Strategic Capacity Management & Inconsummate Information: An Outsourcing Framework

Kumaran Sugumaran
University of the West of Scotland, Paisley, PA1 2BE, United Kingdom. E-mail: kumaran.sugumaran@uws.ac.uk

Shishank Shishank
University of the West of Scotland, Paisley, PA1 2BE, United Kingdom. E-mail: shishank.shishank@uws.ac.uk

Rob Dekkers
University of the West of Scotland, Paisley, PA1 2BE, United Kingdom. E-mail: rob.dekkers@uws.ac.uk
Abstract: This paper proposes a decision making framework for outsourcing when faced with incomplete and inconsummate during the stages of pre-design, design, engineering and manufacturing. The paper starts off by establishing the importance of managing capacity for industrial companies and how this is linked with the total primary process within the context of manufacturing companies. Next capacity management is categorised into five main areas. This progressive research turns its attention on one specific area Outsourcing. Through a literature review it was found that all presently available frameworks for decision making on outsourcing assume available information are accurate and complete. The research hypothesis in this paper challenges this statement. Hence, the proposition of this new framework. To validate the framework, the Delphi technique is introduced to patch the gaps in the framework by seeking opinion of experts on outsourcing from academia and industry. The underpinning aim is to record the actions taken by companies when faced with in-consummate or inaccurate information from both the internal and external environment during the decision making process at operational level with capacity management as a criteria for outsourcing. Keywords: Inaccurate information; Delphi technique; decision making.

Introduction

Researchers and practitioners within the manufacturing field would commonly agree that since the industrial revolution in 1940s (Petrov et al., 1968), industrial companies have started moving in different directions adopting different technologies and strategies (Voss, 2005) to create a niche for themselves in order to gain competitive advantage. As a result, we evidenced the creation of multiple manufacturing philosophies such as Group Technology (Burbidge, 1971), Just-In-Time principles (Golhar and Stamm, 1991), Agile manufacturing (Gunasekaran, 1998), Lean Production techniques (Bayou and de Korvin, 2008) and Flexible Manufacturing Systems (Kaighobadi and Vengkatesh, 1993). However, the intensity of domestic and foreign competition creates a rather chaotic manufacturing environment where the fulfilment process takes place at a pace similar to that of an accident and emergency unit in a hospital. It is not uncommon to have sudden influxes of order requests demanding urgent deliveries. These requests when arrive concurrently with regular orders causes supply requests to be expedited and delivery

Kumaran Sugumaran, Shishank Shishank and Rob Dekkers Capacity Management & Inconsummate Information: An Outsourcing Framework

arrangements re-scheduled to prioritise urgent deliveries over mandatory deliveries. While over-capacity orders in the pipeline maybe welcomed by some manufacturing companies to spread the fluctuations in demand during low seasons, it can also have equally tarnishing effect when orders are not fulfilled on time. Customers may source from other firms that are more reliable and able to meet delivery performance. Therefore, to retain customers and enjoy continuous influxes of orders in todays dynamic business environment, it is crucial that industrial companies address methodically those issues related to managing capacity. 1.1 Why is capacity management important? Capacity management within organisations was mainly measured based on four main performance criteria in the past. These according to Krajewski (2007) were quality, cost, speed and flexibility. A number of other researches (Crandall and Markland, 1996; Fitzsimmons and Fitzsimmons, 1998; Armistead and Graham, 1994) have investigated capacity management topics reflecting on similar performance criteria. These studies contributed to sharpening operational planning and control issues. Ellis and Bhojas (2002) study show the way to minimise assembly, setup and processing time in a manufacturing sector. Kim and Uzsoy (2009) demonstrate ways to tackle operational performance measures for capacity planning problem and congestion in work-in-process. Inter-factories capacity planning problems were solved by Wang and Chen (2009) while Jawahar and Balaji (2009) show possibilities to minimise the total distribution cost by managing capacity effectively. Managing capacity strategically also helps industrial organisations to efficiently administer their total assets. Moreover, Sun Microsystems, Inc. (2007, p. 6) puts forward that by actively monitoring capacity and performance levels, capacity managers can detect capacity issues before they become incidents. The same source also points out that although it may be possible to realise capacity issues early, not all problems can be can be resolved by increasing capacity. Sometimes re-evaluating key areas of the business and adjusting the overall operation and resource allocation could prove fruitful. In short, a well defined capacity management initiative could support the business needs in an optimised manner. In recent times, more focused paradigms to capacity management have surfaced called the resource-based view and its related concept of core competencies (Jeremy, 2001). These theories are targeted at managing the firms resources, manner in which they are used and emphasises that heterogeneous resources owned by a firm provide sustainable competitive advantage. However, the resource-based view is a new theory that has not produced empirical methods for identifying and measuring heterogeneous resources [due to the qualitative nature of these resources that] cannot be readily or easily measured; an example is the expertise of the companys design engineers (Jeremy, 2001, p. 16). Background to the study Capacity Management can be defined as a situation where strategic decisions are made to manage the level of resources (Marucheck and McClelland, 1992) for maximum capacity utilisation and operational performance. Previous studies have looked at a number of widespread issues. Hallgren and Olhager (2009) have used volume and product mix flexibility combinations to show performance of manufacturing function. Qiu et al. (2006) demonstrate the use of decomposed material flow management to interact with enterprise workflow systems to manage capacity. Coman and Ronen (2000) present a linear programming technique in terms of extending capacity through outsourcing. Plambeck and Taylor (2005) describe capacity management as criteria for decision making on outsourcing. At operational level, outsourcing decisions focus on capacity utilization (Dekkers, 2000) in view of meeting deadlines and optimizing expenditures. Although, these studies portray multiples techniques for managing capacity, based on the outcome of an action research at several industrial companies conducted by Dekkers (2003) managing capacity may be grouped into five main categories: Outsourcing Process innovation Acquisition of resources Expanding internal resources and technology Re-aligning organisational structures to meet demands and business performance The choice between the five depends on individual business circumstances or sectors and lies in the tradeoff choices (both financial and non-financial). Dekkers (2003) also indicates that for the manufacturing organisation capacity management mainly concerns the total primary process. See Figure 1.

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Kumaran Sugumaran, Shishank Shishank and Rob Dekkers Capacity Management & Inconsummate Information: An Outsourcing Framework

Source: Dekkers (2003) Figure 1: Total primary process Literature to date weakly documents studies that integrate the success of capacity management as a criteria for outsourcing based on incomplete or inconsummate information that is available during the stages of predesign, design, engineering and manufacturing.. All presently available frameworks on outsourcing takes the position that all information required for decision making are available at all levels (strategic, tactical and operational) in an organisation. This paper proposes a framework to fill this gap. Due to the progressive nature of this research study, attention is given at this stage by investigating issues related to outsourcing. The following is the research hypothesis for this study. More information can be found in section 3. RH: The level of information that is available to managers and engineers at different stages of the total primary process (pre-design, design, engineering and manufacturing) is inaccurate and inconsummate, hence not all desirable information for decision making are available.

Theoretical foundation for Outsourcing framework

2.1 Transaction Cost Economies Willaimsons (1979) Transaction Cost Economics Theory of 1975 argues that cost reduction and importance of asset specificity will always form the basis of decision to outsource. That is the companies should outsource the activities if to carry them out internally would cost more to get the lowest unit price. Further this theory refers to specificity. Arnold (2000) goes on to suggest that the higher specificity is directly linked to huge investments. And, if the requirements change then there is complete loss of asset. To avoid incurring high losses the companies search for pre-empted opportunistic alliances (Dekkers 2009). In case the asset specificity is low the decisions to outsource the specific function are a common scenario (Fine and Whitney, 1996) where the alliance partner(s) is/are able to bundle demand and manufacture the product at a lower unit cost by meeting the economies of scale. This criteria for outsourcing has been supported extensively in literature (Dyer, 1997; Geyskens et al., 2006; Humphreys et al., 2002) whereas Ghosal and Moran (1996) have also questioned the validity of the theory of Transaction Cost Economies for decision making on outsourcing at operational level. The implication of Transaction Cost Economies Theory is for demand uncertainty, asset specificity and frequency of transactions whilst taking into account inaccurate and inconsummate information for decision making on outsourcing. 2.2 Resource Based View Grant (1991) describes outsourcing from the perspective of resources and capabilities. The companies resources and capabilities form the basis of formulating capabilities. Framework presented by Grant (1991) associates strategy, competitive advantage and resources and capabilities. The companies have to decide between developing resources inside or acquiring them externally. In order gain competitive advantage the resources must not be possessed by the competing firms, must be difficult to imitate and contribute positively to performance (Espino -Rodriguez and Padron-Robaina, 2006). Dekkers (2009) suggest that the application of Resource Based View in context of outsourcing might lead to consider the buyer-supplier relationships as Strategic Networks. A concept dominated by trust and power factors (Deng and Teng, 2001; Huemer, 2004). As
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such as the resources for one of the firm increase and the agent in the network tend to achieve independence from the Network due the uniqueness of their resources the network will move towards local optimisation creating power shift (Medcof, 2001). This suggests that the decision to outsource should form a part of the primary process and due care be taken with regards to inconsummate and inaccurate information at the strategic, tactical and operational level. 2.3 Core Competency Approach This theory in context of outsourcing decision making focuses on strategic decision making itself. Various studies have linked strategic decision making to outsourcing (Dekkers, 2000; Momme 2002; Heikkila and Cordon; 2002). This theory has also been combined with the Transaction Cost Economies (Arnold, 2000) or Resource Based View (Hafeez et al, 2002). As Dekkers (2000) declares that focussing on core competencies (Prahalad and Hamel, 1990) and outsourcing fails to answer the key issues of which ares of production are needed to be maintained and which on which areas the companies should concentrate to achieve optimal performance. In practice it may be difficult to judge with certainty whether a product or process should be categorized as core or non-core (Murray and Kotabe, 1999; Hibbert 1993; McIvor, 2000). Manufacturing strategy can only be defined if and only id companies succeed in linking core- competencies to integral decision making for resource- acquisition and capacity management (Hayes and Pisano, 1994). 2.4 Other studies and its relationship to outsourcing Outsourcing has progressively become an explicit strategy commonly used by industrial companies to attain cost advantages in the long run (Sislian and Satir, 2000). As such it has been aptly summarized by (Lonsdale, 1997) as a substitute for conglomeration, horizontal integration, vertical integration, and internal integration. Many theories on outsourcing rely on the deployment of criteria derived from the traditional make-or-buy decisions. Sustainable long term performance (Wu et al., 2005), the transaction cost theory (Williamson, 1979), the resource based view (McCarthy and Anahnostou, 2003) and core competency models (Quinn and Hilmer, 1994) are among other theoretical areas well discussed by academia as having strong relationships to outsourcing. Conversely, studies at operational (Arnold, 2000; Wheelwright, 1984; Tayles and Drury, 2001), tactical (Momme, 2002; Canez et al. 2000; Brannemo, 2005; Talluri and Narasimhan, 2004; Arnold, 2000) and strategic (Hamel and Prahalad, 1989; Momme, 2002; Tayles and Drury, 2001; McIvor, 2000; Quinn and Hilmer, 1994; Nellore and Soderquist, 2000) levels on decision making on outsourcing also fail to include incomplete and inconsummate information. To address this, the continuous decision making model defined by (Dekkers, 2000) for outsourcing forms the basis of this research. The model captures supplier involvement during the design and engineering phases to operational decisions during manufacturing. Sugumaran and Dekkers (2009) introduced the Quick Scan multivariant information retriever framework for Strategic Capacity Management. This model permits users to specify variables to process information and filter and extract relevant information according to specific case setting for decision making. The process can be repeated to extract the different information should the scenario changes which actually allows flexible enterprise-wide decision making. See Figure 2. The proposed framework in section 3 is an enhancement of this both these frameworks. This objective of the expanded framework is to facilitate decision making on outsourcing with inaccurate and inconsummate information that industrial companies make during the four different stages in the manufacturing process: pre-design, design, engineering and manufacturing. The underpinning aim is to record the actions taken by companies when faced with inconsummate or inaccurate information from both the internal and external environment during the decision making process.

Proposed research framework

The new framework is proposed by linking Process Model for Outsourcing (Dekkers, 2000) Decision-making methods, Criteria, and Availability of information In Figure 3 the information and decisions differ during each stage of product development; during pre-design it mostly concerns sub-systems and during later stages it turns to detailed production planning. Product subsystems may be defined either by the customer, through tender specifications, or by engineering design. During initial phases of product development, estimates only and not complete specifications are available. Nellore and Soderquist (2000) address the role of specifications in outsourcing decision making.
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Kumaran Sugumaran, Shishank Shishank and Rob Dekkers Capacity Management & Inconsummate Information: An Outsourcing Framework

External environment

Internal enterprise environment

External environment
Feedback

Extended enterprise network

Information Pool Filter Resources Pool

Discard Chamber

Monitor changes in industry standards and regulations

Outsourcing

Strategic Capacity Management decision making Tactical Redesigning Operational Functions Customers

Source: Adapted from Sugumaran and Dekkers (2009) Figure 2: The flow model of Quick Scan Strategic Capacity Management This framework involves decision making on supplier involvement at early stage of design and engineering ranging to operational decision making during manufacturing assisting in preliminary development of conceptual design and definition of major components and systems (Laudon and Laudon, 1998). Such decision making will help a company to concentrate on its core competencies as well as monitoring the capabilities of its suppliers. This implies that only those activities for which the firm does not have any special capabilities or those for which the firm does not have a strategic need are outsourced (Hicks et al., 2000). By adopting the resource based view (Nellore and Soderquist, 2000) firms concentrate on their own set of core competencies (Hamel and Prahalad, 1989) and providing unique value for their customers as a direct consequence of outsourcing decision making. This leads to a strong need for the companies to clearly identify and maintain their core competencies. In the past, the application of core competency theory has not led to a clearly defined manufacturing strategy for global manufacturing, outsourcing and resource management (Dekkers, 2000). This framework allows the manufacturing strategy including outsourcing to relate to the market strategy and the strategy for developing new products. Here process mapping is combined with decision-making. At each level of the product structure, processes are mapped and compared to technological and performance criteria, a recurrent process at every stage of the pre-design, design, engineering, manufacturing engineering and manufacturing. Decision making on outsourcing at all the strategic, tactical and operational level might utilise the same method but the information at all stages (pre-design, engineering and manufacturing) will differ and decisions will be different. This holistic and multi criteria decision making framework presented for decision making on outsourcing is structured to capture inconsummate and inaccurate information whilst making such decisions. The next stage in this research would be to validate the framework to confirm what approaches (for e.g. satisficing, multi-attribute decision-making, neuro-dynamic programming approach, fuzzy logic, set based concurrent engineering) are to be mapped at what level of outsourcing decision making for all strategic, tactical and operational levels and for all stages of pre-design, design, engineering and manufacturing engineering. There have been gaps identified in the framework as: Presumptions made with regards to the level of availability of information for decision making. Pre-supposition that the industry practices on outsourcing is correct. The Delphi technique is adapted to close the gaps in the framework by seeking opinion of experts on outsourcing from academia and industry. The Delphi technique is designed as a group communication process that aims at conducting detailed examination and discussions of a specific issue for the purpose of allowing a group of experts, as a whole, to deal with complex problems (Turoff, 1970). As a means and method for consensus building Delphi technique fits well, by using a series of questionnaires to collect data from a panel of selected experts (Dalkey, 1972, Linstone andf Turoff, 1975; Martino, 1983). Delphi Technique can be used for achieving the following objectives; suggests Delbecq et al. (1975):
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Kumaran Sugumaran, Shishank Shishank and Rob Dekkers Capacity Management & Inconsummate Information: An Outsourcing Framework

To explore or expose underlying assumptions or information heading to different judgements; To seek information which may generate a consensus on the part of the respondent groups; To correlate informed judgements on a topic spanning a wide range of disciplines.

Figure 3: The proposed framework for decision making on outsourcing

Methodology: The Delphi technique

The ability to make effective decisions in situations where there is contradictory or unavailable information has led to an increased use of consensus methods, such as brain storming, nominal group techniques and Delphi technique (Hasson et al., 2000). The Delphi technique is a widely used and accepted method for achieving convergence of opinion concerning real-world knowledge solicited from experts within certain topic areas. n number of heads are better than one (Dalkey, 1972) is the rationale for the prediction of this technique. The Delphi survey for this study will rigorously adapt the following basic principles that characterise the Delphi technique: 1. It is a repetitive process. The same experts will be asked the same questions at least two times. Feedback on the pervious round will be provided in order to enable experts to change their estimations. 2. It will be a structured process. The information flow will be co-ordinated through researcher and there is no direct information flow among the experts. 3. The experts will give their opinions 4. The anonymity of experts will be maintained throughout the process, and 5. The survey is designed to enable the statistical presentations of the results.

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Kumaran Sugumaran, Shishank Shishank and Rob Dekkers Capacity Management & Inconsummate Information: An Outsourcing Framework

The Delphi technique follows a prescribed set of procedures that reflect the statistical processes (Powell, 2002). Typically three rounds (Powell, 2002; Hasson et al., 2000; Turoff, 1970) of questionnaires are sent to preselected experts, although the decision over the number of rounds remains debateable in the literature. The Delphi Technique is therefore an iterative multistage process designed to combine opinion into group consensus (McKenna 1994, Lynn et al., 1998). The first round questionnaire is usually unstructured and seeks an open response (Rowe et al, 1991). For this study the questionnaire is designed as a three scale Likert style to address the issue of availability of data during the different stages and at different levels. The questionnaire also collects qualitative comments, which will be fed back to the participants in a quantitative form through second questionnaire (Hasson et al., 2000). This will allow the experts a relatively free scope to express their opinion. The iterative process will continue until a consensus or the law of diminishing return met. That is the responses will be summarised between rounds and communicated back to the participants through a controlled feedback process. The second and subsequent rounds, if required, will be more specific, with the questionnaires seeking quantification of earlier findings, through rating and ranking techniques. As the results from the previous rounds are fed back, there tends to be convergence to a consensus of opinion. Murphy et al. 1998 has described the process of feedback to the participants to be of very high importance as this is the only communication between them. The most important issue in the Delphi technique is the understanding of the aim of the Delphi exercise by all participants. The respondents of the questionnaires should be well informed in the appropriate area but the literature suggests that a high degree of expertise is not necessary. In order to facilitate the understanding of the aim of the Delphi technique a brief background of the study is being forwarded to the participants. The success of this study is dependent on the combined expertise of the participants who have made the expert panel. In this study the participants have been identified from both the academia and industry to gain from their knowledge on decision making on outsourcing. Literature on Delphi technique underpins the idea of identifying and selecting the appropriate experts through a nomination process (Hsu and Sandford, 2007). Ludwig (1997) recommends the nomination of well-known and respected individuals within the target group. From academia for this study experts have been identified after following a review of their publications in literature and for experts from industry top management decision makers have been chosen. With regards to the number of minimum experts to be an appropriate choice there is no consensus in the literature (Hsu and Sandford, 2007). Though it is argued and supported (Ludwig, 1997; Powell 2002) that the expertise of the individuals involved plays an active role in the successful outcome of the Delphi survey. Representatives are assessed on the qualities of the expert panel rather than its numbers. Hsu and Sandford (2007); Delbecq et al. (1975) and Ludwig (1997) document that ten to fifteen participants could be sufficient if the background of the Delphi participants is homogenous. For this study fifteen participants each from academia and industry has been adjudge to be appropriate based on the evidence from literature. Further, permission is sought from these individuals by telephone before sending out the questionnaire. This process enables the possibility to achieve response rate of 100% for the Delphi survey. The analysis of the responses between rounds will be carried out by defining decision rules to assemble and organise the judgements and insights provided by the participants. The major statistics used will be central tendency (mean, mode and median) and level of dispersion (standard deviation and inter quartile range) in order to present the collective judgements of respondents (Hasson et al., 2000). As this study will have a major part of the questionnaire as three point likert scale style, and the probability of cluster formation as opposed to single point convergence exists, the mean and median could be misleading, as such mode of the responses will be taken into account. The main advantage of the Delphi technique is reported to be the achievement of consensus in a given area of uncertainty or lack of empirical evidence (Delbecq et al. 1975; Dawson and Barker 1995; Murphy et al. 1998). Delphi technique brings direct knowledge and experience to the decision making process (Murphy et al. 1998). There are no geographical boundaries suggests Jones et al. (1992) and anonymity maintained to avoid any expert over powering the opinion of the other participants.

Implications

It is common that researchers and practitioners extract information from a variety of sources. Therefore, the key to gaining good output using this framework is determining the validity of data used and ensuring transparency in feedback and control mechanisms to ensure continuous measures on both company and supplier performances are converted into corrective and preventive actions. 5.1 Research implications The current study on the formation of a research framework for outsourcing decision is still incomplete. This paper proposes a methodology to describe and analyze decision making process incorporating the incomplete
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Kumaran Sugumaran, Shishank Shishank and Rob Dekkers Capacity Management & Inconsummate Information: An Outsourcing Framework

and inconsummate information based on presuppositions made at the time of designing the new framework with reference to the level of availability of information during the different stages. The confirmation of the presuppositions is expected to be achieved through a survey adopting the Delphi technique. After a pilot survey, the framework may need to be re-structured to reflect say for example the changing needs of the business enterprise. The execution of the outsourcing decision making framework should support the management of the overall business process, thereby aiming to meet these performance requirements. Intersecting Quick Scan Strategic Capacity Management framework (Figure 2) with the primary process model (Figure 1) could potentially indicate the existence of an alternative role (example options to synchronise information flow) for future research. 5.2 Managerial implications At operational level once an order reaches the stage of material flow, decision-making focuses on capacity utilization, seen from the point of view of managing outsourcing. Process mapping by information systems will reveal which operational decisions on outsourcing will improve overall performance. The overall strategy on outsourcing will result in availability of resources, increasing the readiness of procurement process. This implies less time in finding new supplier or extending the contract with the same supplier. The new framework suggest close co-operation between engineering and manufacturing, including procurement for enhanced decision making.

Conclusion

From the 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 capacity utilisation of the company. The main underlying raison d'tre for outsourcing is to allow firms to concentrate on managing capacities (resources and capabilities) where they can achieve pre-eminence and provide unique value for customers. The proposed framework highlights the importance of inaccurate and incomplete information on outsourcing at strategic, tactical and operational levels and during all stages of design, engineering and manufacturing. Outsourcing is a recurring process as the companies at the end of contract face the decision whether to prolong the relationship, find an alternative supplier or take back the functional area (insourcing). Considering this reoccurance and dynamic nature of outsourcing, capacity needs to be managed at every stage and analysed during the product development process. The challenge for managing capacity pertinent to production can be the best alternative foregone for outsourcing. Hence, the exhortation by manufacturing companies to improve performance depends on the harmonious blend of available information for decision making and the use of control process to manage them. Hence, making explicit decisions on outsourcing with respect to capacity management provides an opportunity to adapt more flexibly to the changing market demands.

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Proceedings of the 4 European Conference on Technology Management 6-8 September, 2009, Glasgow

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