Creation of outsourcing decision-making model

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School of Engineering Science

Degree Programme in Industrial Engineering and Management

Riikka Veijalainen

CREATION OF OUTSOURCING DECISION-MAKING MODEL Master’s Thesis

Examiners: Professor Timo Pirttilä M.Sc. Kaija Seppälä M.Sc. Ville Piironen

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ABSTRACT

Lappeenranta-Lahti University of Technology LUT School of Engineering Science

Degree Programme in Industrial Engineering and Management Riikka Veijalainen

Creation of Outsourcing Decision-Making Model Master’s thesis

2021

87 pages, 17 figures, 4 tables and 4 appendices Examiners: Professor Timo Pirttilä

M.Sc. Kaija Seppälä M.Sc. Ville Piironen

Keywords: Outsourcing, Operation, Production, Business performance

Outsourcing is a quite common approach to access productivity, performance, and cost- effectiveness in a rapidly changing environment in today’s business. Outsourcing has many advantages, but also many risks, and to achieve the best results, these advantages and disadvantages need to be considered effectively. Cost-effectiveness is the most identified driver for making an outsourcing decision, but currently many other areas are also named, in which Thesis is focusing. The most important things to consider are the company's core competencies, of which examination affects the outsourcing decision and value creation in terms of both cost and efficiency.

This Master’s thesis is considering the phenomena of outsourcing and examined the different outsourcing models that have been, are used or would be used in engineer-to-order frequency converter production of ABB System Drives. The target of this Thesis is to compare benefits and risks parallel and support decision-making in choosing the best and most productive outsourcing models for different business situations. The study specifically addresses the issues when an outsourcing decision is worth making, and for which part of the operations.

Furthermore, this thesis consists of a literature review of effective implementation of outsourcing, a current state analysis of the used models and processes and a description of the decision-making process compiled for further use. The purpose of the thesis is to help optimize and compare situations in outsourcing decision-making for products such as System Drives' highly variable product type and to make the outsourcing models currently used more comparable.

A decision-making model that considers literature research and product type serves as a support for decision-making, especially in a situation where an outsourcing decision is being considered in an unfamiliar environment and opportunities for comprehensive optimization exist. The result of the study also emphasizes the importance of digitalization in outsourcing decision- making, which is increasingly possible today.

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TIIVISTELMÄ

Lappeenrannan-Lahden teknillinen yliopisto LUT School of Engineering Science

Tuotantotalouden koulutusohjelma Riikka Veijalainen

Ulkoistamisen päätöksentekomallin luominen

Diplomityö 2021

87 sivua, 17 kuvaa, 4 taulukkoa ja 4 liitettä Ohjaajat: Professori Timo Pirttilä

DI Kaija Seppälä DI Ville Piiroinen

Hakusanat: ulkoistaminen, operaatiot, tuotanto, liiketoiminnan tehokkuus

Ulkoistaminen on hyvin yleinen tapa parantaa tuottavuutta, suorituskykyä ja kustannustehokkuutta nopeasti muuttuvassa ympäristössä nykypäivän liiketoiminnassa.

Ulkoistamisella on monia etuja, mutta myös monia riskejä, ja parhaiden tulosten saavuttamiseksi näitä etuja ja haittoja on tarkasteltava tehokkaasti. Kustannustehokkuus on yleisimmin tunnistettu ajuri ulkoistuspäätöksen tekemiseen, mutta nykyään tunnistetaan myös monia muita osa-alueita, joihin työ syventyy. Tärkeimpiä asioita, joita tulee ulkoistamispäätöksessä huomioida, on yrityksen ydinosaaminen, jonka tarkastelu vaikuttaa ulkoistamispäätökseen ja arvontuotantoon sekä kustannus-, että tehokkuusmielessä.

Tässä diplomityössä tarkastellaan ulkoistamisen ilmiöitä ja tarkastellaan erilaisia ulkoistusmalleja, joita on käytetty, käytetään tai käytettäisiin ABB:n tilaussuunniteltavien ja konfiguroitavien taajuusmuuttajien tuotannossa. Tämän opinnäytetyön tavoite on vertailla huomattavia etuja ja riskejä ja tukea päätöksenteossa valitsemaan parhaat ja arvoa tuottavimmat ulkoistusmallit eri liiketoimintatilanteisiin. Tutkimus käsittelee erityisesti kysymyksiä koska ulkoistuspäätös kannattaa tehdä, ja mille osalle toimintoja.

Tämä diplomityö koostuu kirjallisesta katsauksesta tehokkaaseen ulkoistamisen käyttöönottoon, käytettyjen mallien ja prosessien nykytila-analyysistä sekä jatkokäyttöä varten koostetun päätöksentekoprosessin kuvauksesta. Diplomityön tarkoituksena on auttaa optimoimaan ja vertaamaan tilanteita ulkoistuspäätöksenteossa System Drivesin korkeasti varioituvan tuotetyypin kaltaisten tuotteiden osalta ja tehdä nykyisin käytetyistä ulkoistusmalleista nykyistä vertailukelpoisempia.

Kirjallisuustutkimuksen ja tuotetyypin huomioiva päätöksentekomalli toimii tukena päätöksenteolle erityisesti tilanteessa, jossa ulkoistuspäätöstä ollaan harkitsemassa uudessa ympäristössä ja mahdollisuudet kokonaisvaltaiseen optimointiin ovat olemassa. Tutkimuksen lopputuloksessa myös korostetaan digitalisaation merkitystä ulkoistuspäätöksenteossa, joka on nykyään yhä enenevissä määrin mahdollista.

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ACKNOWLEDGEMENTS

When I was a little, I was told that dreaming is not worth because it only leads to disappointment. But I never believed, as I tend to. Instead, I have always strongly believed that if you do what you love and love what you do it leads to the best results. And here I am today, this Thesis on my hands, so it works.

This Master's thesis is made for ABB System Drives Operations unit. I would like to thank the principal for the opportunity on an interesting and topical topic. I would also like to thank SD Helsinki production unit and people there for believing with me, and for the opportunities, including this Thesis, I have always been provided when I have been ready.

Warm thanks to Kaija Seppälä and Ville Piiroinen for defining the topic of Thesis and instructing it.

Thanks for Timo Pirttilä, for the advice on academic view to the Thesis.

And thanks also to all the colleagues who supported me during the trip.

And finally, thanks to Aleksi for his continual support. It is not always easy with me.

Helsinki 15.10.2021

Riikka Veijalainen

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LIST OF ABBREVIATIONS

ABB Asea Brown Boveri

BPO Business Process Outsourcing COEP Custom Order Entry Point CTO Configured to Order ETO Engineer to Order

KPI Key Performance Indicator

LV Low Voltage Drive

MV Medium Voltage Drive OBE Order Based Engineering OSEP Order Specification Entry Point RBV Resource Based View

SD System Drives

TCE Transaction Cost Economies TPT Trough Put Time

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1 INTRODUCTION

Business is quickly changing nowadays and one of the means to help react to the change is outsourcing. There are a lot of pros in outsourcing and then there are many risks related to it. A company needs to recognize and use the best combination of outsourced activities for the best business model. Focusing on core competence is still important for business, but there are also other drivers that push to outsourcing and to better efficiency of business by it.

This Master’s thesis is considering phenomena in outsourcing and reviews different outsourcing models that have been, are or would be used in highly configured frequency converter operations of ABB System Drives or equivalent operations. Target of this thesis is to create a model of outsourcing decision-making and present concepts, that could be used in different business cases to support decision making in view of costs, efficiency, productivity, and availability.

1.1 Background

ABB System Drives (SD) has frequency converter operations in many different local units in different countries, close to customers, of which most are using a subcontractor in operations.

Each local unit has a local model for outsourcing, and they are all different since outsourcing concepts are created and implemented locally based on current business situation to improve business key performance indicators (KPI) like cost efficiency, scalability and solving bottlenecks like space or workforce. Models differ from the way of purchasing materials, phases of assembly and engagement of functions of ABB. Though, in all the models, the purpose of using subcontractor is to bring efficiency and flexibility to operations. Since each local unit and factory has a local way to implement operational outsourcing, it means that utilizable areas are also in the other site, and that makes the advantage of reviewing this topic trough global SD.

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The topic of the thesis is topical because the business environment is changing fast, and flexibility of operations is increasingly important all the time. When combining the need of flexibility, variation of outsourcing vendors and current possibilities of technology use, a modern vision is gained for increasing flexibility in different business situations. The theme is significant for business too, because in the core of ABBs strategy is to bring value to customer and fulfil the customers’ needs. All starts from business strategy - profitable growth and outsourcing is one concept in operations to be able to reflect to changes in the global markets.

This thesis is made as an assignment to ABB SD Operations unit and its purpose is to research possibilities to optimize and capture different models of outsourcing more globally and create documentation based on research and for further use.

1.2 Problem

In global SD division there is a need to clarify what are the recommended outsourcing concepts and which details are influencing for that. The purpose is to outline and review the value chain of operations from the perspective of value creation and cost-efficiency and figure out the best options of implement outsourcing to support business targets. Defining of thesis is to focus on the most significant business cases and upper level process steps. Focus is only on SD processes, and on cabinet frequency converters.

Scope of thesis is on ABB operations value chain and on order fulfillment and support processes of it. Areas that include in this scope and will be review are purchasing, production, testing, and logistics functions. In this thesis, focus area is on complete production steps. Out of scope are also early state implementation as supplier choice, as well as supplier management feasibility.

SD frequency converter cabinets are divided to two types, which are configured to order (CTO) products, customized with high volume or low volume, or engineer to order (ETO) products.

That means, that almost each product is customized, or at least customer configured. Customer requirements in configuration makes need for order-based-engineering (OBE), which is function between engineering and production, where product will be designed for customer’s needs.

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Purpose of study is to clarify how for example digitalization could be utilized in the operations and production of highly configured products. Nature of the product causes a challenge in outsourcing, because high amount of craftmanship is needed in assemblies, and still quite less work is automatized. In many cases of ETO products, a responsible engineer is required to follow up and support production during assembly, which at least makes outsourcing more difficult than in standard product. Though, current technologies make it more possible than before. Solutions that are expected to find are related of cross-utilizing of current outsourcing actions, and for example utilizing smart solutions for learning new phases of operations.

1.3 Research methods

In the beginning of research, focus is on literature of outsourcing and business performance, to bring a clear understanding in topic. Theory considers first generally on outsourcing topic and benefits and risks of it. Topic specific literature is focusing on supply chain management and value chain, and what are the factors that create value, efficiency and successful when combining outsourcing as a part of business strategy. Later review of SD outsourcing models is based on views of literature review.

Interviews with representatives of local units, where SD frequency converters are produced, have been conducted to support the theoretical perspective in understanding the topic. Used research model when examining the models of different SD factories is to interview the representatives of local units. Interviews are implemented as calls, with a similar pattern of questions. Overall picture is shaped from the answers of interviews and based on it is shaped current state analysis of the problem. In overall picture is also utilized SD footprint synopsis, from current year.

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The target of thesis, is a combination with theory-based understanding, utilizing, and applying the best practices of current models and overall process understanding Drivers for targeted solution are cost effectivity and efficiency of process, which are considered when constructing solutions. Focused problem is quite multidimensional, that many circumstances that are out of this thesis scope, are influencing, and continuously changing. Target of thesis is to research theory of outsourcing topic, and find references to ABB SD model, make a current state analysis, and based on them make a conclusion about outsourcing concepts to fulfill business requirements in the changing global environment.

Project management is supported so that a schedule for implementation, that is seen in Figure 1, was made at the beginning of project. Schedule is guiding, but project is needed to complete during given period. Project phases are definition, theory, current state analysis including interviews and concept creation, which are scheduled in monthly timeframe. For execution of thesis, and engagement of schedule, are organized regular meetings with instructors every two weeks.

Figure 1: Schedule for implementation

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1.4 Outline

Table 1 summarizes content of the chapters of thesis. In the first and second chapter are focused on support information and introduced topic and company. In the third chapter, is handled literature that focuses and complements outsourcing as a topic. In the fourth chapter, focus is on the topic of cost-effective outsourcing and different models to implement outsourcing. The chapter focuses on value chain, supply chain and value chain creation in outsourcing.

After literature research, in the fifth and the sixth chapters are handling current state of outsourcing and its support processes in System Drives. First, outsourcing related process is presented step by step, and second, models of outsourcing in different local units of example have introduced.

In the seventh chapter focus is on current process review by utilizing theory. Chapter focuses on the outsourcing opportunity matrix and use of it. The last chapters go through the thesis topic and gather the results of research.

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Table 1: Input-output figure of thesis

Input Chapter Output

ABB internal details Chapter 2: ABB

Details suited on presentation

General presentation of the company

Theoretical research of outsourcing in general

Chapter 3: Outsourcing Extract the most usable details

Summary of the most general drivers and risk of outsourcing

Theoretical research of outsourcing in Value Chain creation tools and models

Chapter 4: Outsourcing Value Chain Extract the most usable models

Presentation of value chain definition tools

ABB process diagrams, and production models

Chapter 5: System Drives Operations

Utilize topic related data and show it in presented form

Presentation of current supply chain of SD in Outsourcing view

Interviews of different local units

Chapter 6: Current State of Outsourcing in System Drives Gathering data from interviews together

Presentation of currently used outsourcing models in reviewed plants

Utilizable information from current state review,

Theory based information

Chapter 7: Choosing the Outsourcing Model

Connecting current state analysis to theory

Presentation of creating and using outsourcing decision-making model

Results of research Chapter 8: Results and Evaluation

Results summarizing for further use

Review of findings of thesis

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2 ABB

ABB is a Swiss-Swedish leading technology company which strategy today is to build digital future by bringing electrifications to the points of electrical use and automizing industry in all the supply chain. ABB was founded in 1988, when Swedish Asea and Swiss Brown Boveri were consolidated.

ABB consists of four business areas, in businesses Electrification, Automation, Motion and Robotics & Discrete Automation. Motion, of which part System Drives is produces drives including wind solutions, and motors and generators. ABB is employing about 110 000 employees in over 100 countries. The headquarter is in Zurich, Switzerland. ABB operates in many industries and provides solutions to many electrifications, and automation needs.

Industries that ABB is operating are for example automotive, chemicals, food and beverage, marine and ports, mining, and wind power. (ABB, 2021)

2.1 ABB System Drives

System Drives is a part of the Motion business area. Its main products are frequency converters for various industries as marine, oil and gas, power and renewables, and pulp and paper. System Drives functions in tens of various locations. (ABB, Motion 2021)

Frequency converters are electrical devices that convert electric current of frequency to another frequency. That phenomenon is utilized to use correct frequency for current use and hence save energy and costs in it. Electrical motors are using almost 70 % of all industrial energy consumption in the world and ABB frequency converters have a significant position to lower this number and save high amount of energy in the world every day. (ABB, Motion 2021)

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System Drives products can be separated in Low voltage (LV) and Medium voltage (MV) products. LV drives category is consisting in two different product families, which offer extensive power and voltage range, and are possible to specifically design to offer high performance, adaptability, and reliable operation to machine builders. MV drives category consist of six different drive types, and they are used in a wide variety of standard applications across all industries. All SD products are configured to order-products, which means they are produced according to customers need, either engineering by need, or choosing suitable configurations. Examples of frequency converter cabinets are shown in Figure 2.

(ABB, Motion 2021)

Figure 2: ABB frequency converters cabinets, LV and MV products (ABB, Motion 2020)

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2.2 ABB Motion SD strategy

The slogan of strategy ABB Motion 2025 is “We keep the world turning – while saving energy every day”. Idea behind that slogan is that the motors and drives that ABB Motion produces, are an integral part of everyone’s lives, in the part of building technology, transportation and consumer electronics etc., and achieving the best energy efficiency. (ABB, Motion 2021)

In the core of strategy is Superior Customer Experience, which Motion looks for by offering always configured solutions for the customer need with a wide product portfolio. Around those core topics are first, Pioneering technology leader, second, Domain ability and most comprehensive offering and then, Global scale and coverage. (ABB, Motion 2021)

System Drives has its own strategy, which is aligned with the Motion strategy. In the core of SD strategy is superior customer experience as well, and that is wanted to achieve by being pioneers in technology, having the most comprehensive offering and having large global coverage. Tools for achieve superior customer experience are right product offering, in which configurable products are acting key role, and best availability which is achieved by delivering excellent quality and providing full lifecycle support. (ABB, System Drives 2021)

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3 OUTSOURCING

This chapter is focusing on outsourcing and theoretical models of it. In the beginning outsourcing is represented in general, and after those different theories of outsourcing are reviewed. In the end of the chapter the view is on reasons and benefits for outsourcing, which are linked to further description of SD models in following chapters.

3.1 What is outsourcing?

Outsourcing is a process whereby a company is chasing for example lower costs, better productivity, or less investments. Outsourcing brings solutions to balance, among other things, demand variation and respond for customer needs. With outsourcing, a share of production or the whole production can be moved to produce outside of the company. In the most cases outsourcing covers for example a service or a specific part of product. (Twin, A. 2021.)

3.2 Theoretical models of outsourcing

There are a few different often occurring general models and theories of outsourcing. One of the most commonly used are TCE and RBV, which are often shown and compared together, are presented in the first chapter. TCE and TBV determine whether outsourcing is done from a cost or competence perspective. There are different business perspectives for outsourcing, which can be seen as maturity levels. These tactical, strategical, and transformational outsourcing levels are presented in the second chapter, and they take a stand on what the entity to be outsourced is like. Different views and models in outsourcing help to focus on the core competence and get the best benefits from outsourcing.

3.2.1 TCE vs. RBV

Two influential outsourcing theories are transaction cost economics (TCE) and resource-based view (RBV). TCE model was developed in 1937, as an alternative form for review the transaction cost of processes. RBV is a modern model, developed in 1984, since TCE was widely used, the results of it were not always confirmed. RBV purpose is to compare the skills

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of an own and the other firms. RBV’s target is to not to outsource core competence, including specific skills and strategies. (Hamacher, S, Scavarda LF, Wolf de Almeida Neves L. 2014. p.

688.)

TCE focuses primarily on cost management. Benefits of TCE are based on the cost that occurs when production moves from one step to another via transactions. Transaction governances affect cost because controlling, planning, and implementing them requires effort. Using TCE attempts to achieve a managing model, where transaction costs are minimized. The most principal factors to qualify organization productivity are frequency of transactions. The point where TCE occurs, is then when the expansion of a company achieves a point at which the cost of internal transaction is higher than cost of transacting in the market. In that situation outsourcing, in combination with identifying core competencies as well, has the opportunity to lower costs and risks and could gain financial effectiveness too. (Wang, T-C. p. 379.)

There where TCE focuses on financial performance by outsourcing non-value-added transactions, RBV focuses on core competencies that need to be kept in-house and processes outside of them should be outsourced. In the other hand, the less company has core competencies, the more should be outsourced. RBV shows that an organization has special recourses and competence that create value for the firm and are a key to performance. To get the best performance, the organization must be seen as an entirety of competences and those core competences need to be supported as a part of strategic planning of organization. The companies which hold valuable assets with certain characteristics achieve the best result.

Among the other things, economical, physical, HR and organizational assets are included in the company’s recourses. (Wang, T-C. p. 380-381.)

TCE and RBV are focusing on different issues that are first, why companies exist and second, why performances of companies differ from each other. Hence, these two issues are significant when considering outsourcing and operations management. In both models, one of the most critical factors to affect performance of outsourcing is asset specificity, that finds cost that does not bring added value outside of transaction. Other connective factor between theories is organizational capability. According to RBV, outsourcing decision finds the number of skills and knowledge development inside the company. TCE also measures the level of asset

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specificity in outsourcing decisions, which means that more specialized outsourcing functions become, the costly they will be. In conclusion can be found that the function will be outsourced less likely when the level of asset specificity rises. (McIvor R. p. 48; Wang, T-C. p. 381-382.)

As stated, TCE and RBV are complementary theories, but many of their details supplement each other. There are also contradictories between theories, and the aspects of complement are presented in Figure 3. The figure presents those factors that influence either complementary or contradictory are resource position, in other words amount of internal competence, and potential for opportunism. Opportunism means practices to benefit from the circumstances regardless the consequences for others and the target of opportunists actions are intended to gain an advantage in what is being done. In this context, it means that if the environment is favorable and the most cost-effective solution is offered by doing itself, this is supported. If, on the other hand, the cost-effectiveness is not favorable to the company, the risk is transferred to vendor by outsourcing. (McIvor R. p. 48.)

Complementary positions are either the situation of superior resource position and prominent level of opportunism or weak resources combined in low opportunism. If potential for opportunism is high and resources for the phase are good inside of company, in phase that outsourcing decision is in review, both theories are supporting internal production and not to outsource. If both of those are low, both theories are supporting outsourcing. But if one of resource and opportunism is low and the other is high, or opposite, theories are supporting different decisions. Because TCE is focusing on cost, it is not interested in resource position and would produce internally if only opportunism is high. Because RBV is focusing on competencies and especially core competencies as an important part of it, RBV theory would outsource in the same situation.(McIvor R. p. 48.)

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Figure 3: TCE-RBV framework (McIvor R.)

There are numerous proponents for both RBV and TCE models, which are endorsing the pros of the other and cons of the other. As arguments towards TCE, for example, have been used that the model minimizes the opportunistic potential in asset-specific investments, whilst RBV creates competitive advantage. Though, according to McIvor, nowadays a growing group of proponents do argue for complementarity, and that outsourcing decision cannot be done based on only the other. (McIvor R. p. 48.)

3.2.2 Tactical, strategic, and transformational outsourcing

As earlier stated, outsourcing is classifiable to a general form of improve business efficiency, and its environment is continuously changing. Outsourcing forms can be seen by decades, and trends to be changing whilst business surroundings change. These outsourcing maturity levels are often presented as tactical, strategic, and transformational models, and they describe the actual level of outsourcing determined by the activity and maturity of the process. In addition, Vagadia adds also the future innovative outsourcing on the list. (Vagadia, B. p. 27-28.)

Levels of outsourcing can be categorized on a timeline according to the degree of development.

According to Vagadia, the initial phase of outsourcing strived for pure cost savings, and vendor relationships were not significant. After that, in the second phase, outsourced processes began to be closer to core business processes of the company, and so vendor relationships got more remarkable role. That level is called tactical outsourcing. In the third phase outsourcing turned to strategic outsourcing, and outsourcing was seen as a key strategic enabler, that could cause a maximum advantage. The fourth phase, that Vagadia defines as Business Process Outsourcing

Contradictory Complementary RBV - Perform Internally RBV & TCE - TCE -Outsource Perform Internally Complementary Contradictory RBV & TCE - RBV - Outsource

Outsource TCE - Perform Internally

Lower Higher

Superior Resource Position Weaker Resource

Position

Resource Position

Potential for Opportunism

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(BPO), pays attention to vendor relationship more than in earlier phases and grants a significant business responsibility to the service provider. The most modern phase of outsourcing is transformational model, of which BPO is a part, means that vendor becomes a part of actual business structure and processes as a fixed part of those. (Vagadia, B. p. 27-28.)

Tactical outsourcing is first level outsourcing, that focuses on costs. It is mainly used when organization is already in a need to get issues fixed, as financial difficulties, inadequate managerial competence or need to reduce labor. In that case outsourcing may be seen a way to address problems. According to Brown and Wilson, tactical outsourcing relationships are often forced to generate immediate cost savings, cut the need for investments, realize a cash infusion from assets and relieve labor costs. Tactical outsourcing is often seen as a better service for less investment of capital and management time. Transformational outsourcing, in turn, is so called third-generation outsourcing, which means that outsourcing is used for the purpose of redefine the business, that responds to the continually changing market’s needs. (Brown, D; Wilson, S.

p. 20-24.)

Strategical outsourcing focuses on efficiency. Strategy means goal setting and acquiring and using resources and according to Dekkers, a successful manufacturing strategy makes organizations capabilities to provide a competitive advantage. Strategic outsourcing is the model which purpose is to earn greater value from outsourcing by directing attention to the most strategic aspects of operations. The scope of outsourcing as well as vendors involvement is wider than in tactical outsourcing. Target is to create long-term value, and work with just a few best quality service providers in long-term relationship. When reviewing outsourcing at strategic level, the value chain is acting in a significant role of delivering products and services to customer. In that case outsourcing is seen as a tool that gives resources to meet customer requirement. (Dekkers, R. p. 5-6.: Brown, D; Wilson, S. p. 21-24.)

Transformational outsourcing is a model of supposed innovational outsourcing.

Transformational outsourcing pay attention to business entirety and integrates subcontractors and vendors as a part of core business, where the purpose of each is to fulfill an own function.

In transformational outsourcing service providers are seen to deliver operational and financial benefits as well as local operations. In transformational BPO, investments are seen drivers to

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help process management, and better relationship with vendor - actually, investments are seen as initiative for a deep commitment between business partners, and a step for business efficiency. In transformational BPO, controlling vendor is also based on deep trust, transparency, and integrated workflows. (Vagadia, B. p. 28-30.)

3.3 Opportunities of outsourcing

There are many reasons for outsourcing, and the reasons are so far depending on nature of the business. In general, the most identified benefits of outsourcing are cost reduction, improved quality, and competence management, which are presented in this chapter. Products of high standard and simple structure are easier to produce outside and require a low effort of management, so outsourcing can achieve clear cost savings. In the other hand, products of high level of customer configuration require high level of control and are more complex to produce, which makes production outsourcing more difficult. Regardless the product, need for outsourcing may result from different business situations which cause need for review outsourcing models to find the best.

In general, cost reduction is known as the main driver for outsourcing, and it is the main reason in most cases as well. According to the Brown and Wilsons study, in which different BPO situations were investigated, cost reduction is driver in 53 % outsourcing cases. There are still many drivers for outsourcing before focus is on costs. One of the main reasons for outsourcing can simply be that an organization needs to increase scalability and temporarily increase capacity without investments. In that case, investments of time consuming and difficult production volume increasing can be avoided by utilizing outsourcing. Lower costs in this case cause, among the other thing, from either controlled transaction costs as tactical outsourcing presents or less investments on non-core competencies as strategical outsourcing presents.

(Krym, N; Keppler, K. p. 8; Brown, D; Wilson, S. p. 37.)

One of the drivers is flexibility, what comes from cost of labor, which is an important individual driver about cost reduction. External labor can be used also to aid a fast-growth situation. Even if the labor would not be cheaper, it can be a good business strategy to outsource production if growing is seen to bring significant profit in the future. In addition, recruiting processes and

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hiring people are slow and expensive, and those expenses are avoidable if the labor is external.

The same idea is behind in the case of improving flexibility. Business situations can be variable, and by outsourcing a part of process is possible to ensure fast reaction to demand variation. In this case cost avoidance in labor is achieved when only the most necessary labor is in a responsibility of company. Labor also has different prices in various locations, so in some cases, for example part of the production process can be executed in different countries for the cheaper expenses. (Brown, D; Wilson, S. p. 37-38: Krym, N; Keppler, K. p.10.)

Outsourcing has a potential to save time too, which affiliates on accelerated processes, that cause cost efficiency, availability, and better profitability. By producing for example sub- assemblies outside of organization, can production trough put time (TPT) be received lower than if all assembly would be done self. Labor in external subcontractor can also be more acquainted with the one specific process that TPT of an individual process step is more efficient then. (Brown, D; Wilson, S. p. 21-24.); Krym, N; Keppler, K. p. 9.)

Improved quality as a reason for outsourcing occurs in many sources. Topic is significant, because, according Kaner, cost of inadequate quality, consisting of prevention, appraisal, internal failure, and external failure, can be 20 % - 40 % of sales. Whilst the added value of superior quality can be substantial, and in some situation outsourcing provides a solution for improving quality if it is not included in the core competences of the company. (Brown, D;

Wilson, S. p. 37; Kaner, C.; Atkins, T.)

The reason behind outsourcing may also be fully in competence, not in costs – reason can be a need to get new skills. That can occur if the recognized core competence of the firm is totally focused in different are than needed input. This driver is related especially on transformational outsourcing, since by outsourcing in the case new competence is needed, can investments on improvement be kept minimum and high responsibility is given to the vendor. Such an approach enables the best possibility for the company to focus on core competence. Companies can even be willing to outsource functions, that are seen less core competence in the future, to assure the future performance. (Brown, D; Wilson, S. p. 37.)

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3.4 Risks of outsourcing

Therefore, the many reasons and benefits for outsourcing may make it look like an attractive option. Still there are also many risks belonging in outsourcing, what need to be noted.

According to Overby, the failure rate of outsourcing relationships can be from 40 to 70, so it is important to keep notice on the risks. In the general level the risks can be divided to external and internal risks. (Overby, S.)

Organization is not able to affect the external risks. One of the most significant issues are security and privacy when business critical information is needed to externalize outside of organization. Producing outside of organization also unites an issue of inadequate vendor capabilities when use of organizations quality-, process optimizing etc. processes are not necessarily on use. Costs of inadequate quality are a high external risk, but it can be avoided by effective quality engineering. If quality is including on core competencies, and drivers for outsourcing are elsewhere, quality needs particular focus to avoid risks. (Brown, D; Wilson, S.

p. 37; Kaner, C.; Atkins, T.; Krym, N; Keppler, K. p. 5.)

Internal risk, in turn, is a risk that organization can control. First and the most general internal risk is unrealistic expectations towards outsourcing which are related on costs. For example, higher expectations for cost reduction, or lead time reduction than are realistic, can cause dissatisfaction in implementation of outsourcing. One occurrence of wrong expectation may be lack of organizational preparedness, which can be united those unrealistic expectations are realized. Reason for that is that outsourcing implementation requires changes for processes and an insufficient preparation can cause problems. An example of that is Brown and Wilsons study about satisfaction of outsourcing, which submitted that 53 % of respondents felt lack of project management skills in outsourcing and 58 % lack of good process. (Krym, N; Keppler, K. p. 6:

Brown, D; Wilson, S. p. 5.)

Also, a human risk is related to internal risks of outsourcing. When labor of organization get conscious about outsourcing, is possible that decreased commitment inhibits productivity. That problem is mostly occurring in implementation level, but the effect may be the same also in the uncertain situation. Outsourcing may cause uncertainty on operations, if it is seen that failure,

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or changes in the environment will lead to outsourcing activities for cost-effectiveness reasons.

One of the human risks is lack of innovational improvement. There is a common way of doing things inside of organizations and people are improving their work by that way. External vendor is out of the common way and processes are not improving for benefit a company in outsourced part. (Krym, N; Keppler, K. p. 8.: de Treville, S.)

Reputation is also a notable risk in customer vision of organization. Outsourcing means that someone external is produced products or do the work. In some cases, the information about that could affect negatively, especially in quality issue cases etc. Overall, in the implementation of outsourcing, the organization needs to note that margin for the outsourcing service is needed to pay, which means that cost reduction needs to be the amount of margin and willingly more.

(Krym, N; Keppler, K. p. 8.)

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4 OUTSOURCING VALUE CHAIN

In the core of business exists value creation for customers, and value chains that are important to find when making an outsourcing decision. Value chains consist of three levels of activities, which are core competencies, value-adding activities and non-value adding activities. In this chapter, value chain is reviewed in the view of outsourcing. First, focus is on core competence and value chain in general and as a part of value creation. After that, outsourcing implementation, requirements related on it and process steps to follow are presented.

4.1 Core competence

Core competencies are the capabilities and resources that ensure successful business, and as its best, make it stand out from the competition. The idea of core competence was proposed in the 1990s in Harvard Business Review, when it was a new management theory. Currently finding core competencies of business is seen as the key factors. In this chapter is presented core competence recognition from the perspective of a few different models. (Hamel, G & Prahalad C.K. p. 80-81.)

Jovidan presents core competencies as the highest level of resources of the company. According to presentation of core competencies in practice, resources are in the bottom of the competence hierarchy, and they consist of physical resources such as production space or assets, human resources such as management and training, and organizational resources such as culture. The second level is capabilities which means how resources are utilized. Capabilities in turn shape the third level, competencies. They are, according to Jovidan a cross-functional integration and co-ordination of capabilities. Core competencies are the highest level of hierarchy, and they are special competencies that make a difference to competitors. (Jovidan M. p. 64.)

According to Prahalad and Hamel, finding core competencies is about to shift focus from general problems and their local solution to identify core competencies among existing competence. Model underlines the importance and performance of finding the selection of core competencies from existing competencies instead of creating new. Advise to look for core competencies is first, to provide potential access to a wide variety of markets, second, to invest

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significantly to the customer benefits of the product or activity, and third, to make a product or activity difficult to copy for competitors. The link between identified core competencies and product is as said core product, which means embodiment of core competencies. It is a product in which relationship between design and development skills is leading to popularity due to its superiority. A dominant position in these products allow companies to influence improvement of product markets in general. (Hamel, G & Prahalad C.K. p. 83-85.)

Outsourcing decision-making raises the question that which areas of processes are needed only to keep the value-added chain and which areas are needed to concentrate as a core competence.

Core competencies can be, for example, a method to manage processes, or activities with a significant competitive advantage over others. According to Dekkers, these strengths are following from a strategic Strength-Weakness-Opportunities-Threats (SWOT) analysis. SWOT is a strategic analysis, where business factors are placed in four quarters according to capability and competence. Based on analysis, strategic decision making about what to focus on and what not, could be eased. (Dekkers, R. p. 4086-4087)

SWOT-analysis is a tool to review business environment as an entity. For evaluation of specific activities, and ease recognition of competencies Ordoobadi presents a model, that is presented in Figure 4 that helps recognition of competence level. A model concentrates on four questions about resources, value-addition, potential markets, and reproducibility. A model separates competencies to four level, which are high-, medium- and low competence, and peripheral, meaning that an action is not value adding on process view in general. (Ordoobadi, S., p. 13.)

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Figure 4: Recognizing core competencies. (Ordoobadi, S., p. 13.)

4.2 Value chain

The primary aim in any business is to create value for the customer. So, one of the most relevant entries to focus on is the value chain, and which parts of it are the core competence of the company and what are to outsource. It is significant to get outsourcing linked to the primary process in the most optimal way. In the Dekker’s primary process model, primary process consists of three operational subprocesses: Development, engineering and operations which are including manufacturing and procurement. (Dekkers, R. p. 4088-4090.)

Model of primary process is presented in Figure 5 and the following points of value creation are seen in it. It is important in customer value creation view to see the custom order entry points (COEP) in the process, which describes the point where an order meets the material processing flow and determines activities that must be implemented after the start of a custom

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order. From the process performance perspective, equivalent point is, the order specification entry point (OSEP), that describes the amount of engineering before specifying order for production. That means that the more the development has been done in advance the less processing need to be done for the specific order, and that flow is presented as light arrows in the Figure 5. In the most efficient situation, the order specification is ready for production from the clients’ order point. (Dekkers, R. p. 4088-4090.)

Figure 5: Primary process (Dekkers, R. p. 4088.)

According to Dekkers, the COEP and OSEP together find performance requirements affecting management and control mechanisms. The determined requirements depend on demand, but setting the criteria means anyway perfectly understanding customers’ requirements. In the process view that means effectivity on lead-times, product and volume flexibility and stock control, which in turn makes the core competencies of process. When focusing on outsourcing, the outsourcing policy should support managing the overall process to meet requirements.

(Dekkers, R. p. 4088-4090.)

In practice, utilizing the model in decision-making means identifying the points that are the core competencies of the company and focusing on them. Those that are not core competencies in the process can be strategically outsourced. With this consideration it is possible to observe the complete process, and by the arrangement to shorten primary processes TPT by moving even straight from the sales phase to the advanced production process, and depending on the nature of product, maybe from the start to the end in one step. Light arrows in the Figure 5 are modeling feasible options of primary process flows. The arrows show that there are many ways

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to implement the process flow and the competencies need to be reviewed step by step to achieve the right model. Outsourced steps of processes are entirely dependent on the case, but the purpose is to strive for the best possible performance and fulfill the clients’ specifications.

(Dekkers, R. p. 4088-4090.)

As stated, value chain begins on customer order and end to the delivery and is a system of individual activities that are linked to each other’s. Value chain is essentially in connection with the business strategy, and the effecting features of it are for example profitability, quality, and customer experience. It is significant to make difference between value chain and supply chain.

There where the value chain focuses on maximize customer value, supply chain is process orientated way to see material, finance, or information flow in a process. Still, there is a connection between those chains, and with effective supply chain management can value be added. (Banwet, DK., Mohammed, IR; Shankar, R; p. 3-5)

Supply chain management, in turn, is a strategic asset of a company. Besides end customers, the target group to whom the value is generated are stakeholders, investors, and owners. The value for that group is mainly financial, and that makes effective supply chain management significant and in need of measuring efficiency. Camerinelli proposes typical metrics to supply chain measurement based on study of European companies, which can be interpreted in three subgroups that are:

1. Metrics for costs 2. Metrics for efficiency 3. Metrics for availability

Result of the Camarinellis study presents that the key figures for measuring supply chain management are quite similar like drivers for outsourcing, that were presented in Chapter 3.3.

As mentioned, when considering outsourcing, should the whole value chain including outsourcing drivers be reviewed. Combining the similarities of outsourcing implementation and supply chain measurement could be assumed that same key performance indicators (KPI) can be utilized. (Camerinelli, E. p. 95-97.)

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There where outsourcing is a general way on value chain improvement, also is Lean. In implementation of outsourcing, Lean thinking is a significant part of it and outsourcing at a strategic level starts with mapping the necessary process, which is a part of the Lean process as well. A part of process mapping is setting requirements of performance too, and that in turn means understanding customers’ needs and creating value. Decision-making method combines decision-making to process mapping and each level of mapped processes are compared to performance and technology criteria. (Dekkers, R. p. p. 4091-4093.)

Lean strives for zero loss, and benefits of outsourcing advance it. The five Lean principles exist:

define value, map value stream, create flow, establish pull and pursuit perfection. Principles are portrayed in Figure 6, that describes the relationships and influence on value. In outsourcing implementation process, there is a place to notify all of those. A purpose of lean philosophy in supply chain management is to improve the supply chain flow by eliminating waste and non- value-added activities. In a supply chain all the delays should be analyzed as a potential non- value-added activity. In outsourcing perspective, non-value-added activities, should either be eliminated if they are waste or outsourced if they are not core competence of the company.

(Taghizadegan, S. p 108–112.; Mohammed, I R; Shankar, R; Banwet, D K. p. 8.)

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Figure 6: The Lean principles in outsourcing perspective (Do, D.)

As well as costs, efficiency and availability, flexibility is often seen as an important feature of effective value chain. Lean, in turn, is the way that effective value chain should work and the method that strives for producing value to customer. Target of Lean is to eliminate waste and non-value-added activities on supply chain and when reviewing the value chain aspect, it is the principal factor to enhance value creation. (Banwet, DK., Mohammed, IR; Shankar, R; p. 340- 342.)

In general, outsourcing is seen as a factor that brings flexibility in business, but it is also seen as an opposite to Lean. Mohammed, Shankar and Banwet were researching creation of flex- lean-agile value chain by outsourcing and as a result of the research was seen that outsourcing is actually an effective tool in flex-lean-agile value chain. According to research, agile value system focuses on flexibility, efficiency, and ability to respond to unique customer demand.

Often, it is specialized in make-to-order process for manufacturing and order fulfillment, which makes, again, flexibility a significant factor and connects the need for outsourcing to the topic.

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Agility differs from Lean so that Lean emphasizes cost efficiency and agility availability.

(Banwet, DK., Mohammed, IR; Shankar, R; p. 340-342.)

Process mapping is a significant phase to consider outsourcing. Modeling value chain as well, is useful in recognizing the entirety of value chain of focused area. Porters value chain model from the year 1985 is a general model to picture and model value chain and its processes. Value chain model is separated into support functions and primary activities in nine different sections.

All value chain sections cross-function and strive to bring margin to company. Value chain model is shown in Figure 7. (Juuri, P; Laukkanen, T; Puusa, A; Reijonen, H. p.180-181.)

Figure 7: Porter’s value chain (ResearchGate.)

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4.3 Decision-making in implementation

Outsourcing environment changes, as each environment nowadays. The first issue when considering outsourcing implementation is to evaluate options accurately, name the reasons for outsourcing and find the possible benefits of process. In that determination is presented Dekker’s decision-making model below. As mentioned earlier, one of the main reasons for outsourcing can be that an organization needs to improve availability by increasing capacity, so an important thing to consider is also the extent that should outsource, and another question is what to outsource. In that determination, in turn, is presented Brown and Wilsons model for an implementation process. (Krym, N; Keppler, K. p. 135: Brown, D; Wilson, S. p. 25.)

First, when evaluating and identifying the reasons for outsourcing, process mapping needs to be done. According to Dekkers, there is a method that has been developed to support decision- making on outsourcing, that is presented in Figure 8. Model assists in strategic decision-making and combines both process mapping and decision making, and performance criteria and technological aspects. Decisions based on the model concern the identification of core competencies and value-adding activities. (Dekkers, R. p. 4094-4096.)

Dekkers’ model can be interpreted as meaning that the decision-making process begins simultaneously with the pre-selection of suppliers and the development of manufacturing processes. Between those frames are the phases for definition of strategy and so on strategic and tactical decision making of outsourcing. As the sum of comparing and fitting these starting definitions together to meet business requirements, is a basic definition of the processes to be outsourced. After basic definition comes implementation of primary processes and coordination and reconciliation of purchasing and the other contractors. All the steps influence each other either directly or indirectly. The process ends up supplier selection and manufacturing the product. Operational decisions optimize the resource allocation during all the processes.

Optimization, in turn, aims at meeting the customers’ requirements and achieve the performance goals in Lean way. (Dekkers, R. p. 4094-4096.)

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Figure 8: Model for decision-making on outsourcing (Dekkers, R. p. 6.)

When a need for outsourcing is defined carefully and premises are ready for implementation, the next stage is to make an action plan for implementation. According to Brown and Wilson phases of outsourcing implementation process are:

1. Strategy phase

Scoping and defining the outsourcing model and putting effort into deciding budget, time, and resources. To make sure that the chosen actions strategically enhance core competences.

2. Scope phase

Establishing the service levels of vendors and define the relationship between outsourcing functions and the company. Addressing issues with employees, and the community.

3. Negotiation phase

Negotiation with the chosen vendor and signing the contract. It is important to find the lowest total cost or best value.

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4. Implementing phase

Transfer of outsourced functions to vendors and recognized impact on internal operations.

5. Management phase

Managing the relationship and measuring the results with the vendor.

6. Completion or termination phase

The phase when the contract has terminated. Making the decision to either negotiate a new contract or end the relationship.

(Brown, D; Wilson, S. p. 25, 34.)

All the phases are important to execute carefully, and case by case, which is also a basic idea in Lean thinking. Lean manufacturing and outsourcing are acting together in this because both can result in high benefits in business. In turn, that means that the number of outsourced hours can be lower than in a non-optimized situation. Lean tools like continuous improvement and eliminating waste are significant also when thinking outsourcing processes. According to Olsen, value position in processes is measurable by Value Position Matrix, in which the highest level is truly Lean. To achieve truly Lean position, it is needed that value stream is found correctly by using Lean principles, in other words, Lean thinking process, value stream map, and Lean process are accepted as a way of working in the company. The model can be used in outsourcing processes too, because one general problem in outsourcing is understanding the value but fail in Lean process for example by using uncarefully chosen vendors and so causing problems elsewhere. (Olsen, E.)

Brown and Wilson are presenting a decision-making scorecard, shown in Table 2, which can be utilized to understand the business situation for outsourcing. The Scorecard includes four sections for institutional setting, risks, goals and objectives, and provider evaluation, five questions of each. The first section identifies if there is potential to build outsourcing relationship, and it indicates that should operations be outsourced or not. The other sections are indicating the specific issues to note and possible barriers for outsourcing. According to Brown and Wilson, using scorecard in the first level evaluation, ensures more inclusive, accurate and controlled and structured decision. (Brown, D; Wilson, S. p. 34-36)

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Table 2: Outsourcing Decision-making scorecard

Business process Being Considered for Outsourcing: YES NO

Institutional Setting

1. Is this a functional part of our core competencies?

2. Does this service need to be provided on a continual basis?

3. Do we have in-house expertise to provide this service?

4. Do we have available staff to provide this service?

5. Can we legally outsource this service?

Risks

1. Would loss of content of this service harm the organization?

2. Would loss of expertise have a negative impact?

3. Is quality-of-service delivery a concern?

4. Would the response time of situational problems be reduced?

5. Would current contract performance be negatively impacted?

Goals and objectives

1. Can the goals for this service be clearly defined?

2. Are the goals for this service be long term?

3. Can the achievements of these goals be objectively measured?

4. Are objective measures currently on place for this service?

5. If the goals and objectives are not achieved, will this have a negative impact upon a company?

Provider evaluation

1. Are there known external providers for this service?

2. Do the mission and strategic goals of the providers algin with company’s mission and strategic goals?

3. Are the providers known to have the capability to provide this service?

4. Has the company had previous relationships with providers of this service?

5. Are the providers known to deliver high higher quality services?

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4.4 Outsourcing contract models

As stated before, when considering what should be outsourced, the most important thing is to recognize what are the core competencies. The second important things to note are complexity, cost benefits and risks of process, which occur in decision making by choosing billing method and engagement model. Issues affect each other, because for example risk decreases when less complex processes or transactions are those to outsource. The established phases or steps may also be cost-efficient to produce, which affects cost structure. (Krym, N; Keppler, K. p. 17:

Brown, D; Wilson, S. p. 48: Dekkers, p. 4091.)

Affiliating on costs, one decision is to choose the used model of pricing. One of the most common pricing methods is a fixed bid, in which price is defined based on estimated time use.

This model motivates efficient delivery but needs a defined and clear scope for working. In definition needs to be included, among other things, product requirements, delivery requirements, and quality and change management requirements. In time and materials bid customer pays for the expenses that service or product has caused. In most cases a hybrid variation of the above is a suitable model. That may mean that vendor is hired in some fixed amount to do the needed tasks and expenses that are caused on production, for example material costs are covered separately. (Krym, N; Keppler, K. p. 18-19.)

There are also different engagement models for outsourcing. Resource augmentation is a commonly used model, and one of the easiest options to start with outsourcing. In compliance with the name, the model means a way to grow the capacity of some part of production.

Resource augmentation model requires strict management from the purchasing organization but low effort for learning the process making. Component outsourcing means producing a specific component outside. This model requires high control of overhead as well as above. It is possible to outsource a certain project too. In that model minimum management is required and it works well for a project with clear scope and well definition. One model is external teams, which may be at least very cost-effective when everything works fine. External teams involve remarkably high management overhead and require seamless co-operation between customer and vendor.

(Krym, N; Keppler, K. p. 21–23.)

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As mentioned earlier, communication is a substantial factor in succeeding and controlling vendors. First step to success is plan well, follow the plan, and avoid all the communication brakes in it. There are many options to implement communication, from daily meeting to team chat groups or external manager to be responsible of communication, but regardless of what is the chosen form it is important to continuously review the level of communication. Level of engagement influences on how communications are planned, maintained, and controlled.

(Krym, N; Keppler, K. p. 113-114.)

Measuring success is a part of estimate achievement in the project or tasks, so it is also important when estimating the success of outsourcing. The first step is to set up an organization’s baseline before outsourcing and compare it after a given time to find project success. Well scoped goals and defined metrics for outsourcing also helps to estimate the success and calculate e.g., the financial benefits. That also helps to build assigned metrics into vendors service, which is useful when substantial data is wanted to be shown in the results.

(Brown, D; Wilson, S. p. 134.)

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5 SYSTEM DRIVES OPERATIONS

In this chapter considers supply chain of System Drives and focuses on production operations.

In the first sub-chapter, the value chain of System Drive is opened and reviewed by using models that have presented in literature review. In the second sub-chapter, the phases of value chain operations are presented and reviewed in outsourcing context.

5.1 Value chain in System Drives

System Drives key functions of value chain consist of sections that are portrayed in Figure 9.

Value chain is based on System Drives strategy and realizes customer relationship, order fulfillment and support processes. In SD value chain are visible the same primary activities than in Porters’ model that was presented in Chapter 4.2 Strategy guides outsourcing value chain, and outsourcing is used as a tool to fulfill SD strategy.

Figure 9: SD cabinets operations value chain (ABB Internal source. 2021.)

Figure 10 presents SD primary processes considered in Dekkers model and in primary process view production processes are quite highly refined. Depending on the highly configured nature of SD products, both OSEPs and COEPs are early in the primary process. In the primary process part, products differ from each other in the length of engineering phase. In the case of CTO product, only the engineering phase in primary process is choosing different configurators. CTO products are thus going through the third (from the left) OSEP. COEP can variate depending on outsourcing of the first, mechanical assembly, phase. Because the semi-finished configure is standard in CTO products, and can be purchased outside, COEP can be either the first, or the second point. ETO products are highly designed as well, but still including ETO step in primary process. ETO products are thereby going through the second OSEP, and always the first COEP.

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In core competence view this positioning means, that engineering phase is important core competence, and same assumption is supported by Ordoobadi model since it is adding high- value on product and difficult to copy. Primary process has still been shortened in its part as far as possible. In outsourcing perspective, the simplest product class is standard products, which in SD product situation means either standard sub-assemblies or single CTO products.

Outsourcing is still implemented in all the product classes. Even if SD products are invariably highly configured, production processes are very well documented in all situations, which support outsourcing as its part and less the classification for core competencies in its part. Both CTO, and ETO products can get produced by subcontractors, but also by local production in some cases which creates flexibility. Depending on product and existing outsourcing model possibility to outsource complete production phase and only test by ABB.

Figure 10: SD primary processes

Primary activities of the value chain above are presented as a SD cabinets operations process diagram, which is presented as a process diagram in Figure 11 and attached in Appendix 1.

Critical points of outsourcing decision in supply chain are first OSEP, the point where the type of product is determined and second COEP, the point where production plant is decided based on local process, vendors, and product type.

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Figure 11: SD cabinets operations value chain in outsourcing view (ABB Internal source. 2021.)

The process flow in use varies between local units. Based on theory, the functioning model seems to be very highly optimized, because even if the production is not always standard and phases may include also work of core competence, a significant amount of standard work is outsourced, and thus optimal productivity ensured. In practical, a lot of process development work has been done for an existing model before the current situation has been achieved. The amount of process sophistication will be reviewed in the next sub chapters phase by phase.

5.2 Value chain in outsourcing view

Focus of outsourced phases in order fulfillment context is in production and its critical support functions. This phase of value chain can be divided into phases of inbound logistics, engineering, sub-, mechanical-, and electrical assembly, quality control and testing, and outbound logistics, that are presented as a process diagram in Figure 12 and presented phase by phase in following sub-chapters.