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  • Bayer, William R. Jr.
     
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  • Business logistics
     
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  • Contracting out
     
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  • Strategic planning
     
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  • MSEM Thesis.
     
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  •  The direct model : a...
     
     
     
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    The direct model : a tool for evaluating logistics outsourcing opportunities / by William R. Bayer Jr.
    by Bayer, William R. Jr.
    Subjects
  • Business logistics
  •  
  • Contracting out
  •  
  • Strategic planning
  •  
  • MSEM Thesis.
  • Description: 
    ii, 143 leaves : ill. ; 29 cm.
    Contents: 
    Advisor: Kimbel Nap.
    Committee members: Dr. Bruce Thompson, Gene Wright.
    Introduction -- Determinants of outsourcing -- The Sorrento Cheese Company, Inc.: a case study -- Introduction to the DIRECT Outsourcing Evaluation Model -- Define company goals and objectives -- Identify logistics activities and expenditures -- Research potential third party providers -- Evaluate partnership proposals -- Contract negotiations -- Transition to third party provider -- Recommendations -- Summary and conclusions -- Appendix A : List of companies invited to participate in survey.
    The downsizing of nearly every company in America, has created the trend to look to outsourcing various operations in order to leverage scarce resources and improve asset utilization. Among the most prominent operations targeted for outsourcing is the logistics operation. With companies spending over $500 billion annually on logistics services, it offers one of the last frontiers for wringing costs out of today’s business. While the results are often impressive, with cost savings of up to 30 percent realized in some cases, outsourcing is not without possible pitfalls. Until now, the in-house logistics management function lacks the tools necessary to make the right decision when considering outsourcing. Over the next pages, the author will develop a decision process model designed specifically for assisting the logistics professional in determining whether outsourcing is right for his/her company. Effective outsourcing of logistics functions require a methodical approach. The DIRECT Model provides just that. With this tool, logistic managers will be able to make outsourcing decisions that will take all aspects of the company into consideration including: human resource issues, financial aspects, customer service, quality, etc. The rationale behind the DIRECT process approach essentially addresses the advantages and disadvantages to outsourcing. The information is based on data collected through the author’s in-depth research of organizations that have chosen to outsource some or all of their logistics functions. In particular, it satisfies the need for logistics professional to have an effective tool to assist them in making strategic decisions pertaining to logistics functions. It forces the potential buyer of third party services to comprehend the underlying aspects of the outsourcing decision that might have otherwise been forgotten. The result of applying the DIRECT Outsourcing Evaluation Model will significantly impact the success of outsourcing logistic functions or support the decision not to. The DIRECT outsourcing process model consists of 6 basic steps. They are defined as: Define, Identify, Research, Evaluate, Contract, and Transition. The first phase, Define, is initiated when a cross-functional team has been developed to administer the analysis. This team, led by the organization’s CFO, will be represented by various departments including, logistics, finance, manufacturing, customer service, among others. The CFO has been chosen to facilitate the effort of the outsourcing analysis mainly because he or she is not directly involved with any specific function of the logistics operation or any department dependent on it. It is easier to maintain a neutral position and help take down the barriers to change. In the Define phase, the outsourcing team is charged with gathering information, both internal and external, on the organizations goals, objectives and strategies. The outcome of this first phase will be a complete understanding of whether or not outsourcing will ‘fit’ into the organization’s culture. If the team finds it will not, corporate objectives can be realigned or the evaluation process is suspended indefinitely. However, if the team determines outsourcing will ‘fit’ into the organization, the evaluation will proceed to phase two or the Identify phase of the analysis. Here the team will identify logistics activities and their associated operating expenses. This is determined by several different cost analysis methods. One of the more common methods practiced is activity based costing (ABC). Utilizing this method and/or other analysis tools, will ultimately reveal activities or processes that may be more advantageous to the business to outsource. When the costs associated with the various functions of the logistics operation have been established, the results are benchmarked against similar organizations. By doing this, the evaluation team will not only gain an understanding of the current operational cost-effectiveness, but will also provide a cost basis for contract negotiations which take place later in the outsourcing process.
    The next phase, Research, takes the information gathered from the cost analysis and begins to identify the potential third party providers that offer the types of services desired. Several alternatives to collecting information on potential third party providers are discussed. Some of the more common search engines include: journals or newspapers, networking and the Internet. When the search is complete and the number of providers is manageable, an informal initial request for proposal (RFP) is sent to each of the selected service providers. The RFP is basically a request sent out by the organization soliciting more detailed information on how the provider will perform their responsibilities. The elements of the RFP include cost figures, operational and contingency planning, human resources, equipment and facilities, etc. More specifically, the providers are asked to elaborate on how the “work” that was determined in the Identify step of the DIRECT process will be completed with a neutral or positive financial impact. The next phase of the process, the Evaluation phase is initiated when the RFP’s have been returned. The outsourcing team is then charged with evaluating the submissions and narrowing down the field of potential providers once again. Selected criteria, specific to the outsourcing activity(ies), is used in the evaluation of the providers. The result of this phase is a provider which is feasibly and operationally and culturally compatible with the buyers organization. At this point in the author’s model, both parties in the relationship, begin the contract negotiations. The Contract phase of the process solidifies the alliance between the two entities. Issues such as responsibilities, compensation, termination, service features and above all, performance measurements, are put into context. Upon the signing of the agreements, the sixth and final phase, Transition, begins. It is difficult to introduce two corporate cultures in a third party logistics arrangement and expect them to perform efficiently on the first day, but that is when it is most critical. For a number of reasons, it is worth spending some time and effort to ensure the first day is as perfect as possible. Therefore, the author recommends development of a detailed implementation plan in order to smooth out the change process. As part of the implementation plan, performance measurements are put into place in this phase to ensure a profitable relationship in the future. The objective of this paper is to develop a process tool which will assist logistics professionals in evaluating outsourcing opportunities. To make the abstract concrete, the author integrates a “real world” case study as each phase of the model is defined. Sorrento Cheese Company, Inc. is the organization used to illustrate how this model will help develop a world class outsourcing relationship or justify why outsourcing does not fit a business. Sorrento’s success represents the need to have such a tool available. The DIRECT Model for evaluating outsourcing opportunities model fulfills that need.
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