Introduction
The purpose of this paper is to analyze the influence of outsourcing on VDL Group’s supply chain strategy and processes. In addition, a plan to outsource CAD conversion services to Outsource2india will be presented.
Outsourcing refers to the process of “contracting with a third-party service provider for the management and completion of a certain amount of work, for a specified length of time, cost, and level of services” (Oshri, Kotlarsky & Willcocks 2009, p. 4). The main objective of outsourcing is to enable companies to improve their competitiveness through cost reduction, economies of scale, and flexibility in production (Varadarajan 2008, pp. 1165-1172).
VDL is a manufacturing company that was founded in the Netherlands in 1953. The company is organized into four divisions namely, subcontracting, car assembly, bus/ coach, and finished products (VDL 2014). The subcontracting division specializes in mechatronic systems, manufacturing plastics, and surface treatment. The car assembly division produces cars on behalf of other companies. The bus and coach division produces coaches and buses.
The finished product division produces several products, which include car suspension systems, heating systems, and production automation systems (VDL 2014). Overall, the group consists of 81 operating companies that specialize in the production of specific products. The group has operations in 18 countries where it employs over 9,100 employees. In 2012, the company realized 1,756 million Euros in revenues (VDL 2014).
Impact of Outsourcing
VDL has outsourced production of the seats for its cars and buses to a Turkish company referred to as Brusa Seating. Brusa Seating specializes in the design, development, and production of seats, which it sells to original manufacturers of commercial vehicles (Brusa 2014). Outsourcing has had the following impacts on VDL. First, outsourcing has enabled the company to adjust the scale and scope of its production capability at a low cost.
Given the high competition in the automobile industry, manufacturing companies have had to adopt lean production technologies in order to reduce operating costs. One of the strategies being used by VDL is to produce cars and buses on demand. This means that the company has to adjust its production capacity frequently in order to satisfy existing demand without holding unnecessary inventory or stock of completed buses/ cars.
When the demand for buses is high, the company simply increases its order for new seats. This leads to cost savings since the company does not have to invest in new production systems or inventory to produce more seats (Williamson 2008, pp. 5-14). Conversely, when demand for buses is declining, the company orders for fewer seats. As a result, it avoids operating at excess capacity, thereby eliminating the costs associated with warehousing and laying off staff during low demand seasons.
Second, outsourcing enables VDL to concentrate on its core activities, which include assembling cars and manufacturing buses. Undoubtedly, companies cannot pursue excellence in all activities in their value chain due to resource limitations (Liu & Nagurney 2011, pp. 539-549).
Thus, companies focus on their core competence in order to achieve a competitive advantage. In this context, core refers to the activities that are performed internally, contribute directly to the bottom line, and determine the future of the company. VDL’s core competence is in assembling cars and buses on behalf of third parties. Thus, it outsources the manufacture of car parts such as seats to third party producers where the manufacture of car parts is a core competence.
Outsourcing enables companies to focus on activities that add value to their customers (Tayauova 2012, pp. 188-195). At VDL, the value adding activities include product development, research, and provision of technical support to customers. By focusing on these activities, the company has been able to improve the quality of its products, thereby increasing sales, customer satisfaction, and market share.
Finally, outsourcing enables VDL to achieve cost advantages through economies of scale. Economies of scale refer to a cost advantage that a company achieves through increased production of a given product (Belcourt 2006, pp. 269-279). Specifically, the fixed cost per unit reduces as the number of units produced rises.
Outsourcing enables VDL to achieve economies of scale in several ways. To begin with, it enables the company to increase its production capacity without incurring the fixed costs associated with hiring new employees and holding large inventories. Outsourcing also enables the company to improve its efficiency by purchasing seats at a favorable price.
In particular, Brusa Seating has to supply the seats to VDL at a competitive price in order to maintain the outsourcing contract. Economies of scale enable VDL to reduce the average cost of producing its buses and cars, thereby improving its profit margins. Moreover, low production costs enable VDL to price its products competitively, thereby overcoming competition in the market.
Risks and Benefits
Benefits
First, VDL benefits from access to the capabilities and the expertise of Brusa Seating. The automotive industry is capital intensive and thrives on the application of advanced technologies to achieve product and process innovation. This requires investments in modern production systems and the best talent (Gabriela & Clark 2006, pp. 250-253).
The automotive industry in the Netherland is underdeveloped due to its high concentration. As a result, access to talent and advanced production technologies is limited. By contrast, Turkey’s automotive industry consists of numerous large producers who have decades of experience. Thus, outsourcing enables VDL to access advanced technologies and expertise through Brusa Seating (Weidenbaum 2005, pp. 311-315).
Second, the company benefits from low labor costs by outsourcing to Brusa Seating. Turkey is “an emergent market in the new millennium expected to attract the interest of global companies in their attempt to obtain competitive advantages” (Aktas et al. 2011, pp. 833-852).
One of the main advantages of Turkey is low labor cost. In 2013, the average hourly labor cost in the Netherlands was $34.75, whereas in Turkey the cost was $5 (World Bank 2014). Low labor costs enable Brusa Seating to produce seats for VDL at a low cost. As a result, VDL’s overall cost of producing buses and cars will reduce in the long-run (Quelin & Duhamel 2003, pp. 647-661).
Third, VDL has achieved a competitive advantage in the market through outsourcing. The company has achieved a differentiation advantage by contracting Brusa Seating to manufacture its seats. As a specialized seat producer, Brusa Seating focuses on conducting research and development to produce seats that meet the specific needs of its customers.
Through product innovation, Brusa Seating has been able to supply VDL with seats that offer more comfort and flexibility than those provided by other companies. Differentiation will enable VDL’s buses to penetrate the market easily.
Risks
First, outsourcing to a Turkish company exposes VDL to the risk of language barriers. The official language in Turkey is Turkish. Over 90% of Turkey’s population speaks Turkish. By contrast, Dutch is the official language in the Netherlands and it is used by over 90% of the population.
Only 0.06% of the Netherland’s population can speak Turkish and Arabic. This means that communication is likely to be a problem since the employees of VDL and Brusa Seating are not likely to speak the same language. Undoubtedly, language barriers cause serious challenges such as misunderstandings among business partners. This can lead to costly mistakes such as poor product development and ineffective coordination of supply chain activities (Foogooa 2008, pp. 858-864).
Second, VDL and Brusa Seating have different levels of skills, expertise, and technical infrastructure. These differences limit the ability of the two companies to collaborate through joint research and development activities. As a strategic partner, VDL has to involve Brusa Seating in its product development initiatives to meet its product quality objectives. However, collaboration during product development will be very difficult if the employees from the two companies have different levels of expertise and skills (Trott 2006, pp. 672-681).
For instance, VDL’s employees may not understand the procedures that their counterparts at Brusa Seating use to manufacture seats. Lack of special skills in key areas such as management of people, contracts, and processes will limit VDL’s ability to maintain control over the quality of the seats produced by Brusa Seating (Rottman & Lacity 2006, pp. 56-63).
Finally, cultural differences between the two companies and their countries of origin can limit their ability work as partners. Culture is an important aspect of every business since it determines the way people think, make decisions, communicate, coordinate, and resolve conflicts. The Netherlands and Turkey have very different cultures. Turkey has a high-context culture in which individuals value reputation, politeness, and tradition rather than clarity.
The Netherlands, on the other hand, has a low-context culture where people value individualism and achievement. Given these differences, employees from the two companies are likely to have different expectations about the outsourcing partnership (Barthelemy & Geyer 2001, pp. 195-202). The resulting communication gaps or misunderstandings can lead to conflicts that will eventually lead to failure.
Outsourcing CAD Conversion Services to Outsource2india
Developing and executing an effective outsourcing plan involves following five key steps, which are summarized in figure 1. Based on this framework, VDL should consider the following plan to outsource CAD conversion services to Outsource2india Ltd.
Needs Assessment
CAD conversion is the process of transforming hardcopy designs into a computer aided design format to facilitate improved storage, accuracy, and easy modification. As a manufacturer, VDL requires effective CAD conversion services to improve the quality of its services. CAD conversion is a vital process that requires advanced expertise, resources, and a dedicated team of professionals.
Thus, VDL will require a significant amount of financial capital and expertise to run its own CAD conversion department. This is likely to shift the focus of the company away from its core activity of assembling cars and buses (Mclvor 2008, pp. 24-34). Since CAD conversion is not a core activity, VDL can outsource tasks such as CAD digitization, conversion to MicroStation, conversion of JPG to DWG, and conversion to AutoCAD to Outsource2india (Mclvor 2008, pp. 24-34).
By outsourcing these tasks to an experienced third-party, VDL will benefit from time efficiency, quality work, and better utilization of its resources (Kobelsky & Robinson 2010, 105-119). In addition, the company will save the costs associated with hiring and training CAD conversion staff and the cost of operating a CAD department.
Proposal and Contracting
Outsource2india has core competence in providing CAD conversion services to global firms. The company has a flexible capacity to handle any scope of CAD conversion work (Outsource2india 2014). Its capability is characterized by access to high-end technologies and infrastructure, as well as, the use of the latest software. Additionally, the company has in-built redundancy, which will facilitate quick capacity adjustments in response to an increase in demand (Outsource2india 2014).
Outsource2india will provide high quality CAD conversion services due to its ability to access a highly skilled workforce. As a specialist in CAD conversion services, Outsource2india has invested in employees with technical skills and expertise in various aspects of computer aided design. As a result, it will provide custom CAD conversion solutions to suit each project’s requirements.
Outsource2india provides time zone benefits since the company operates 24 hours, seven days a week. Thus, VDL will benefit from quick turnaround time (Samsudin, Hasim & Fuzi 2013, pp. 1-8). Moreover, VDL will save up to 50% of its operating costs due to the low labor costs in India (Outsource2india 2014). Thus, the proposal to contract Outsource2india will enable VDL to enjoy both differentiation and cost advantages (Jensen 2011, pp. 311-326).
Communication and Change Management
At this stage, Outsource2india will collaborate with VDL to articulate the issues associated with outsourcing CAD conversion services. The communication vehicles that will be used include VDL Group’s newsletters and meetings. The communication activities will be used to identify the affected stakeholders and the basis of relationship between Outsource2india and VDL (Tate & Ellram 2009, pp. 256-268). In addition, the benefits of outsourcing will be explained to the affected stakeholders to motivate them to support the anticipated changes in organizational design that will occur due to outsourcing CAD conversion services (Oshri, Kotlarsky & Willcocks 2009, pp. 94-112).
Transition Management
This stage will involve establishing the transition governance system to align the objectives and strategies of VDL to Outsource2india’s delivery system (Mani, Barua & Whinston 2006, pp. 15-28). The change control process will be implemented to address emerging risks (Oshri, Kotlarsky & Willcocks 2009, pp. 94-112).
In addition, the timeline for completing the work and the expected deliverables will be clarified at the transition stage. Training programs will be implemented to facilitate knowledge transfer from Outsource2india to VDL. Moreover, relationship management initiatives will focus on promoting effective coordination of supply chain activities between Outsource2india and VDL (Oshri, Kotlarsky & Willcocks 2009, pp. 94-112).
Service Stabilization
The transition team will be in charge of the service stabilization stage to ensure that the expected deliverables are achieved. Outsource2india will focus on delivering the CAD conversion services as required by VDL. The relationship governance structure will be used to resolve any issues that might arise during the provision of the outsourced services (Dolgui & Proth 2013, pp. 6769-6777).
Recommendations
According to the agency theory, outsourcing contracts are likely to face significant challenges if the vendor and the client have different goals. Outsourcing is likely to fail if the client is not able to measure the vendor’s output (Ryan & Delgado-Sanchez 2009, pp. 52-71). Moreover, opportunistic vendors will always take advantage of the loopholes in the outsourcing contract to fulfill their goals at the expense of their clients.
In order to avoid these challenges, VDL should use an outcome-based contract where the vendors are paid according to their achievements. This will shift the risks associated with the contract to the vendor, thereby encouraging high productivity (Logan 2000, pp. 27-30).
VDL should control vendors’ opportunistic behaviors by increasing its involvement in the production of the outsourced services. Additionally, it should hire a qualified independent consultant to audit the vendors to enhance achievement of the desired quality standards.
Second, VDL should visit Brusa Seating’s premises in Turkey to inspect the adequacy of its production capacity and to identify the challenges that the company is likely to face in producing seats. This will enable VDL to identify the risks that are likely to reduce the effectiveness of its outsourcing contract with Brusa Seating in order to take timely actions (Kroes & Ghosh 2009, pp. 124-143).
Finally, VDL should invest in IT and communication techniques to improve its supply chain system. This involves integrating its supply chain system with those of its outsourcing partners to facilitate effective exchange of information and coordination of activities.
Integration can be achieved through technologies such as cloud computing and business-to-business e-commerce platforms. Furthermore, VDL should train its employees on various languages to overcome communication challenges. This will facilitate effective communication between the company and its outsourcing partners who are based in various countries.
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