Abstract: The aim of the present study was to construct a systemic model to evaluate the outsourcing activities. This study took an electronic company as a case and then finalized a quantitative decision-making model for business managers to evaluate and manage the outsourcing strategies. Firstly, through the literature review and expert interview the criteria were constructed. Secondly, the Grey Decision-Making was applied to schedule the eventual factors. Finally, the model was organized for business outsourcing management. In the findings, the criteria of Innovation, are the first ranking indices, quality, the second, the customer responsiveness, the third, efficiency, the fourth and integration capability, the fifth. The proposed model constructed from the electronic industry can be also modified to incorporate other outsourcing activities evaluation.
INTRODUCTION
Outsourcing is defined as the purchase of value-creating activities from external suppliers through long-term contracts instead of being previously made internally. By outsourcing activities in which they lack capabilities or they can’t create value, firms can concentrate fully on their activities of core competencies.
The main problem in managing outsourcing activities effectively is that companies need to build a suitable evaluation criterion to monitor the process and to push the whole activities towards the best profits[1-5]. Accordingly, the aim of the present study is to construct the evaluating factors by consulting the relative literatures. Firstly, in order to determine the factors in every aspect, such as strategy, economics, technology, management, costs and etc., we interviewed experts and sought for models for outsourcing objective, estimate index and performance evaluation criterion[2,4-6]. Secondly, we sought to establish an evaluating structure, suitable for multi-goal and multi-criteria in the electronic industry in Taiwan. Thirdly, we designed and practiced the research methods. Eventually, we constructed a suitable decision-making model with criteria for enterprises to evaluate the outsourcing performance. The objective of this study was as follows: apply the method of Grey Decision-Making to establish a quantitative decision-making model allowing companies to evaluate outsourcing performance evaluation criteria.
By means of literature review and in-depth expert interviews to analyze these outsourcing activities, we proposed 5 categories (C1~C5) of Performance Evaluation Criteria: efficiency (C1), quality (C2), innovation (C3), customer responsiveness (C4) and integration capability (C5); 5 objectives (O1~O5) of outsourcing activities: share risk of operation (O1), reduce cost of operation (O2), advance contract management capability (O3), greater productivity (O4) and focus on core activities (O5); and 9 items(O11~O13, O21, O31, O41, O42, O51, O52) of evaluation indices on outsourcing activities: supplier commitment (O11), subtier relationship and control (O12), financial and material control (O13), performance and results (O21), management systems and planning (O31), manufacturing capability and improvement process (O41), quality systems (O42), support to new product development (O51) and process quality management (O52) and then , we also developed 41 items(O111~O115, O121~O125, O131~O135, O211~O214, O311~O314, O411~O414, O421~O424, O511~O515, O521~O525) of sub-level evaluation indices, such as: continuous improvement (O111), customer satisfaction and support (O112),…etc.
The indices above were verified by the experts; consequently, we constructed the objective analysis for outsourcing activities (Fig. 1).
| Fig. 1: | Multi-target and multi-criteria analysis of outsourcing frame for electronic industry |
Then, we adopted the methods of Grey Decision-Making to evaluate these indices in order to develop a suitable decision model regarding on performance evaluation criteria of outsourcing activities.
AN CASE STUDY OF TP ELECTRONIC COMPANY IN TAIWAN
Grey Decision-Making: Grey Decision-Making (GDM) was advanced by Deng[7]. It differs from conventional method of probability and statistics. It treats the problems of large uncertainty samples. The theory of Grey System is mainly applied to treat the issues with least data and uncertainty .
According to the GDM, we selected a set of the most effective program (games) from past experiences (events) in order to treat the latest events that need to be resolved. This is so called grey decision and the combination of event and game are situations. The equation is illustrated as follows[8]:
Situation = (Event, Game): The suitability of a game adopted here is relative to the measurement scale of evaluation and we call it target. Generally, the GDM consists of four factors as follows:
Event: matters need to be deal with.
Game: solutions applied to deal with the matters.
Effect: the effects of solutions toward events.
Target: multi-criteria or multi-scale that is employed to measure the effect.
The fundamental of GDM used in the present research is thus described as below:
We treated the selection of different performance evaluation criteria of suppliers as event. The various alternative programs of performance evaluation criteria were served as game. We took each evaluation index to measure the effect as target and the values of all the performance evaluation criteria on targets under different outsourcing were regarded as effect.
Using the method of GDM, we are able to analyze numerous estimated indices of suppliers before calculating the suitable program of performance evaluation criteria.
Evaluation of each outsourcing program
Effect measure: Due to the different requirements on the targets, there
are also different effect measures of targets. Therefore, the effect measure
of target depends on the concrete situation. Generally, we adopted upper effect
measure, lower effect measure and medium effect measure, described as follows:
Upper effect measure
| (1) |
The uij is the real measure result of situation sij. The upper effect measure is suitable for the target of the larger, the better target. For example, this research considers the outsourcing targets advance capability of contract management (O3) and greater productivity (O4) as upper effect measure.
Lower effect measure
| (2) |
The lower effect measure is suitable for the target of the less, the better.
The targets share risk of operations (O1) and reduce cost of operations(O2) are considered as lower effect measure.
Medium effect measure
| (3) |
The u0 is the designate medium value among the effect sample uij.
The medium effect measure is suitable for the target of neither large nor little. The target focuses on core activities (O5) belongs to medium effect measure.
By the way of the analysis of effect measure, we directly calculated the effect measure value and didn’t need to correct the original measurement, because the Grey Decision-Making was able to provide upper effect measure, lower effect measure and medium effect measure.
The present research used upper measure shown in (1) regarding factor dimensions of advance contract management capability (O3) and greater productivity (O4), as well as, lower measure shown in (2) concerning factor dimensions of share risk of operations (O1) and reduce cost of operations (O2). As to the medium measure, shown in (3), related to the factor dimension of focus on core activities (O5), in which experts decided the most suitable grade serving as medium measure normal weighting. In this case, the best condition was taken for the medium measure.
Since all the performance evaluation indices were qualitative criteria, we took the weightings recognized by experts as the performance value of evaluation programs with regard to the questionnaire results.
| Table 1: | Results of evaluation for 1st and 2nd layer factors with the GDM in TP Company |
For example, the measure effect weighting, uij of continuous improvement (O111), in the 3rd layer target is: efficiency (C1: 73.33), quality (C2: 88.89), innovation (C3: 80), customer responsiveness (C4: 77.28) and integration capability (C5: 77.78). We took the lower effect measure as umin = 73.33 and used (1) to calculate the effect measure weighting rij; thus the results are; Gefficiency (C1: 73.33/73.33= 1.000), quality (C2: 73.33/88.89 = 0.825), innovation (C3: 73.33/80= 0.917), customer responsiveness (C4:73.33/77.28= 0.949) and integration capability (C5: 73.33/77.78= 0.943). By analogizing the same process, we were also able to have the lower effect measure weighting rij in the 3rd layer’s estimate index.
Multi-target decision matrix: When it exists several targets in evaluating the effects of situations, every target P corresponds to the decision unit
The synthetic matrix of multi-target decision is as follows:
| (4) |
Decision criteria: The Sij is derived from D(∑) and we select row decision as below:
| (5) |
The corresponding s*ij is the best situation of row.
According to the performance evaluation criteria of outsourcing management,
the present study applies the Grey Decision-Making to analyze and evaluate the
three layers indices of multi-target decision evaluation. For example, the calculation
and weighted effect value of the 1st item (O1) in the 3rd layer
Evaluation of multi-targets decision: Before the selection of final
program, we should consider all of the weighting with each factor. As a result,
we used 4 to calculate weighting. For the convenience of further analysis, we
can also use the whole analysis model to evaluate all the weightings. The results
are shown as Table 1. Taking the index supplier commitment
(O11) corresponding to the criterion efficiency (C1) as an example of calculation.
Firstly, we sum up the weighting
We sum up the index effect measure of efficiency (C1) corresponding to five targets of outsourcing activities [share risk of operation (O1), reduce cost of operation (O2), advance contract management capability (O3), greater productivity (O4) and focus on core activities (O5)] and obtained 0.8365, which is the weighting of integral suitable (Sum -1 0.162 + 0.1691 + 0.1855 + 0.1860 + 0.1339 = 0.8365). Using the same process, we obtained the results of all integral suitable alternatives and then, we used row decision shown in the Eq. 1 to obtain the ranking result of GDM analysis.
CONCLUSIONS
| 1. | From the present study, we get the result of sequences for GDM. The categories of innovation and quality are classified as the first and second appraisal. |
| 2. | As for the integral suitability of outsourcing activities, the present study pointed out that their innovation is considered the first and quality the second (Fig. 1). Hence, the findings indicate that if an enterprise can put more emphases on striving innovation to reduce cost, improvement and responsiveness, engineering service quality, cognition and performance for quality and reliability, their outsourcing activities could reach a higher degree of integral suitability. |
| 3. | In fact, it is necessary to have those five categories of evaluating criteria for outsourcing activities in this case. Because the grades among those categories are similar, it means that we cannot ignore any of them. Besides, it may cause differences, if each category has different goals. Thus, we suggest that firms should adjust outsourcing activities criteria (Fig. 1) and seek for their enough resources to support based on different developing environments. |
| 4. | In the process of outsourcing activities, firms often face the problem of how to propose a suitable project in limited resources. The result of the present study provides suggestions for firms that are interested in outsourcing activities. Furthermore, based on this study firms could focus on their characteristics and establish suitable evaluation criteria for outsourcing activities. |