OUTSOURCING VALUE CREATION ACTIVITIES: ACHIEVING OVERALL

OPTIMAL PERFORMANCE

Shishank Shishank

1

Dr. Rob Dekkers

2

1Research Student, University of the West of Scotland, Paisley Campus, High Street, Paisley, Scotland,

PA1 2BE.

Telephone: +44 141 848 3664 - Email: shishank.shishank@uws.ac.uk

2Division Management & Business Economics, University of the West of Scotland, Paisley Campus,

High Street, Paisley, Scotland, PA1 2BE.

Telephone: +44 141 848 3876 - Email: rob.dekkers@uws.ac.uk

ABSTRACT

Decision-making on outsourcing takes place at different levels of strategic, tactical and operations

within a company. Distinguishing these levels will help assigning specific frameworks and

requirements for each of these three processes and simultaneously assist in free and continuous flow of

information from one framework to another. During the stages the decisions differ; during pre-design it

concerns mostly of subsystems or equipment and during later stages it turns to detailed production

planning and is based on the availability of information and different levels of aggregation. In stages

information is transformed according to specific requirements of the individual process hence,

probability of distortion of this information during change remains high. In light of the significant

impact outsourcing has on the overall performance of the organisation, the development of an

integrated multi decision making criteria and a framework on different aspects of outsourcing

incorporating the accurate transformation of information during different stages.

Keywords: Manufacturing, Decision-making, Strategy

INTRODUCTION Over the many years outsourcing has played a vital role in the overall performance of the organisation.

Outsourcing has been viewed as a form of predetermined external provision with another enterprise for

the delivery of goods and/or services that would previously have been offered in-house (Quinn &

Hilmer, 1994; Beaumont & Sohal, 2004; Finlay & King, 1999; Elfring & Baven, 1994). This is

especially true in light of recent managerial trends that advocate focusing on core competencies to gain

competitive advantage in the industry (Quinn & Hilmer 1994). The prospective of outsourcing has now

shifted from activities like ICT to outsourcing value creation activities such as design, engineering and

manufacturing engineering. However, organisations do not have a set criteria and a model, which

supports the decision-making during different stages of the value creation activities in terms of

outsourcing (McIvor 2000; Dekkers 2000). The information available to the managers and engineers

during the different stages of these value creation activities of design, product development and

engineering is incomplete and hence, not all desirable information for decision-making is available. But

both the engineers and managers will need to make decisions on sourcing of subsystems, components

and parts at all stages of design, engineering and manufacturing engineering.

The current literature, as will be demonstrated later, calls for the development of an integrated

decision making model criteria and a framework on different aspects of outsourcing incorporating the

accurate transformation of information during the different stages of these value creation activities and

the criterion adapted by the engineers and the management in the industry.

BACKGROUND

Industrial companies face a challenging environment. The global market affects industrial companies

by the competitive environment and the possibilities for outsourcing. This is discussed by Dekkers

2000, where he presents how globalization affects manufacturing with the development in data and

telecommunications, in information technology and the diminished trade barriers. This leads to the

possibility of manufacturing and assembling of parts and products at the most suitable place anywhere

in the world. Boeing for its new 787 Dreamliner outsourced its manufacturing process to 70 suppliers

across the globe. Boeing increasingly focuses on its core competencies in high-end design, engineering

and systems integration, outsource to suppliers that are highly focused on their own core competencies,

continually striving to create additional value in everything they do while achieving optimal

performance of operations. By specializing on a limited activity structure, outsourcing companies have

been able to improve the performance of their in-house activities (Quinn & Hilmer, 1994; Ellram and

Billington, 2001). Baxter et al. (1996) suggest that companies shift away from vertical integration to

strategic dualism and clustered control. Hence, outsourcing becomes not only an issue for decision-

making (Dekkers 2006) but also demands for continuous and free flow of information during the

different stages of value creation activities. The state-of-the art communications technology enables the

organisations to control activities at great physical distances without the necessity of meeting or

traveling around the world. Due to increased competition, companies face the choice of either

specialization or differentiation. Both choices provide opportunities for cost-reduction, improving lead-

time and meeting customer demands. The challenges handling the varying lot sizes, reduced lead times

and increased product variety have left the manufacturing industries with no other alternative than to

modify their strategies as per the contemporary market environment (Chan et. al, 2006). Outsourcing

decisions (Baden-Fuller and Hunt, 2000) play a vital role in the overall performance of an organisation.

According to Quinn and Hilmer (1994), a major strategic concept in outsourcing decisions is core

competencies. Outsourcing raises the key issues which areas of the manufacturing are needed to

maintain the value-added chain and on which key area’s the company should concentrate for achieving

optimal performance. Beaumont et. al 2004 emphasis that the decision on outsourcing depends on

whether to insource or outsource the activities based on the objective to achieve long term competitive

advantage and optimal performance (Klier 1994). However, to address contemporary issues of

manufacturing, industrial companies need an integral approach to bridge strategy and operations.

SCOPE OF PAPER History of outsourcing is aptly summarized by Lonsdale and Cox (2000) as some kind of substitute for

conglomeration, horizontal integration, vertical integration, and internal integration. As Beaumont and

Sohal (2004) suggest outsourcing is a fashionable way of solving some business problems and there are

numerous reports of its increased use. On the other hand, outsourcing is a strategically important

activity that enables an enterprise to achieve both short and long term benefits (Wu et al., 2005).

Strategic outsourcing in terms of sustaining long term performance (Wu et al., 2005), the transaction

cost theory (Williamson 1979) and the core competency model (Quinn, 1994) are well discussed by

academia. The literature available on outsourcing decision making models suggests that none of these

models take into account the criteria of free flow of information during the different stages of value

creation activities (Dekkers, 2000). In light of the significant impact outsourcing has on the overall

performance of the organisation, the motivation for developing an integrated multi decision model and

framework on different aspects of outsourcing incorporating the accurate transformation of information

during the different stages of these value creation activities and the criterion adapted by the engineers

and managers in the industry is evident.

This paper addresses this issue from the point of view of the non availability of complete and

undistorted data for decision making during the different stages of the value creation activities i.e.

design, engineering and manufacturing engineering.

OUTLINE OF PAPER

The first part of this paper reviews the current literature in this area from a strategic, tactical and

operational level. The paper reviews the mechanism beginning with an overview of a process model

(Dekkers, 2002) for outsourcing. The second part of this paper looks at the requirements for an

outsourcing decision making model framework(s) with continuous information flow. Finally a

conclusion is provided.

LITERATURE REVIEW

There are, of course, many reasons for outsourcing, the main one being the ability to purchase

components, sub-assemblies, finished products or services from outside suppliers when internal

production capacity is limited. An enterprise will also outsource its business when it does not possess

the crucial technology, but still wants to seize the business opportunities presented (Wu et.al, 2005;

Julka et. al., 2006; Klier 1994). Outsourcing enables an organisation to better marshal its own resources

and those of external agents who have the required expertise and specific technologies to accomplish

all the tasks involved (Wu et. al 2003). Effective use of outsourcing will, therefore, allow an

organisation to focus on a limited set of strategically important tasks and will in turn lead to continuous

development of core competencies (Quinn 1992; Kotable 1990; Venkatraman 1989). For many years

companies have been encouraged to pursue strategies of identifying and focusing on core competencies

– the skills, knowledge and technologies that a company must own in order to compete effectively

(Hamel and Prahalad 1994). Over time, the perceived potential for outsourcing has expanded to include

critical areas of activity such as design, manufacture, marketing, distribution, and information

technology with almost the entire value chain open to the use of outside supply (Jennings 1997).

However, this does not lead directly to a clearly defined manufacturing strategy for global

manufacturing (Dekkers 2002).

Before embarking on the issue of undistorted and free flow of information across the different stages

of design, engineering and manufacturing engineering, it is necessary to understand the requirement of

transformation of information across these different stages in context of outsourcing. For this purpose

the process model (Figure 1) defined by Dekkers (2000) for outsourcing is used in this paper.

Figure 1: Process Model for Outsourcing at strategic, tactical and operational level.

(Source: Dekkers 2000)

The model ranges from early supplier involvement during the design and engineering phases to

operational decisions during manufacturing. This model takes into account both the market strategy and

manufacturing strategy to achieve the optimal performance levels. A transparency is required with

regards to outsourcing, relating products to processes, performance requirements and core

competencies whilst making decisions.

Outsourcing at strategic, tactical and operational level

In an organisation decision-making on outsourcing takes place at strategic, tactical and operational

levels (Dekkers 2000). Figure 1 represents this notion, showing the breakdown of overall strategy into

its components. It is important to distinguish these three levels to help assigning specific frameworks

and requirements for each of these three processes.

Outsourcing at strategic level

Strategy here refers to a set of co-ordinated objectives, action programmes applied to the firms

manufacturing function, acquiring resources, the utilization of these resources and linking them.

Strategy suggests how the resources should work together to achieve objectives (Brown et. al, 2003)

including the achievement of the performance levels at optimal level (Haberberg et al 2008). Hayes

and Pisano (1994) assert that a successful manufacturing strategy is not simply manufacturing – by, for

example, adopting JIT, JIS, TQM, or some other three-letter acronym – it is a strategy for using

manufacturing to achieve competitive advantage and optimal performance levels. The manufacturing

strategy ensures a match, or congruence, between the company’s markets and the existing and future

possibilities of enhancing performance levels of an organization (Brannemo, 2005). Outsourcing is one

of the many notions like supply chain management, vertical alliances, lean supply and industrial

Defining Manufacturing strategy and strategic decision making on outsourcing

Engineering

Tactical Decision making on outsourcing

Pre-Design

Manufacturing Engineering

Suppliers

Design

Purchasing and Contracting

Manufacturing and Assembly

Pre-

select

ion of

Suppl

iers

Deve

lopm

ent of

Manu

factur

ing

Proce

ss

networks that have emerged from the extensive amount of literature produced in the last two decades in

relation to manufacturing management. Outsourcing links capabilities to the availability of resources as

part of a network, extending beyond current performance capability of the organizational itself (Bock

2007; Jennings 1997; Philpott et al., 2004; Dekkers 2000; Wang and Chen, 2008). Indeed there is

evidence that outsourcing contributes positively to market value of an organisation (Rappaport, 1986;

Hayes et. al. 2000). Furthermore, for outsourcing to be meaningful, both value creation and value

appropriation processes must be appraised (Auguste et al., 2002).

For many activities, outsourcing has been adopted on a simple value-for-money basis (Alexander and

Young, 1996). This is supported by the research conducted by Lonsdale and Cox (1997) which

suggests that outsourcing decisions are rarely taken within a thoroughly strategic perspective, with

many firms adopting a short-term perspective and being motivated primarily by the search for short-

term cost reductions. The strategic approach to outsourcing provides the firm with information about

main activities that can potentially be outsourced (Quelin and Duhamel, 2003). When considering

outsourcing at strategic level, the value chain expresses the necessary processes and order flows for

delivering goods and services to customers (Dekkers 2000). Furthermore, with the advent of e-

commerce and the relative ease with which suppliers across the world can be identified (Momme 2002)

leads to the supply chain being wide open (Jennings 1997) to the use of outside supply. Analyzing the

firm’s value chain reveals the value created by the various activities in its chain (Heikkila and Cordon,

2002). It also reveals the activities are linked to each other and to other activities in the whole value

system. The management of the linkages among activities in the system is essential to creating and

sustaining competitive advantage. Porter’s concept of value chain (Porter 1985) supports that

optimization over the whole value chain aims at meeting the customer needs and achieving overall

performance requirements. Because of intense competition, organizations are forced to reassess and

redirect scarce resources (Jennings, 2002; Ketler and Walstrom, 1993; Kriss, 1996; Razzaque and Chen

1998; Dritna 1994; Ketler and Walstrom 1993; Leavy 1996; Quinn 1999) via different forms of co-

operation like acquisition, alliances, joint ventures, consortia, and networks which depends on overall

control mechanisms with their supportive information systems needed to kept up–to-date with the

changing environment (Johnson et al., 2008 page 358).

Strategic decisions in an organisation are based on business environment, costs, supplier

relationships, technology and capability (Jennings 1997; Talluri and Narasimhan 2002). Understanding

the clients as well as business needs is the requirement for setting the performance criteria to achieve

optimal performance levels. As the subsystems are in a continual state of interplay the feasibility of

course of action for each of these set criterions is important for achieving the set goals.

There are, however, potential pitfalls when outsourcing for strategic reasons. As quoted by Kremic

et al., 2006 organizations may “give away the crown jewels” if they are not careful (Gillett, 1994). If

companies outsource the wrong functions they may develop gaps in their learning or knowledge base

which may preclude them from future opportunities (Earl, 1996; Prahalad and Hamel, 1990).

Specifically, in highly integrated and evolutionary technologies, applying the traditional core

competencies tests may result in outsourcing too many or the wrong functions. Literature also suggests

that in industries with complex technologies and systems, internal synergies may be lost when some

functions are outsourced (Quinn and Hilmer, 1994).

Outsourcing at tactical level When a customer orders a product for delivery and engineering has to start, the combined capabilities

of engineering and manufacturing determine performance of the overall process (Dekkers2002). To

achieve the integration, manufacturing management should participate actively in product development

(Bock 2008; Hayes and Wheelright 1984; Welch and Nayak 1992). Therefore, product development

should address issues for manufacturing strategy to gain competitive advantages and achieving

acceptable levels of performance (Fogarty et al., 1989). As Dekkers 2000 points, the issues that need to

be addressed to gain competitive advantage are:

• Managing the value chain. This includes decision-making on alliances and networking to

supply new products to the markets.

• Improving the core competencies and exploiting outsourcing for optimization of manufacturing

processes.

• Paying attention to process innovation for meeting performance requirements.

A strong co-operation and communication between product development and manufacturing leads to

growth of these issues. Erlandson and Yxkull (1993), mentions product development concentrates

mostly on the products and its aspects, so if manufacturing aspects were to be addressed, they need to

be compared with decision-making on product level. Furthermore, Dekkers 2002 suggest that the use of

stage/gate methodologies prove important for managing product development, at each gate assessment

of manufacturing aspects allows linking the manufacturing strategy to product development. The

manufacturing aspect should include outsourcing (Dekkers 2000, Tsai et al., 2005), production

planning (Malhotra et al., 2001; Julka et al., 2006), materials management (Brown et al., 2003),

technological criteria (Dekkers 2000), performance requirements (Brown et al., 2003) and process

development (Dekkers 2002). Process development refers (Dekkers 2002) to improving the existing

manufacturing methods, the sourcing of new processes and the assessment and acquisition of new

manufacturing technologies. Descending the product structure results in greater detail both for

descriptions of the product and processes (Figure 2).

Figure 2: Product Structure (Source Dekkers 2000)

Product

Assembly 2 Assembly 1

Part

Component

Sub-Assembly

Increase in Detail

The decision-making while descending the product structure should be transparent in terms of

outsourcing, relating product to processes, performance requirements and core competencies during

different stages of these value creation activities such as design, product development, engineering and

manufacturing engineering.

Outsourcing at operational level Outsourcing decision-making at operational level takes into account capacity utilization in view of

optimizing performance levels (Dekkers 2002) and competitive analysis (Momme 2002). Laudon and

Laudon 1998 refer to the focus on capacity utilization, seen from the point of view of managing

outsourcing. Wang and Chen 2008 suggest process mapping by information systems will reveal which

operational decisions (Probert et al. 1999; Ashford , Dyson and Hodges 1999) on outsourcing improve

overall performance. This reflects the interrelationships of existing activities and resources as well as

the interdependencies of the decision-making during the different processes (Philpott et al, 2004).

The strategic, tactical and operational outsourcing activities must be viewed as derivatives of the

competitive priorities and decision categories that define the manufacturing strategy (Hayes and

Wheelwright, 1984; Miltenberg, 1995) and to achieve the optimal performance levels (Dekkers 2000;

Johnson, 1997).

MANUFACTURING AS PART OF THE PRIMARY PROCESS

Since manufacturing is a part of the total primary process, strategy is too. Figure 3 shows the

breakdown of the overall strategy into its components: marketing strategy, product development

strategy and manufacturing strategy. Although each strategy will generate in depth details, these

strategies should have a strong common link but the factual direction of the separate strategies diverges

(Wheelwright 1984, Dekkers 2002) during the implementation of decision-making in each field, thus

reducing the total efficacy from strategy formulation and implementation.

Figure 3. Components of Strategy

Figure 4 depicts manufacturing as a part of the total primary process. Manufacturing provides the

marketplace with products by being a subsystem on its own, as well as connecting the processes of

product development and engineering to the market. The new competitive landscape in many industries

Overall

strategy

Marketing

strategy Product

development

strategy

Manufacturing

strategy

is one of ongoing and heightened levels of competition, which demands flexibility, delivery speed, and

innovation. However, firms remain highly dependent on an elite strategy-making group at the top of the

organisations hierarchy (Hayes and Wheelwright, 1984; Brown, 1998a).As a result of this, a state of

strategic dissonance (Brown, 2000) occurs not only in firms chosen markets but also within the firm

itself; in the mismatch between strategic intent (Hamel and Prahalad, 1989) and operations capabilities

(Canez et al., 2000; Seeley et al., 2001). The firms need to integrate their strategies to achieve the

overall optimal performance levels (Dekkers, 2000; Jiang and Qureshi, 2005).

Figure 4: Total Primary Process (Source: Dekkers 2002) Manufacturing management is confronted with increasing pressure on overall performance (Nellore

and Soderquist, 2000; Howells, 1999; Murray and Kotabe, 1999) and reducing costs (McCarthy and

Anagnostou, 2003; Koszewska, 2004). The issues for management relate to the set-up of the primary

process and control, leading to increased competitiveness in today’s global market. Schroeder et al.

(2002) argue that managing resources and creating competitive advantage by meeting performance

requirement does not suffice, since creating unique proprietary processes and assets contributes

strongly to profitability and long term competitiveness. In effect, this notion links to research

undertaken in to the adaptation of organizations to the dynamic changes of the environment (Dekkers,

2000). This point to major issues within the manufacturing strategy: capabilities relate to outsourcing

and process innovation, and capabilities relate to strategic and tactical resource management. The

strategy should eventually define performance requirements (Teece, 1987; Anderson and Weitz, 1986)

and the criteria to meets the strategic objectives. In other words strategy has two components: the

exploitation of the competitive advantage and the acquisition plus utilization of resources to create

advantage (Dekkers, 2002; Doh, 2005). Therefore, it is axiomatic that manufacturing should be

connected to the overall primary process to improve the overall performance of the resources and

structure the utilization of resources by making explicit decisions on outsourcing, whether it concerns

suppliers, alliances or partnerships, provides an opportunity to achieve optimal performance levels and

adapt more flexibly to the changing market demands imposed on the industrial firms. This is backed up

Engineering

Pre-Design

Manufacturing Engineering

Suppliers

Design

Purchasing and

Contracting

Sub-assembly & Assembly

Manufacturing

Domain of Manufacturing

Domain of engineering

Domain of sales

by Wheelwright (1984), Mole et al. (2001), Taps (2001) who suggest that the manufacturing strategy

should be incorporated in to the overall corporate strategy to achieve long term competitiveness.

As an important aspect of the strategy, outsourcing provides the opportunity for acquiring

manufacturing technologies to expand capabilities (Kogut and Zander, 1992; Teece et al., 1997; Levy,

2005, Momme, 2001). At the same time it enhances the focus on the firms own capabilities to achieve

leveraging of the performance of its manufacturing system (Friedrich, 2000).

Thus outsourcing evolves from both technological demands and performance requirements. The

recognition of competencies creates insight into the load on the available resources, and the remaining

capacity of resources is available for optimizing the performance of manufacturing through in- and

outsourcing.

EXISTING OUTSOURCING DECISION MODELS

The outsourcing decision making models discussed in the literature take into account the concept of

core competencies (Prahalad and Hamel, 1990), control of component knowledge (Quinn and Hilmer,

1994), long-term performance (Wu et al., 2005), strategic decision making and core competencies

(Dekkers 2000), combination of transaction cost economies and the core competencies concept (Arnold

2000).

The major ideas of the outsourcing decision models proposed by Prahalad and Hamel (1990), Quinn

and Hilmer (1994), Olsen (1997) and Dekkers (2000) are summarized in Table 1.

Table 1: Comparison of outsourcing decision models by Prahalad and Hamel, Quinn and Hilmer, Olsen and

Dekkers

Approaches to

outsourcing

Prahalad and

Hamel (1990)

Quinn & Hilmer

(1994)

Olsen (1997) Dekkers 2000

In – house manufacture Critical effect

on feature of

final product

(core

component)

High potential

competitive edge;

high strategic

vulnerability (high

control

component)

Nil Critical effect on

the final product

(core

component)

Collaboration Nil Medium potential

competitive edge;

medium strategic

vulnerability

(medium control

component)

High strategic

importance of

purchasing;

difficult to mange

the purchasing

situation.

High strategic

importance of

purchasing;

difficult to

mange the

purchasing

situation.

Transformation of

information during

different stages

Nil Nil Nil Nil

Source: Derived from Wu et al., 2005 and Dekkers, 2000

The core competency model by Prahalad and Hamel, 1990 is based on the identification and

strengthening of core competencies within an organisation. They identified access to wide variety of

markets, a significant contribution to the perceived customer benefits of the end product and difficult

for competitors to imitate. A ‘core’ competency is one which is critical to the functioning of the

product; a ‘non-core’ component denotes otherwise. 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).The application of concept of core competencies in outsourcing

became very popular among researchers. The concept has been predominantly used to develop and test

various outsourcing decision frameworks arguing that the core activities shall remain in house.

Quinn and Hilmer’s model (1994) focuses on the control of component knowledge. The properties

of components including the potential competitive advantage and strategic vulnerability form the basis

of this model. Here, Vulnerability denotes the degree to which the technological content of a particular

component can be deciphered and captured by a competitor.

Olsen’s model (1997) seems to place an emphasis on the effect of outsourcing on production with

the aim to avoid disruption. As Wu et al, 2005 suggest this model employs two indices: one to indicate

difficulty of sourcing a component, and the other the criticality or relative importance of that

component. Olsen’s model emphasis on the effect of outsourcing on production with the aim to avoid

disruption. It’s main line of thought still seems to be dictated by the traditional outsourcing, ignoring

the important issue of long-term performance.

Dekkers model (2000) assists management in strategic decision-making, supports the phases of

development and engineering, and improves production planning. It combines technological aspects

and performance criteria, allowing co-operation between development, engineering and manufacturing.

This model combines process mapping with decision-making. At each level of the product structure,

processes are mapped and compared to technological and performance criteria. This model includes

decision-making on outsourcing during the stages of product development.

On summarizing the contents of Table 1, it is clear that in literature little or no research has been

undertaken on the development of an integrated concept of outsourcing decision making model during

the different stages of design, engineering and manufacturing engineering incorporating the free flow

of information across the stages of these value creation activities. Furthermore, figure 2 depicts that

information is transformed and becomes more complex as it descends the product structure. In which

case outsourcing decision making during the different stages of the value creation activities should be

transparent while undertaking process innovation and manufacturing management.

OUTSOURCING AND FLOW OF INFORMATION

In most theories about outsourcing processes the perspective has been focused on exploring certain

issues emerging within the phases of the process (Perunovic and Pedersen, 2007). It has been admitted

that the information is not perfect and new economical models emerged to explain situations where two

parties possess unequal or none quantity of information. Application of the economy of information in

manufacturing management is associated with outsourcing decision-making during the different stages

of the value creation activities such as design, engineering and manufacturing engineering (Figure 4).

Undistorted and free flow of information is necessary to facilitate the managers and engineers in

outsourcing decision-making. However, the economy of information hasn’t been explicitly used in the

studies of the outsourcing decision-making process (Perunovic and Pedersen, 2007).

FUTURE RESEARCH

The research so far led to the review of the literature on outsourcing decision-making models. During

further research a decision-making model will be designed to incorporate the economies of information

during the different stages of the value creation activities. Secondly, the prototype will be tested via

multiple case studies in the manufacturing industry across Scotland. The prototype will be developed in

stages and development of each stage will be influenced by the performance of previous designs or

deficiencies in the decision making criteria will be corrected to meet the functionality, robustness and

the desired goal. Thirdly, the intension exists to transfer the method into a tool for use by professionals

in manufacturing management. The method as such will provide guidelines for the development of this

tool.

CONCLUSION This paper is the first in series of the overall exploratory study to be conducted as a valuable means of

searching the literature; to seek insights; to ask questions and to assess phenomenon in a new light on

outsourcing and related subjects. Traditionally, the study of outsourcing and its determinants has

focuses on economics approaches, such as from the perspective of transactional costs theory, which has

received much empirical support in outsourcing decision making analysis (Walker and Weber 1984;

Murray et al., 1995). Furthermore, Tomas and Vicor (2005) analyzed outsourcing with a strategic

approach using resource-based view of the firm as the reference point. Quinn and Hilmer (1995)

suggested that firms concentrate on resources and capabilities where they can achieve pre-eminence

and provide unique value for customers. As Dekkers (2002) identifies that strategic resource and

capabilities are hard to detect in practice (Tsai et al., 2005) and also, the bulk of literature seems to

focus on reasons for outsourcing, pro’s and con’s of outsourcing, critical success factors and on which

activities primarily are outsourced in certain industries (Tayles and Drury, 2001; Ettlie and Sethuraman

2002).

On reviewing the literature it is evident that to achieve optimal performance levels outsourcing

should be carried out from the strategic perspective and integrated in to the overall strategy of the

organisation (Dekkers 2002; Philpott et al., 2004). Further more the literature identifies the gap in

academic literature on strategic aspects of outsourcing for industrial companies and the criteria adopted

by the engineers and management in the industry. In an age where management weighs the costs and

benefits of investment, finding evidence of the decision making criteria for outsourcing is critical. As

summarized in Figure1, by defining a manufacturing strategy, the systematic decision-making on

outsourcing strategic, tactical and operational levels becomes possible. During all the stages of

manufacturing process the decisions differ; during pre-design it concerns mostly subsystems or

equipment and during later stages it turns to detailed production planning. During all these stages

information is transformed according to specific requirements of the individual process hence,

probability of distortion of this information during transformation remains high.

In light of the significant impact outsourcing has on the overall performance (Dekkers 2000, Talluri

and Narasimhan 2001; Gadde and Jonsson, 2007; Jennings 1997) of the organisation, the motivation

for developing an integrated multi decision making criteria and a framework on different aspects of

outsourcing incorporating the accurate transformation of information during different stages of these

value creation activities and the criterion adapted by the engineers and management in the industry is

evident.

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