integration.
7. Results
One of the basic premises of this research is that
outsourcing might advantageously be viewed as
phases. The domestic and international outsourcing
literature does not present a common picture of which
phases can be said to represent a generic outsourcing
process. This is no surprise, however, when consider-
ing that the number of phases depends on whether
outsourcing is viewed from a strategic or an opera-
tional angle. Since this research focuses largely on
strategic outsourcing, most of the literature examined
in order to reach a better understanding of processual
views on outsourcing and its phases is strategically
oriented. For example, Johnson [40] emphasises the
importance of integrating a company’s strategic
analysis with the outsourcing process. Specifically,
Johnson argues that six phases appropriately define
outsourcing:
1. Strategic analysis.
2. Identifying the best candidates.
3. Defining the requirements.
4. Selecting the providers.
5. Transitioning the operations.
6. Managing the relationship.
The processual view proposed by Greaver [41] comes
close to Johnson’s definition. According to Greaver,
successful outsourcing involves seven phases:
1. Planning initiatives.
2. Exploring strategic implications.
 J. Momme / Computers in Industry 49 (2002) 59–75
3. Analysing costs/performance.
4. Selecting providers.
5. Negotiating terms.
6. Transitioning resources.
7. Managing relationships.
Neither Johnson nor Greaver seems to be concerned
with the point that any outsourcing relationship is
restricted in time. Irrespective of whether the company
and the supplier have prolonged the relationship one or
more times as a result of successful conditions, the
company must guard against the fact that the relation-
ship will inherently phase out at one point in time.
Lonsdale and Cox [42], on the other hand, address this
point by suggesting the following six phases:
1. Assessment of criticality of business activity.
2. Assessment of supply market.
3. Selection of appropriate types of supplier relation-
ship.
4. Supplier selection.
5. Supplier management.
6. Re-tender or return in-house.
This research takes its starting point in the three
generic phases (1) start-up, (2) operations, and (3)
maintenance in order to emphasise the holistic per-
spective applied on the process as well as the influence
of production and operations management [4]. How-
ever, these three phases are obviously not sufficient to
describe the detailed aspects of outsourcing. There-
fore, focus has been on how to distinguish between
strategic and operational phases. This is based on the
rationale that top managers in the industry will need a
management tool focusing mainly on strategic out-
sourcing considerations. Against this, purchasing
staff, process engineers and other people involved
in the daily work on outsourcing will be more inter-
ested in tools that can help guide them through the
necessary operational decisions and actions. The
strategic outsourcing programme and the outsourcing
framework presented below are strategically and oper-
ationally oriented, respectively. The aim is to identify
key activities, performance measures and expected
output for each of the outsourcing phases and link
these decision variables to the strategic planning
process. Overall, this contributes to facilitating start-
up, operations and maintenance of the buyer–supplier
relationship.
69
7.1. Strategic outsourcing programme
Aalborg Industries’ strategic programme for out-
sourcing is rooted in US Company’s development
during the 1990s where the subsidiary has managed
to convert its manufacturing set-up into low vertical
integration. The action research primarily focused on
adapting ‘‘the US Company way of outsourcing’’ to
the specific needs of Head Office (Aalborg Production
was not included in this part of the action research).
This research and development process was carried
out in collaboration with the global outsourcing
manager and an appointed outsourcing team whose
members represented an interdisciplinary competence
profile, necessary to comply with the cross-functional
interdependencies. Besides, other top managers at
Head Office supported the team. My role in the
process was mainly to act as a professional secretary
supplemented by project engineering tasks. This
implies that I had to steer the process, provide a
theoretical frame of reference, develop certain tools
and techniques and document the strategic results of
the outsourcing team. As an action researcher, I did
not ‘‘just’’ enter the organisation to examine a com-
plex of problems associated with outsourcing, propose
a solution and then leave the company, but was urged
to take an active part in developing and implementing
the outsourcing programme and establishing a knowl-
edge base.
By synthesising the key elements of the mature
outsourcing programme in US Company and the
research and development efforts at Head Office,
we developed a Strategic Outsourcing Programme
(SOP) which consists of four coherent phases: (1)
identification and assessment, (2) audit and approval,
(3) project execution, and (4) performance manage-
ment [9]. In practice, the four phases are both sequen-
tially and laterally connected, which implies that they
are to some extent performed in parallel. In essence,
SOP serves as guidance on how to identify, evaluate
and select those suppliers best qualified to aid internal
manufacturing and relevant support functions. Certain
cross-functional tools and techniques for how to
search for potential suppliers, carry out supplier
audits, approve the supplier, execute the project and
manage the relationship support SOP. The develop-
ment of these tools and techniques took place in joint
effort between the members of the outsourcing team.
70 J. Momme / Computers in Industry 49 (2002) 59–75
As part of the teamwork, I had the full mandate to
develop so-called product profiles and databases.
These product profiles and databases support Aalborg
Industries’ auditors and other outsourcing specialists
in (1) assessing the manufacturing and quality system
of potential suppliers, and (2) keeping record of
potential and approved suppliers as well as current
and former outsourcing projects. Overall, the tools and
techniques help implement SOP and collect, structure
and assess the data relating to the four phases.
The philosophy of SOP is that meeting the commit-
ments to the customers requires that Aalborg Indus-
tries receives the same level of commitment from the
suppliers. Thus, the suppliers are an extension to the
company’s unique resources and capabilities, since the
customers merely consider the quality (i.e. price,
design, reliability and performance) of the finished
boiler, regardless of the individual contributions in the
supply chain. Put differently, the total expertise of the
suppliers is a key factor in Aalborg Industries’ efforts
to establish the image as a trend-setter and market
leader. This implies that SOP is used partly as an
internal management tool and partly as an external
marketing tool. In short, Aalborg Industries’ decisions
to outsource are based on the following considerations
[43]:
 The company retains or insources those manufac-
turing resources and capabilities that are most
critical to the boilers and that it is distinctively
good at maintaining.
 It outsources only when the suppliers have a com-
parative advantage, e.g. greater scale, fundamen-
tally lower cost structure, more customer proximity
or stronger performance incentives.
 It uses outsourcing proactively through a stronger
focus on the internal core business areas as a way to
improve manufacturing performance, generate
employee commitment and consequently increase
competitiveness and profitability.
From a corporate perspective, SOP seeks to exploit
the optimum combination of Aalborg Industries’ pro-
duction facilities and outsourcing relationships. One
aim is to provide low-cost and high-quality products
and services in compliance with specific customer
needs as well as general standards and trends in the
market. In addition, SOP holds the market-strategic
objective of being close to the customers wherever and
whenever Aalborg Industries’ assistance is required.
SOP elaborates on this customer focus by stressing
that the Aalborg Industries employees represent the
philosophy that every deal or agreement should be to
the long-term benefit of all parties involved. The main
incentives of SOP are listed below:
 Create a global network of approved suppliers.
 Provide a flexible response to customer needs and
requirements.
 Reduce the risk of business.
 Reduce operating costs.
 Improve cycle times.
 Improve bottom line profit.
Aalborg Industries’ primary scope of outsourcing
up to now has been the fabrication of pressure vessels
for both land-based boilers and marine boilers. Tra-
ditionally, these fabrication parts have been highly
wage consuming because of a large number of welding
hours per boiler. As argued, the company’s total
product portfolio and the manufacturing processes
have reached stable phases during the 1990s which
means that other providers master them as well. There-
fore, the sourcing of pressure vessels to external
partners has taken place without major business risk
in so far as Aalborg Industries has anticipated the
pitfall of competence exposure and of losing control/
knowledge of the complementary competencies.
Finally, engineering assistance has in few cases been
added to the scope of outsourcing, implying that the
suppliers have had limited design responsibility.
7.2. The outsourcing framework and its implications
The first outsourcing projects at Head Office asso-
ciated with land-based pressure vessels were launched
in 1999, thus, forming an integral part of the case study
and action research programme. In this context, the
action research established that Aalborg Industries’
outsourcing team would benefit from a practical fra-
mework in support of SOP. Basically, the framework
would have to function as a steering tool that could
guide the team members through the essential deci-
sions and actions relating to the process (cf. a manual
expert system). Besides, it would have to facilitate a
knowledge base on outsourcing projects in the orga-
nisation (cf. a historic at an activity/experience level).
Supposing the framework could comply with this
 J. Momme / Computers in Industry 49 (2002) 59–75
Fig. 3. The framework depicts six generic phases of the outsourcing process with built-in key activities, performance measures and expected output. It aims to facilitate start-up,
operations and maintenance of the buyer–supplier relationship by linking operational and tactical considerations to strategic planning ([3], p. 272; [9]). Adapted from [44] (p. 85).

71
72 J. Momme / Computers in Industry 49 (2002) 59–75
twofold objective, it would provide Aalborg Industries
with a better understanding of processual incentives
and pitfalls (i.e. reduce the main risks of outsourcing
and augment the potential benefits).
Based on the literature review and the empirical
work, I argue that the entire outsourcing process from
an operational standpoint can appropriately be viewed
as six generic phases. These phases are listed sequen-
tially below:
1. Competence analysis.
2. Assessment and approval.
3. Contract negotiation.
4. Project execution and transfer.
5. Managing relationship.
6. Contract termination.
For each of these phases, a varying number of key
activities with related performance measures and
expected output are identified (henceforth: decision
variables). The six phases and the decision variables
are mainly synthesised from the four strategic phases
of SOP, our integrated model of six steps that links
core competence thinking and outsourcing [26] and
the operational ideas presented by Bragg [11], Wasner
[12] and others. The conceptual idea of the framework
derives from the research of Laudon and Laudon [44]
on open systems modelling. Laudon and Laudon refer
to the order management process at Procter and
Gamble after redesign. By breaking down the order
management process into concrete steps or activities
and their core processes, analysts were able to develop
specific performance measures and set improvement
targets. This implies that the synthesis combines the
exploratory integration and the case study and action
research programme. The main result of the synthesis
is shown in Fig. 3.
The framework depicts the processual correlation
between the phases and the decision variables, giv-
ing three examples for each set of decision vari-
ables. Hence, it shows an extract, and is not
exhaustive. It is emphasised that the decision vari-
ables depend on the context and scope of the indi-
vidual company. This means that they must be
thoroughly reviewed and adapted by the responsible
outsourcing team based on the situational factors.
As indicated, an interdisciplinary group of people
should be assigned to the outsourcing projects as
this will add a wide range of synergistic perspectives
to the decision variables, hence, facilitating identi-
fication and prioritisation. The system model sup-
ports the establishment of a capable outsourcing
team due to the key support functions identified
(cf. Fig. 2).
From a holistic point of view, outsourcing is a
dynamic process in the sense that the related decisions
and actions must continuously be adapted to changes
in the strategic direction of the company. In addition,
outsourcing is a recurring process (cycle) because the
company at the end of the contract period faces the
decision on whether to prolong the relationship, find
an alternative supplier or take back the functional area
(insourcing). Considering this dynamic and recurring
nature of outsourcing, the process must be supported
by feedback and throughput mechanisms to ensure
that continuous measures on both company and
supplier performance are converted into corrective
and preventive actions. This puts heavy demands on
the company’s strategic preparedness, development
resources, employee skills and adaptability, technol-
ogy base, etc.
The framework implicitly contains feedback and
throughput mechanisms in so far as the output from
one phase provides input to one or more of the other
phases. Part of the process involves re-engineering
where the company adapts its organisation to the
supplier performance. During this transformation,
the company has a strong incentive to rethink its
vision and strategy and assess the quality of its
knowledge bases and operating procedures relative
to suppliers and competitors. This is likely to result
in certain spin-offs as to strategic direction and
human/technical assets. In addition, the access to
the supplier’s complementary competencies is
expected to produce a number of benefits like shared
resource base for organisational learning and pro-
duct/technology development, greater flexibility,
reduced operating costs and improved cycle times.
However, the company must also be aware that it can
lose critical competencies or develop the wrong
competencies, which can be fatal due to the risk
of expropriation. Collectively, the outsourcing fra-
mework aims to facilitate proper planning, control
and continuous improvement of the buyer–supplier
relationship. This makes allowance for establishing
a rational balance between in-house production and
outsourcing.
 J. Momme / Computers in Industry 49 (2002) 59–75
8. Conclusion and outlook
This paper documents 4 years of research on out-
sourcing within the settings of the production system
and relevant support functions. However, we still lack
knowledge and recognition to be able to explain every
facets of the outsourcing process. One might take a
step further by claiming that research into this parti-
cular field will continue for an indefinite time. Why
might this be the case? The main argument would be
that outsourcing is a dynamic and recurring process
which largely rests on the propositions of socio-tech-
nical theory, including open systems theory and con-
tingency theory. These three theories are founded on
the same scientific paradigm within social system
theory, which is called ‘‘functionalist’’ [4,45]. Burrel
and Morgan explain that functionalist is highly prag-
matic in orientation, concerned to understand society
in a way which generates knowledge that can be put to
use. Moreover, functionalist is usually committed to a
philosophy of social engineering as a basis of social
change. Hence, it seems reasonable to assume that one
static/unambiguous road map relating to outsourcing
of manufacturing, which meets the requirements of
every sectoral pattern, cannot be developed.
While the literature review provides a state-of-the-
art knowledge base on outsourcing, the empirical
inquiry confines itself to one internationally estab-
lished company in the heavy industry. Or maybe the
word ‘‘confines’’ is inappropriate. At least, I hope that
the combination of theoretical absorption, longitudi-
nal case study and systemic action research contri-
butes to accentuating the scientific legitimacy of the
project as a whole. This combined methods approach
essentially pursues conceptual understanding, optimi-
sation of organisational performance and prescriptive
tools and techniques, which challenges the traditional
logic behind statistical generalisation.
In the paper, primarily the strategic and conceptual
aspects of the outsourcing process were addressed.
From this, a framework for outsourcing that focuses
on start-up, operations and maintenance of the process
was developed. The aim was to take outsourcing
theory a step further towards industrial practice by
providing value-added guidance to managers respon-
sible for or interested in the development and imple-
mentation of strategic outsourcing. This involved
among other things identification of a wide range of
73
outsourcing incentives and pitfalls. Nevertheless,
operational details are a prerequisite for choosing
the right sourcing strategy, of which outsourcing is
only one. In general, this calls for an approach to
sourcing strategy which complements the one pre-
sented in this research. This includes moving focus
from global sourcing, product supply and corporate
development (cf. corporate/business strategy) to pro-
blems of materials management, planning and control,
etc. at the factory level or the shop floor level (cf.
functional strategy). In other words, we need supple-
mentary models and methods which help us to ask
questions like:
 How do we identify the operational activities, deci-
sion variables and performance measures that pro-
vide the input to the outsourcing framework?
 What are the important issues specific to contract
negotiation, project execution and transition of the
manufacturing task?
 How do we establish precise measurement and
control points?
 How do we rationally prioritise one choice of
sourcing strategy before another?
 What opportunities and constraints result from this
prioritisation?
Such a perspective would imply that sourcing
strategy is viewed as a bottom-up redesign of under-
lying processes rather than a top–down management
tool to ensure strategic direction and employee com-
mitment. That is, a ‘‘reverse’’ perspective of the one
which has largely been applied in this research.
Future research should also demonstrate how the
production system and each of the support functions
explicitly influence the phases/decision variables of
outsourcing. Besides, the interconnections between
the internal and external workflow interfaces should
be visionalised. As to the external workflow inter-
faces, the research has failed to produce in-depth
structural and processual knowledge from a supplier
standpoint in so far as no interviews with present or
potential outsourcing partners of Aalborg Industries
have been performed at the present stage. Thus, the
research would inevitably benefit from applying a
supplier perspective on the outsourcing process as a
supplement to the buyer perspective already imple-
mented. In addition, organisational forms likely to fit
different types of buyer–supplier relationship—given
74 J. Momme / Computers in Industry 49 (2002) 59–75
situational factors—should be illuminated. This
involves verification of what socio-technical compe-
tencies are called upon in order to absorb the dynamic
and recurring nature of outsourcing. Finally, the
research results are undergoing evaluation and refine-
ment within Aalborg Industries. The next step would
be to examine their applicability in other heavy
industrial companies and in sectors other than the
heavy industry.
Acknowledgements
The author wishes to thank corporate management
of Aalborg Industries A/S for its commitment, readi-
ness to release empirical data and not least for co-
funding the research project. Thanks also go to
Department of Production and the European Doctoral
School of Technology and Science, Aalborg Uni-
versity, for providing the 3.5-year scholarship. Key
points and illustrations are due to fruitful discussions
with Timothy J. Billings and Christian Preuthun
Pedersen in Aalborg Industries as well as Henrik Bjørn
Christensen and Hans-Henrik Hvolby from Aalborg
University.
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Jesper Momme graduated with a MSc degree in International
Technology Management from Department of Production, Aalborg
University, in 1997. Same year he started as an industrial researcher
at Department of Production and was part time employed by
Aalborg Industries A/S, which co-funded the PhD project. In March
2002, he defended his thesis and was conferred the PhD degree in
Outsourcing of Manufacturing in April 2002. Since September
2001, Jesper Momme has worked in Aalborg Industries as a change
co-ordinator within the area of product and process standardisation.