OUTSOURCING – A POSSIBLE SOLUTION FOR IMPROVING THE PERFORMANCE OF THE LOGISTICS SYSTEMS IN THE ORGANIZATIONS
. Scientific Bulletin – Nicolae Balcescu Land Forces Academy15.2 (2010): 121-128.
Outsourcing is the process by which organizations, after they have assessed the economical strategic opportunities and / or their own skills, transfer to the outside the operative management of one or more functions, groups of activities or elements of the internal business activity development system, with specific contractual forms . The current economical and financial context that characterizes the beginning of the twenty-first century, accompanied, of course, by a crisis of the “classical” management mechanisms, brings into discussion more than ever, the outsourcing paradigm as an efficient way of saving resources, a fact which became best practice in the civilian techno-economic organizations and even in some NATO armies. Through this article we wish to highlight the characteristics, requirements and opportunities of using this management tool in the logistic systems field with customization for the military organization, in the national context. [PUBLICATION ABSTRACT]
Outsourcing is the process by which organizations, after they have assessed the economical strategic opportunities and / or their own skills, transfer to the outside the operative management of one or more functions, groups of activities or elements of the internal business activity development system, with specific contractual forms . The current economical and financial context that characterizes the beginning of the twenty-first century, accompanied, of course, by a crisis of the “classical” management mechanisms, brings into discussion more than ever, the outsourcing paradigm as an efficient way of saving resources, a fact which became best practice in the civilian techno-economic organizations and even in some NATO armies. Through this article we wish to highlight the characteristics, requirements and opportunities of using this management tool in the logistic systems field with customization for the military organization, in the national context.
Outsourcing, Military Logistics System, Performance Improvement
1. Requirements and risks of outsourcing activities in organizations
Outsoucing may begin from entrusting the most simple services (cleaning, secmity, duplication of documents, internal mail, feeding personnel, accounting), called tactical outsourcing, and reaches to the concession of processes that are of strategic importance for the enterprise (logistics, human resources, information processing, finance, marketing), called strategic outsourcing. Outsourcing should not be confused with under treatment, which is a transfer of executions, while outsourcing is a transfer of responsibility.
The decision of outsourcing the logistics activities is, however, very complex, and is, generically speaking, based upon the performance of each one of the organizations. Among logistics systems activities, those which can be outsourced are: the storage of goods, operations related to control and inventory of the stocks, warehouse management, transport and auxiliary transport operations and, last but not least, logistics consulting operations. Whether its manufacturers or distributors, regardless of the activity department, outsourcing logistics activities must accomplish the following requirements :
a. Economic Stakes
With the logistics business being a basic competence that can be shared with competitors, companies will not hesitate to outsource logistics activities in order to benefit from economies of scale. Companies will rcfrain from activities that are not considered strategic, being willing to share assets with competitors through the provider if the aim is to reduce costs (encountered at products with high volume and low margins, like alimentary products).
b. Strategic Stakes
Some companies recognize that logistics is a key element of their competitiveness, not only in terms of cost but also in terms of quality inventory management, product availability, flexibility to cope with maiket developments in terms of volume and range (mix of services that characterize the performance of logistics). In parallel, the managsme nt of financial resources determines companies not to invest in logistics assets, but rather the power provider so it can anticipate market developments. Entrusting the management of a part from the logistics chain for a product, a range, an area, is admitting that the management of this competence must be owned by professionals. It is not just about sharing resources, but also a genuine partnership that offers solutions adapted to the development of a market in which producers and distributors aie in competition.
c. Incre asing performance
Recourse to an external logistics provider is cost transparency and convergence of information
d. Social factors
In general, deposits workforce is marginalized and regarded as unproductive. For this reason, outsourcing allows better management of this problem.
e. Integration of technological innovations
Outsourcing and choosing the provider is strongly influenced by its ability to introduce new technologies, particularly in the informatics field , but also in terms of manipulation.
f. Developing new markets
The global expansion of the industrial and commercial enterprises can not be done without adapted logistics, which supports the commercial operations of launching these products.
Outsourcing strategy is explained by the accompanying decrease in costs and in the need to focus efforts for the company’s basic trades. However, Publishing House it has certain risks that need to be mastered: risks related to the strategic approach to business (enterprise carried fluctuations that are considered non-strategic can become strategies at some point, depending on the evolution of business and market); operational control risks (outsourcing may change power relations between organizations), work-related risks (although outsourcing generates a very significant reduction of the “visible” costs, it causes, among others an increase in indirect hidden costs, which are often underestimated); legal risks related to personnel management.
2. News and trends of outsourcing in the military
Outsourcing in the field of defense consists of the delegation of certain tasks to private organizations in order to relieve the armed forces missions less vital to national security. Professionalised forces would thus be more available to focus on the basic missions, specific to a military organization. When manpower is insufficient, as was the case in Iraq, private auxiliary recourse allows to allocate more troops to combat units. In an outlook for developments in national armies , for outsourcing the activities in the military, the following three features were emphasized:
a) defining the defense needs using existing tools;
b) the correct description of the obligations of the actors involved. Usually, buyers seek to carry out the work contracted, at qualitative parameters and favorable cost price, whereas sellers want to ensure that they receive money for their services. Hence, there is an overstatement of costs or cheap offers, but with no future;
c) flexibility of the actors involved in a contract of sendee or another, in other words, the contract must allow upward trend of relations between the two partners in order to have a clear future;
d) professionalization of persons dealing with the outsourcing of activities and sendees of the Ministry of Defense;
e) the delegation of signature for “purchase of services” development.
The importance given to this solution is also being stressed in Romanian Army’s transformation strategy , in which, at the chapter for logistics, for the period 20082015, it is mentioned: “the logistical efforts will focus on completing restructuring of the logistics system at the strategic, operational and tactical levels, in order to integrate Romania’s Army logistics into NATO logistics. The Army’s Logistics Information System (LIS) will be finalized, military technical equipm ent procur erne nt pr ogr ams will be run, there will be strategic transport capabilities and outsourcing of services will develop in all structures.
Military organization’s appeal to some tasks outsourcing involves defining what is “outsourceable” or not. “Non-combat” tasks as well as nutrition, livestock transport and part of combat equipment, supplies, recreation, maintenance of premises and equipment could be entrusted to private organizations.
On the other hand, the increasing complexity of military equipment also requires specific technical skills that private companies can more easily provide, unjustifying the training and employment of specialists serving categories of technique, very little representative measured by quantity.
Outsourcing of services in defense and, in particular, logistics activities, is part of logic of economic rationalization. This development allows, in fact, certain flexibility in managing the stocks.
There is no need to maintain a vast army, especially for small countries. It may appeal to private companies, which are only paid depending on the requirements. In addition, there are no more expenses for structure or social coverage. A good example of this is mentioned in a study for the U.S. Army which shows that the Pentagon’s Scientific Council intended to make savings of 4.5 to 6 billion per year by appealing to private companies to carry out tasks and activities of the army.
Related to outsourcing, although the name is undoubtedly not perfect and only partially reveals the existence of plurality and diversity of their shapes of existing and the gieat variety of services it offers, in the theory and the practice of logistics, in the last 10 years a new concept has been developing: Private military companies or private military societies, which are defined as privately owned commercial enterprise that offer, in whole or in part, that usually services, security and defense related.
Clear consequence of globalization, private military companies as mentioned in American literature, offers various services such as military training, protection of persons and goods, supply of materials, consulting services, even activities of military operations support.
In a study on human security and private military companies , it is shown that among the outsourced activities, logistics support to military operations, humanitarian operations and peace operations, there are often delegated to private companies being the work exemplified in this respect: the firm Kellogg, Brown and Root (KBR) was responsible for managing U.S. forces stationed in bases and infrastructure in the Balkans, the company has signed Dyncorp International in July 2003, a State Department contract to provide all the logistics support in humanitarian aid operations conducted by the U.S. in Africa.
3. Features of military logistics activities outsourcing
In the special literature in Romania, the reputed specialist Peter Dutu  from the Center for Defense and Security Strategic Studies, National Defense University “Carol G, describes this process as “the outs our cing process, triggered about fifteen years in the bosom of the military, responds to two considerations: on one hand, seeking greater efficiency and availability of the armed forces and, on the other hand, the concern to reduce costs to tighter defense budgets. ” Starting from this consideration, ina research-based questionnaire completed (applied for officers with student status from Sibiu- total investigation of the population with this feature) in the Department of Military and Managerial Sciences (LFA, Sibiu) we watched, subsumed to the overall objective (current status and trends of military management theory and practice), and investigation of opinion on outsourcing.
As time horizon (Q9 item in the questionnaire), over 50% (53.13% and 64.15%) of respondents appreciate the trend, certainly considering the Romanian military experience organization in the past 20 years (Figure 1.1)
Concerning the activities which would constitute priorities to outsourcing (QlOfree-response question), most often indicated, in Figure 1.2 there are plotted (figures indicated next to each activity are also graphics labels): feeding livestock (1) guard of the military objectives (2) Maintenance (3) services (4) equipment maintenance, washing underwear (5), supply materials, spare parts, CL, etc. (6), transport (7), providing financial accounting (8), providing medical services (9), metrology (10), prevention of fire fighting (11) Recreational (12).
As noticed from the chart, most of the activities (9 of 12 most frequently mentioned) are specific activities of the military logistics system, the first three ranked are nurturing, security objectives and maintaining military equipment and technical systems.
The results obtained in the military organizations of some NATO countries support the idea that organizations can successfully implement outsourcing support services of some missions, can focus and concentrate on achieving their main performance targets. Looking forward from this, in conjunction with selective research results obtained in Q9 and Q10, we found that the 16 hypothesis of research, according to which the outsourcing of specific Romanian logistics system activities is a necessity and, therefore, it should be a priority of the military organization transformation.
As evident from the processing of the participants, answers to questionnaire processing, maintenance is part of the logistics system which is a priority for outsourcing.
Looking back in time, the outsourcing of maintenance, the technique and equipment in equipping military units was always used, being imposed by insufficient production capacity of military organization and the lack of assimilation of the repairing technologies by productive units of the army, either for economic reasons or lack of providing qualified staff for some maintenance works. In the Romanian military organization, even before 1989, repairs to military equipment could be shared with different economic enterprises specialized in repairs. The novelty lies in the scale and coherence to be given to this process, the current socio-economic conditions.
The main factors influencing outsourcing of maintenance activities are:
– the quantity and quality of technical endowment;
– time needed to fund the work;
– degree of efficiency of the technique;
– technical staffing for maintenance management and execution;
– necessary equipment, machinery, facilities, equipment;
– there is potential economic credentials, and capabilities;
– national legislative framework.
As good practice in this field, the case U.S. is eloquent, which, as shown in a special study of the Defense Department, had outsourced since 2004, 46% of the volume of maintenance works (Figure 1.3).
Availability represents the probability that the technical means to be able to work at any time, without failing during the given time interval (for example, during the average duration of war actions). Another characteristic of military vehicles is represented by the fact that they are used during long periods of time (10-20 years or even more) and their replacement with other new technique requires significant expense, especially in terms of combat equipment. Quite low feasibility of military vehicles (fact practical proven), high maintenance costs and the striking need for modernization impose a flexible maintenance system (at least for the moment) that has to be the solution for the problem of military technique performance increase. Therefore, creating a system of military vehicles maintenance based exclusively on outsourcing this sendee or on the activity of specialized military structures, needs amore complex study. In the following, there are presented some arguments required to support each solution under study depending on the type of technique, maintenance activities, costs and also the time of immobilization of the technical mean.
Generally, the outsourcing of the secondary competences of organizations seems to be one of the best business practices of organizations that can reduce costs and also can facilitate the acquisition of high technology, this practice is in theory supported since ’90 by the famous C.K. Prahalad who argued that a competition for the fixture is partly a competition for the construction and use of key competencies.
This contribution certainly helps, to avoid diminishing the performance-level of organizations.
Outsourcing of military logistics activity should be the result of a thorough, relevant and accountable analysis made by military decision makers, taking into account a list of logistics-performance criteria expressed both quantitatively and qualitatively.
Given the specific characteristics of the life cycle of technical systems and military equipment, the outsourcing is part of a strategic perspective that means that it is entrusted to a specialized trader for a few years, specifying the requirement to maintain quality and cost of contracted services.
Thus, the continuity of the contractual term and guarantee of obtaining the service purchased are ensured, the lack of accomplishment of this desideratum leading to malfunctioning failures, with major repercussions upon the military action.
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“NICOLAE BALCESCU” LAND FORCES ACADEMY, SIBIU
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Copyright Nicolae Balcescu 2010