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The purpose of our thesis is to find out the factors that affecting the customers satisfaction on outsourcing. The importance of Supply Chain Management (SCM) is being a vital part of a company; however, a well SCM is not as mature as some old function like Human Relation Management, Accounting, etc. Thus, companies may outsource SCM or particular function among SCM to the 3rd party services provider.
Meanwhile, the quality and effect on outsourcing would be a concern to companies. Customers make the sales, profit of a company. If the part which being outsourced may contact customers directly, is there any precaution and measurement to ensure the services provide will not be affecting during outsourcing, or how to minimize the influence to companies.
Today's Supply Chain Management
Many companies today are strengthening their connections with partners all along the supply chain. They no longer just treat suppliers as vendors and distributors as customers. They treat both as partners in delivering customers value. Most business nowadays are customer-oriented, e.g., Sales, CS & Business, Insurance, Banking/Finance, Beauty Care/Health, etc.
Background of Outsourcing
In a global marketplace an increasingly huge competition forces companies striving to find strategies that give them competitive advantage over the competitors (Christopher, M., 1998). Outsourcing has been treated as one of the most important business and economic concepts for achieving competitive advantages.
Outsourcing can be defined as "the transfer of the production of goods or services that had been performed internally to an external party" (Van Weele, A., 2005). Company can focus on their core business if the companies transfer its operations to another company to produce goods or services some 3rd party services provider.
The basic reason for outsourcing is the increased trend of globalization (Enarsson, L., 2008, p.33). The reasons behind outsourcing may lower the cost on delivery, utilize local firm's resources thus avoid capital investment on fixed asset for developing non core products, and to gain access technology, performance through effective partnership.
Outsourcing, regardless a powerful economic and business strategy, does not always ensure success to the outsourcesr involved in the entire process. There are many drawbacks in outsourcing operations. It might help a company on cost saving, focus on core business; enhance capacity for innovation, wider experience and knowledge, etc. However, there are some arguments on guaranteeing quality of service, qualifications of outsourcee, standpoint of labor.
Once a company determined which projects will be outsourced, they have to know why outsource and when to be carry out, how to prevent from mistakes while outsourcing.
In this part we will explain the concept of supply chain management and outsourcing as well as their relationship from the point of view of different available and established theories and literatures. In this section our goal is to elaborate more about outsourcing in a theoretical frame.
Supply Chain Management (SCM)
A customer focused definition is given by Hines "Supply chain strategies require a total systems view of the linkages in the chain that work together efficiently to create customer satisfaction at the end point of delivery to the consumer. As a consequence costs must be lowered throughout the chain by driving out unnecessary costs and focusing attention on adding value. Throughput efficiency must be increased, bottlenecks removed and performance measurement must focus on total systems efficiency and equitable reward distribution to those in the supply chain adding value. The supply chain system must be responsive to customer requirements."
SCM describles a longer channel, stretching from raw materials to components to final products to final buyers. To implement an efficiency and effective supply chain systems take lots of time to design and manage, and so many companies nowadays decided to outsource parts of logistic function to a 3rd party services provider. Then they can allocate more resource and pay more effort on their core business.
The Trend of Outsourcing
There are no constrains to any functions which can be outsourced or not to be outsourced. To enhance the levels of competition, many organizations have started to consider in developing and maintaining the range of expertise and skills needed to compete effectively. This need has led many companies to engage with various kinds of sourcing; like outsourcing (Oshri, I., Kotlarsky, J., & Willcocks, L.P., 2009)
Definition of Outsourcing
Different authors have defined the outsourcing that covers a wide scope of the concept of outsourcing. The word of "outsourcing" can be split as "out" and "source" which means sourcing externally. Some simple definitions of outsourcing are given as follows
"...contracting with a third service provider for the management and completion of a certain amount of work, for a specified length of time, cost, and level of service..." (Oshri, I., Kotlarsky, J., & Willcocks, L.P., 2009, p 4)
"A contract is the means by which the planning, responsibility, knowledge, and administration of processes is transferred to an external party" (McCarthy & Anagnostou, 2004, Blumberg, 1998)
According to Franceschini, F. et al., 2003, Outsourcing is a managerial approach usually taken for delegating the responsibility to an external source for carrying out the operation of production process or services of an enterprise.
In these contexts, it can be summarized that, outsourcing is an agreement between buyer and supplier(s) to avail processes or services that the buyer is providing internally at present; with an intention to reduce cost, increase focus on core business, improve quality of products and services and to ensure more flexibility.
Evaluation Process for Outsourcing
An organization needs to maintain an operational cycle to conduct the outsourcing operation. There are the outsourcing life cycle brought up by M.J., Desouza, K.C., & Bonifazi, C. (Source: Power, M.J., Desouza, K.C., & Bonifazi, C., 2006)
Strategic assessment - As the first stage of the outsourcing process, strategic assessment is the crucial activity in the whole life cycle of outsourcing. The organization should identifie a certain business case and assesses the potential benefit of adopting the outsourcing as a strategy.
Needs analysis - After completion of the strategic assessment, the next step for the organization is to define the needs and more specifically areas of the needs that are needed to be focused on.
Vendor assessment - Organization goes for soliciting, evaluating and choosing the vendor for its outsourcing needs.
Contract and negotiation management - To be engaged in negotiations (and renegotiations) until an agreement is reached about the details of outsourcing work.
Project initiation and transition - This is the most influential stages of the outsourcing relationship. The client organization slowly starts to hand over the control of the work to the outsourcee. Outsourcer should always pay attention to deal with emergent issues and smooth out any problems that occur. This stage marks the foundation of the continued relationship.
Relationship management - To keep up to date with the outsourcing relationship
Continuance modification or exit strategy - Organization must evaluate its current outsourcing contract to see if its best interest lies in continuing, modifying or exiting the relationship.
Motives for Outsourcing
Cost reduction has been the prime motive for outsourcing (Ford, D., et al., 1993). To develop a complete product is always expensive for a company as it needs huge investment to improve products and production process through continuous research and technology development. Outsourcing reduces the cost of the client company in this area as the service providers invest in this area to meet up the demand of the buyers in a large scale. In this way, a company can achieve the competitive advantages in the market reducing the cost through outsourcing process.
Focus on Core Business:
Every company has some activities that are not as essential as compared to its core business functions. By sourcing non-core business activities a company can focus on its core business in a better way. So, the efficiency of a company is likely to increase as more time and resources are focused only on the core business functions (Davis, J., 2002).
In addition, there are some other driving factors that encourage the buyer company to adopt the outsourcing strategy. Such as operational expertise, enhance the capacity for innovation, capacity management where the risk in providing the excess capacity is borne by the supplier.
IKEA Hong Kong's Concept and History
They offers a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them. This is the idea at the core of everything IKEA does, from product development and purchases to how they sell their products in retail stores.
IKEA can make a good-quality product for a high price, or a poor-quality product for a low price. But to make good products at low prices, they need to develop methods that are both cost-effective and innovative. This has been the focus of IKEA since its beginnings in Småland, Sweden. Maximizing the use of raw materials and production adaptation to meet people's needs and preferences has meant that their costs are low. The IKEA way of doing things is to pass these cost savings on to customers.
Importance of Select Reliable Outsourcee
Under our investigation, IKEA Hong Kong has outsourced the home delivery and assembly services to an independent contractor. Basically, with return or exchange, home delivery and assembly services would be the final stage for company to provide services to customers. From ordering to delivery, IKEA takes at least three workings, even the staff give excellent customer services at retails store, the experience in store almost fade out after placing order. As the period from waiting order delivery to complete can replace the experience in store, services provide during these period of time is essential to decide will this customer return or not.
No customers, no business, no sales. Those satisfied ones turns to be a loyal customers, otherwise, unsatisfied customers will bad month our company. Word of mouth is a reference to the passing of information from person to person. The influence of word of mouth is not measurable and difficult to rebuild company image.
The dimensions of reliability; responsiveness; assurance; empathy; tangibility and cost in the service quality approach can be used in identifying critical factors that may suggest some ideas on selection of logistic services provider (LSP) (Kong & Mayo, 1993; Bienstock, et al., 1997).
Variety of Services
Track and Trace
No Goods Damages
Case Study I: Apple Computer and TNT Express (See Appendix I)
Apple Computer has been outsourced its delivery services to TNT Express. There would be a list of complaint about the services of TNT Express. The complaints are regarding to package missing, long delivery time, with recomfirm to package receiver.
Apple Computer outsourcing its delivery services to TNT, every one who place the order from Apple store knew this. Once the order is placed, there are an implication of customers are agreed to let TNT Express to take over the duty of product delivery.
Unlike IKEA Hong Kong, the delivery materials of contractors like trucks, boxes are printed in IKEA logo. It is difficult for customer to identify they are not the staff of IKEA. In order to protect the image or reputation, IKEA should ensure the contractor can perform like an IKEA staff, i.e., the delivery worker should have basic product knowledge, especially for solving the enquiries during the process of services delivery. That is unreasonable to say "we are contractor rather than direct staff of IKEA".
Customer service is any contact between a customer and a company, which can cause a negative or positive perception by a customer during services delivery. As an outsourcer, they may state clear of relationship between outsourcer and outsourcee may reduce complaints caused by misunderstanding.
The case of Apple, sometimes online checking system of TNT Express does not show the actual product delivery status. Those complainers about product delivery did focus on the services provider - TNT Express instead of complaining the Apple's decision making on contractor selection.
Case Study II: Survey on Outsourcing of Government Activities on 2002 and 2004 (See Appendix II)
The Efficiency Unit of HKSAR has been conducted a survey about outsourcing of governemt activities as at 2002 and 2004 since 2000. In this two reports, it showed, over 80% of bureaux and departments have beed outsourced at least one function to an indepentend contractor.
According to the report on 2004, those functions which occupied the most expenditure were capital works & constraction, building & property management and environmental hygiene are the top three outsourced functions.
By analyzing the pattern of annual expenditure, the fluctuation of transport services is the most serious among the listed functions. The ratio of reducing expenditure is the most significant as well. In 2000, the expenditure was around $1 billion and then it dropped to $0.1 billion in 2002. Unlike other services categories, transport services were doubling up the expenditure on 2004.
The focus of outsourced function of IKEA Hong Kong is the delivery services, it may categorize as transport services among the government functions. Reference to the expenditure on different services categories, transport services it is did not donminated the propular function of being outsourced.
Reference to the page 6 of survey on 2004, there are current satisfaction of outsourcee's performance. Around half of the outsourcee full met the requirement of outsourcer. Yet there is also another half that only partially fulfill.
IKEA is now the world's largest furniture retailer; they have a fixed group of partners on manufacturing, purchasing and supply functions, design and development of products in the IKEA range. For distribution they have their own logistics center Europe is located in Dortmund, Germany and Asian logistic center is located in Singapore along with its IT base. To retaining customers, they have the customer relation system of IKEA Family.
IKEA perform well in Europe no matter for SCM, marketing and customer retention. In Hong Kong region, they also have a good SCM, even they outsourced parts of service to an independent services provide. Yet the seldom to hear so negative comment to those outsourced services.
Furthermore, under our investigation, we found that only one contractor took over the job of delivery, assembly services. The part that would appreciate is even the delivery services are being outsourced, IKEA Hong Kong still having a backup delivery term in-house. Once there are any conflicts or under peak seasons of ordering, IKEA can take over part of the order themselves.
However, it is difficult to understand why they have not launch the loyalty card in Hong Kong. To strength the loyalty of customer, which is important to understand the purchase pattern of customers, in order to give related promotion and information to encourage them repeating purchase.
There are no absolute anwser for good to be outsoure or not to be.Companies should adopt a planned approach towards outsourcing taking into account the interests of employees and customers alike and come up with a balanced advance.
The cycle of evaluation process for outsourcing is a good model for a company which would interest in outsourcing a/some particular function to a 3rd party services provider.
For those companies which have been outsourced, a regular evaluation on before and after outsourcing is important. In today's dynamic marketplace, there are no rules can last till the end. The one who wants to be dominant of the market, they should keep track on of market trend, find out the competitive advantage and having a periodical review company's performance from time to time.
Some links of complaint about TNT Express when taking over the order from Apple Computer.
(a brief survey hold by some forum members)