OUTSOURCING LOGISTICS ACTIVITIES An exploration of outsourcing materials handling activities at Scania Production Zwolle

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OUTSOURCING LOGISTICS ACTIVITIES

An exploration of outsourcing materials handling activities at Scania Production Zwolle

University of Groningen

Faculty of Economics and Business MSc Technology Management

Final Thesis

Diagnoses Research Project

Supervisors University of Groningen dr. ir. W. Klingenberg

drs. R.R. van der Velde

Supervisor Scania Production Zwolle A. Rook

Author J.D. Boksma

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ACKNOWLEDGEMENT

First of all I would like to thank Scania Production Zwolle for giving me the opportunity to perform my final research project in this company. Performing my final research project within this professional and dynamic environment with a pleasant work atmosphere resulted in a valuable and joyful time. During this research many people at Scania Production Zwolle helped me. I would like to thank all those who have contributed to the completion of this research.In particular I would like to thank Andre Rookfor coaching me during this research and for the numerous times providing me with constructive feedback on many issues.

Furthermore I would like to thank Warse Klingenberg for his feedback on the research and this thesis. The approach to the research and the structure and readability of this thesis improved strongly thanks to his valuable comments. I would like to thank Robert van der Velde for his insightful feedback and suggestions, and for reviewing this thesis.

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SUMMARY

Outsourcing logistics activities is included in the options considered by the management of Scania Production Zwolle in order to anticipate on the future increase in production output and to arrive at an optimal use of current warehouses. Management has indicated that it requires assistance on assessing the rationale and options for outsourcing logistics activities. This motivates exploring outsourcing logistics activities at Scania Production Zwolle.

Outsourcing physical logistics activities of incoming parts from external suppliers for the assembly of trucks currently performed at the facility in Zwolle is explored, excluding transport to and from Zwolle. Logistics activities without transportation are defined as materials handling activities. The aim of this research is exploring rationale and options for outsourcing logistics by assessing the feasibility of outsourcing materials handling activities and identifying suitable ways to undertake this.

A structured approach to logistics outsourcing is provided by combining costs, resource availability and supply chain control factors for assessing the outsourcing decision. Two logistics outsourcing frameworks including these approaches are found in current literature. Since logistics outsourcing includes outsourcing materials handling activities, these frameworks are used to assess the outsourcing decision. Assessment is performed using the five factors of the two frameworks logistics as industry critical success factor (true), logistics value to supply chain and competitive strategy (high), logistics as core competency (logistics is not a core competency), resource availability of in-house logistics (decreasing with respect to space in the logistics centre due to expanding activities in this area), and operational performance of in-house logistics (decreasing with respect to costs due to necessary investments in warehouses). Based on these factors, outsourcing materials handling activities is feasible for Scania Production Zwolle. A sophisticated way of outsourcing materials handling activities is recommended by the two frameworks, taking into account cost, resource availability and supply chain control justifications for outsourcing.

The level of detail necessary for identifying and assessing materials handling outsourcing methods lacks in current literature. A framework is developed that distinguishes materials handling outsourcing methods based on the three dimensions: the location where materials handling activities are performed, the type of materials handling activity, and the performer of the outsourced activities. The newly developed framework is used for assessing the distinguished outsourcing methods on the operational performance criteria delivery reliability and cost. It is concluded that outsourcing warehousing (storage and picking only) to a facility close to, or at the site of Scania Production Zwolle gives the highest operational performance. A short transport distance from the facility where materials handling activities are performed to Scania Production Zwolle prevents unreliable delivery due to transport disruptions and limits transport costs as well. Outsourced warehousing results in a buffer at Scania Production Zwolle consisting of parts not yet related to customer orders which assures the buffer can effectively cope with unreliable deliveries.

A selection of parts for which to outsource materials handling activities is made by focussing on space consumption and the operational performance measures (transport) cost and delivery reliability. It is found that only 115 of the more than 4000 parts consume 40% of the total space consumed by all parts. Outsourcing warehousing activities for these parts is suitable with respect to space consumption in current warehouses. A high operational performance of the outsourcing method used is assured by further selecting part groups which enable high transport efficiency and limited complexity of the outsourced process. High transport efficiency is achieved by selecting parts which have a stable demand, and which can be transported in batches from supplier to the materials handling location. This results in high volumetric utilization of transport trailers for these long distances. Low complexity of the outsourced process is assured by excluding parts which have a high frequency of engineering change orders, and by selecting parts which have a stable demand and few part variants.

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IV

1 INTRODUCTION

This report gives the results of a research exploring the rational and options for outsourcing logistics activities at Scania Production Zwolle. The research is performed by the direction of the logistics management in the context of a final research project, concluding the master of Technology Management at the University of Groningen.

This introduction introduces the company Scania Production Zwolle briefly, followed by the motivation for this research. The research design and the methodology are given next.

The theoretical background discusses factors relevant for logistics outsourcing. A framework is developed achieving the level of detail necessary for assessing the outsourcing decision. The newly developed framework is used for assessing outsourcing methods on criteria relevant for Scania Production Zwolle.

This report ends with a conclusion and recommendations giving an overview of the outsourcing assessment and an advice for further work.

In connection with this research an article has been written which discusses outsourcing of logistics activities with specific attention to materials handling and investigates different choices for its implementation. This article has the title “A framework for outsourcing materials handling activities in automotive: differentiation and implementation” and is included in the appendix.

1.1 The company

This research took place at Scania Production Zwolle BV, which is one of the production units of Scania CV AB. Both are introduced briefly, followed by an overview of the strategy of the companies. Scania is a leading manufacturer of heavy trucks and buses as well as industrial and marine engines. The company also markets and sells a broad range of service-related products and financing services. Scania is a global company with operations in Europe, Latin America, Asia, Africa, and Australia. It is the world’s third largest make for heavy trucks and the world’s third largest make in the heavy bus segment. More than 28,000 employees work for Scania worldwide. Of these, about 24,000 work in Europe and about 4,000 in Latin America. In addition, about 20,000 people work in Scania’s independent sales and service organization.1

Scania Production Zwolle is the largest of the three European production units for heavy trucks. In 2007 more than 30,000 trucks were delivered to more than 60 countries from the production facility at Zwolle. Scania Production Zwolle has 1,500 employees, of which a large part works in two shifts of 8 hours.2 Trucks are assembled to customer order only which results in a high variety of trucks. The production process is performed in total mix at two assembly lines.

The strategy of Scania Production Zwolle is defined as producing trucks in a flexible process with a high productivity. A high productivity and a flexible process at Scania’s production units are achieved by using a modular product system and the Scania Production System. The modular product system provides a carefully balanced number of main components with standardised interfaces which results in great flexibility. The Scania Production System is based on the lean manufacturing philosophy which aims at removing waste in the production process.

1.2 Motivation for this research

An increase in demand resulted in longer delivery lead times of trucks to the customer because the capacity at Scania’s production units could not meet demand. In order to reduce delivery lead times of trucks the production output at the production units will be increased. This will be achieved by uniformly decrease takt times at the several production units with more then 17%. The output of Scania Production Zwolle (SPZ) will increase with a comparable factor in 2009. The logistics department at SPZ investigates the organizational measures necessary to enable the increase in production output.

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2 Organizational measures necessary to enable the increase in production output are taken into account in the search for optimal use of current warehouses.

Outsourcing is included in the options considered by management to cope with the increase in production output and in optimizing the use of current warehouses. Beyond a general sense that outsourcing might be a feasible option to cope with the challenges ahead, management has indicated that it requires assistance on assessing the rationale, approach and steps to be taken next in the decision making process. Besides the reason described above, developments in outsourcing logistics in the automotive industry in general stimulate SPZ to further investigate outsourcing.

The current necessity to enable the increase in production output and optimal use of current warehouses, and the uncertainty with respect to outsourcing is the motivation for this research to explore outsourcing logistics activities at SPZ.

1.3 Research design

The research is given focus by determining the scope of the research and translating the motivation in an aim and research questions.

1.3.1 Scope of the research

This research is restricted to exploring outsourcing of physical logistics activities of incoming parts from external suppliers for the assembly of trucks currently performed at the facility in Zwolle. Inbound and outbound transportation fall outside the scope of this research. Logistics activities without transportation are defined in this research as materials handlingactivities.

The scope of the research was confined due to limited time available. Time restrictions for performing a final research project determined by the masters program of Technology Management and a vacation time in which SPZ was closed resulted in a limited time period in which the research was performed.

1.3.2 Aim of the research

The aim of this research is exploring rationale and options for outsourcing logistics by assessing the feasibility of outsourcing materials handling activities and identifying suitable ways to undertake this. This exploration should result in a judgement whether outsourcing materials handling activities is a feasible option for SPZ. In case this option is feasible, an identification which ways are suitable for SPZ will follow.

1.3.3 Research questions

The aim of this research is reflected in the research questions below. 1. Is outsourcing materials handling activities a feasible option for SPZ?

1.1 Which factors are relevant for assessing outsourcing materials handling activities? 1.2 How is outsourcing materials handling activities judged on these factors for SPZ? 2. Which materials handling outsourcing ways are suitable for SPZ?

2.1 Which materials handling outsourcing ways can be identified? 2.2 Which criteria are relevant for assessing suitability of ways for SPZ?

2.3 How are materials handling outsourcing ways assessed based on the criteria?

Answers on the main research questions are found by answering the research sub questions. The way in which these sub questions are answered is described in section 1.4.2.

1.4 Methodology

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3 1.4.1 Case study strategy

Characteristics of the case study strategy are one or a small number of research units; a profound approach; a selective or strategic sample; the use of mainly qualitative data; and an open observation on location. In a case study the researcher tries to get an integral view of the research object, a holistic approach is used. The holistic approach is presented by the use of qualitative data and an open way of gathering data. Data triangulation, the use of several sources for gathering information, is used to obtain an integral view of the research object. For this research the singular variant of the case study strategy is used, as only one case is studied into extent.

Advantages of the case study strategy are the opportunity to obtain an integral view of the research object, flexibility due to limited pre structuring at the start of the research, and the acceptance of results due to the actual participation of the researcher. A potential disadvantage of the case study strategy is the fact that the external validity is limited due to the focus on only one or a few cases3. However, external validity is not aspired within the scope of the research project.

Data triangulation will be used to achieve profoundness. Data sources used are literature; persons, using interviews; company documents; and historical data accessed by using company databases. The following section explains which data sources are used for answering the research questions given in section 1.1.3.

1.4.2 Answering research sub questions

Relevant factors for assessing outsourcing materials handling activities (research sub question 1.1) are identified using existing theory on logistics outsourcing. Theory based factors and frameworks for assessing the outsource decision are discussed in chapter 2.

Literature is incomplete regarding materials handling outsourcing ways (research sub question 2.1). Limited differentiation exists on the level of logistics activities and an overview of materials handling outsourcing ways is completely unavailable. This lack of detail in current literature gives cause for own development, which is carried out in order to provide the level of detail needed. The developed framework is presented in chapter 3.

The feasibility of outsourcing materials handling activities (research sub question 1.2) is assessed on the theory based factors and frameworks using interviews and company documents and presented in is chapter 4.

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2 THEORETICAL BACKGROUND

Since logistics outsourcing includes outsourcing materials handling, literature on this topic is suitable for identifying relevant factors and frameworks for the outsourcing decision to be made. Relevant factors for the outsourcing decision are given in section 2.1. Section 2.2 presents frameworks for assessing the general logistics outsourcing decision.

2.1 Theoretical approach to logistics outsourcing

Regularly mentioned reasons for logistics outsourcing in literature are cost reduction4, concentration on core competences5, cost flexibility6, volume and mix flexibility7, and response to expanding customer requirements8. The reasons strongly diverge and reflect operational, tactical, and strategic influences. For an integral view of reasons and factors related to logistics outsourcing, a structured approach is helpful.

This structured approach to logistics outsourcing is introduced by Bolumole, Frankel and Naslund9, who discuss three theories that provide a rational for logistics outsourcing. These theories are transaction cost economics (TCE), resource based theory (RBT), and network theory (NT).

Transaction cost economics insists that production should take place wherever the sum of production and transaction costs is minimized10. Transaction costs represent the costs of physical and human resources incurred in order to complete an exchange of goods ands services between parties. According to TCE an activity needs to be outsourced to another party if the sum of performing the activity and transaction cost is lower at this other party than the sum of those costs when performing the activity in-house. From a TCE perspective, a reason for outsourcing is a reduction of the sum of production and transaction costs. Logistics outsourcing decisions from a TCE perspective centre on minimizing costs through gaining access to effective logistics functions11. The extent of the outsourcing decision from a TCE perspective is mainly operational11.

The resource based theory (RBT) principally describes a firm as a set of resources12. Those resources of the firm include all inputs that allow the firm to work and implement it strategies13. The resources can be classified in three categories: input factors, assets, and capabilities. Input factors are generic resources that can be acquired in the market (e.g. forklift truck, warehouse racking). Assets are stocks of available factors owned or controlled by the firm (e.g. warehouses).

Capabilities are complex bundles of individual skills, assets and accumulated knowledge (e.g. Wal-mart’s distribution system) 13. Important capabilities are core capabilities, which are strategic resources at the corporate level. These are called core competences by Prahalad and Hamel14.

According to the principles of the RBT, an organization must secure an efficient bundle and flow of the right type of resources from its environment in order to survive and improve its operational performance15. From a RBT perspective, a reason for outsourcing is acquiring resources. Outsourcing decisions centre on acquisition of resources depending on the internal resource availability16. For example, the warehouse of another party could be used in case the availability of own warehouses is insufficient. The extent of the outsourcing decision from a RBT perspective is mainly tactical with respect to acquisition of input factors and assets.

With respect to core competences (capabilities) the extent of the outsourcing decision is mainly strategic. Core competences are strategic resources of the firm and prominent in helping a firm to achieve its purpose17. The core competence approach suggests that an organization should invest in those activities constituting core competences since these providing the organization’s growth and direction18. Outsourcing activities constituting core competences is regarded undesirable. Prahalad and Hamel view activities related to core competencies as critical to a firm's success and those should not be contracted out19. Contracting out these activities could for example lead to knowledge disappearance.

The network theory (NT) of the firm focuses on the formation of external relationships, organizational structures, and alliances required supporting integration of the firm in its network. The cooperative act of outsourcing should result in benefits for the entire network, of which the firm is an integral part20. Logistics outsourcing is viewed as a strategy of using third parties to enable the logistics integration21. The extent of the outsourcing decision from a NT perspective is mainly tactical and strategic21.

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5 relevant for assessing outsourcing logistics activities as well as for assessing materials handling activities. Research sub question 1.1 is answered, as relevant factors for assessing materials handling outsourcing are given.

Table 1 summarizes the influencing factors, reasons, and extent of the decision of the three perspectives.

TCE perspective RBT perspective NT perspective Factors influencing outsourcing decision Transaction and production costs In-house resource availability

Supply chain and network wide control Reason for outsourcing Cost reduction Resource acquisition Value creation through

supply chain integration Extent of outsourcing

decision Mainly operational

Mainly tactical and strategic

Table 1. Theories providing rational for the logistics outsourcing decision, adapted from Bolumole et al

2.2 Logistics outsourcing frameworks

The logistics outsourcing decision can be assessed using the framework of Spear22 and it’s modification by Bolumole23. The framework of Spear uses the factors industry critical success factor and core competency for evaluating the logistics outsourcing decision. The latter reflects a RBT perspective, since the internal resource core competence is being valued. The four options provided in this framework are perform in-house; spin-off; outsource; and outsourcing functions, maintain control of process. The framework of Spear is depicted in figure 1.

Figure 1. Spear’s framework for evaluating logistics outsourcing decisions

The option perform in-house is advised if logistics is a core competence and an industry critical success factor. This is in accordance with Prahalad and Hamel who discourage contracting out core competence activities. A spin-off is recommended if logistics is a core competence but is not an industry critical success factor. An example of a spin-off is a third party logistics firms who often is a spin-off of an asset-based transport company24. Outsourcing as an option is advised if logistics is not a core competence, nor an industry critical success factor. This is in line with the suggestion that organization should invest in those activities constituting core competences and outsource the rest25. The last option, outsource functions while maintaining control of processes, refers to the situation where organizations adapt a strategy in which individual functions are outsourced while control of the overall process is retained in-house. If logistics is not a core competence, but is an industry critical success factor, this option is recommended.

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6 Bolumole’s framework has the guiding factors (perceived) business value of logistics to supply chain & competitive strategy and resource availability & operational performance of in-house logistics for supporting the logistics sourcing strategy. The second factor reflects both a TCE and a RBT perspective since operational performance, which includes cost, and internal resources are being valued. This second factor in the framework of Bolumole has a broader view then the second factor in the framework of Spear, which only values core competency as a part of the RBT perspective.

Three of the four options mentioned by Bolumole are the same as in the framework of Spear, only the option smart source differs from Spear. In this option, the resource, cost and control justifications for outsourcing come together. A smart choice has to be made on the basis of resource, cost and control justifications that separately or jointly influence the organizations outsourcing decision26. Here all the relevant factors of the three perspectives discussed in section 2.1 needs to be taken into account. The framework of Bolumole is depicted in figure 2.

Figure 2. Bolumole’s decision support framework for logistics sourcing strategies

The operational performance in Bolumole’s framework can be evaluated using the operational performance measures of Stock, Greis, and Kasarda which relate to the efficiency and effectiveness of manufacturing and logistics processes27. Efficiency and effectiveness reflect capabilities including cost, delivery speed and reliability, quality, and flexibility. These four categories reflect the two most important dimensions of operational performance27.

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3 MATERIALS HANDLING OUTSOURCING WAYS

Literature is incomplete regarding distinguishing materials handling outsourcing ways. In this chapter a framework is developed in order to provide an overview of possible outsourcing ways. A materials handling outsourcing way is defined for this research as a combination of an outsourcing method and a selection of parts for which materials handling activities are outsourced. A framework is developed which distinguishes methods by identifying relevant dimensions of outsourcing. This framework is presented in section 3.1. Variables relevant for selecting parts are given in section 3.2.

3.1 Materials handling outsourcing methods

Logistics activities in general can be outsourced to a firm offering logistics services, often called a logistics service provider (LSP). This LSP can be a current supplier who already delivers goods, or a third party. A third party offering logistics services is commonly called a third party logistics (3PL) provider. Outsourced materials handling activities can find place at a supplier facility, at an additional node in the materials network28, or at the own facility.

Literature describing Western Europe automotive industry cases reveals more detailed materials handling outsourcing options and these are used as a start develop a framework giving an overview of methods. The two dimensions in which the literature examples were found to differ are the performer to which materials handling is outsourced and the location where the materials handling takes place. These dimensions are used to build a framework.

The performer of outsourced materials handling activities can be a supplier, a supplier plus, or a 3PL provider. A suppliers plus refers to a supplier performing materials handling activities for parts delivered from other suppliers. The location where outsourced materials handling activities are performed can be a supplier facility, a cross-dock (x-dock), an intermediate facility28, or the facility of the firm who has outsourced the activities. The additional node mentioned by Mathisson-Ölmertz et al28 can thus be a cross-dock or a general intermediate facility. A cross-dock is a facility used for transport consolidation of parts. Consolidating less than truckload (LTL) transports descended from two or more suppliers into a full truckload (FTL) by using a cross-dock increases transport efficiency because transports cost per part are lower for FTL transports. In a cross-dock goods are not stored but moved directly from the receiving dock to the shipping dock29. An intermediate facility is here defined as a location where materials handling activities are performed and which is located between a supplier or cross-dock and the production facility.

Existing methods used by the car manufacturers Seat, Volvo, GM, Saab, MG Rover, Nissan, and anonymous cases are placed in figure 3. The type of materials handling activity performed is placed between brackets behind the car manufacturer name.

Materials handling PERFORMER

Supplier Supplier plus 3PL provider

Supplier Anonymous30 (sequencing) Anonymous30 (kitting) Cross-dock

Intermediate Seat31 (warehousing) GM31 (sequencing) GM31 (sequencing)

facility Volvo31 (sequencing) GM31 (warehousing)

Anonymous32 (sequencing) Seat33 (sequencing) Saab34 (sequencing) Anonymous35 (kitting) Own facility MG Rover36 (sequencing) Nissan37 (warehousing,

M a te ri a ls h a n d lin g L O C AT IO N sequencing, kitting)

Figure 3. Overview of materials handling outsourcing ways

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8 Kitting concerns picking parts for a single production order and is followed by delivery of those parts together to the assembly line. For example; parts needed for an assembly step of a car at a certain place at the assembly line are picked and delivered to the line in a single box.

Other materials handling activities could be performed as well using one of the twelve options given in figure 3. Section 3.1.2 identifies other relevant materials handling activities.

3.1.2 Refinement of materials handling activities

The number of materials handling activities mentioned in figure 3 is limited, and a distinction is made based only on cases found in literature. Because of the difference between materials handling activities, a more refined overview of materials handling activities is introduced.

Table 2 below presents the physical materials handling activities with their description distinguished for this research. The activity order picking is similar to sequencing as both activities sequence respectively collect parts for production orders. Of the activities in table 2 warehousing, repacking, picking, sequencing / order picking, and kitting could be completely outsourced to another facility and party. Those are ticked in the right column of table 2. The activities unloading, internal transport, and buffering can not be completely outsourced to another facility as they cannot be avoided at the assembly facility.

Activity Description

Unloading Unloading parts from a transport vehicle, either a vehicle used for external transport or a vehicle used for internal transport

Internal transport Transport of parts at the facility where the parts are used for assembly

Warehousing Storing of parts including lifting activities necessary for placing parts

in the correct place in the warehouse X

Repacking Changing the original package of parts, for internal transport or

presentation at the assembly line X

Picking Picking (a package of) parts from a larger package for another

activity or presentation at the assembly line X Sequencing /

Order picking Sequencing / picking parts for production orders X

Kitting Picking parts for a single production order X

Buffering Temporarily storing parts before another activity or use on the assembly line

Table 2. Physical materials handling activities

Only the activities warehousing, repacking, picking, order picking, and kitting will be used for further development of the framework distinguishing materials handling outsource methods. These could be completely outsourced to another facility and party and could logically be considered for outsourcing. 3.1.3 Framework for materials handling outsourcing methods

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Figure 4. Framework for materials handling outsourcing ways

3.2 Part selection

The way in which materials handling activities are outsourced is determined by the parts for which activities are outsourced as well. Literature on co-location of suppliers provides variables relevant for selecting parts because of similar considerations with respect to the location of activities. Co-location refers to locating other organizations at, or next to the own facility. These organizations can be suppliers as well as LSPs. Reasons for co-location of suppliers can be enabling sequential just-in-time deliveries38, increasing delivery reliability due to shorter transport distances39, decreasing transport costs40, increased face-to-face contact, quicker problem resolution, and better mutual understanding41. Parts suitable to source from co-located suppliers are parts specific to a particular product41, especially when where there are a number of variants of the part per model41; bulky parts that are costly to transport43; and parts that have a high-volume and low-value44. The suitability to source parts from co-located suppliers can be related to several part variables. These variables relate to characteristics of a part and the location of its supplier and are presented in table 3.

Variable Explanation

Part-product relation45 Determines whether a part is product (un)specific

Value46 Monetary value of a part

Volume47 Volume of a part

Variants48 Number of part variants in a part group

Supplierdistance49 Distance to supplier of part, determines transport distance and cost

Table 3. Theory based variables for selecting parts

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4 ASSESSING OUTSOURCING MATERIALS HANDLING ACTIVITIES

The feasibility of outsourcing materials handling activities is assessed using the logistics outsourcing frameworks discussed in chapter 2. This is followed by determining relevant criteria which will be used to asses materials handling outsourcing ways. The most suitable materials handling ways are identified using the outsourcing methods framework developed in chapter 3 and by making a selection and assessment of suitable part groups.

4.1 Logistics outsourcing assessment

The frameworks of Spear and Bolumole are used to determine whether outsourcing materials handling activities is feasible for SPZ. The factors of the two frameworks are assessed. Figure 5 shows the two frameworks together.

Figure 5. Logistics outsourcing frameworks

First the horizontal sides of the frameworks will be assessed, followed by the vertical sides. Based on own interpretation, interviews and internal documents the following conclusions are made.

Logistics is not a core competence of SPZ. Prahalad and Hamel provide three conditions to determine whether a competence is a core competence50. These conditions will be used to determine whether logistics at SPZ is a core competence. First, a core competence provides potential access to a wide variety of markets. Second, a core competence could make a significant contribution to the perceived customer benefits of the end product. Finally, a core competence should be difficult for competitors to imitate.

Logistics at SPZ does not provide potential access to a wide variety of markets. Logistics does add to serving the current market, but logistics is not seen as providing potential access to a wide variety of other markets. The significance into which logistics contributes to the perceived customer benefits of the end product is unknown. Delivery lead time could be of importance here, however Scania’s delivery lead times are not unique compared to other truck manufactures. Imitation of the logistics process is irrelevant as competitors of Scania already make use of comparable logistics systems. Using the three conditions of Prahalad and Hamel, it is concluded that logistics at SPZ is not a core competence. Confirmation is found in an interviewi and in the mission statement of Scania, stating that Scania’s operations specialise in developing and manufacturing vehicles51. Logistics is not mentioned in the mission statement, or elsewhere in the strategic platform.

The operational performance of in-house performed logistics is satisfactory at this moment, but will decrease with respect to costs in the future. The operational performance of in-house performed logistics is satisfactory at this moment but will be influenced with respect to costs by the increasing production output and optimization of the use of current warehouses.

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11 The increasing production output requires a higher logistics throughput as more parts per day are needed for the assembly of trucks, which will have consequences for resources used for performing materials handling activities. The increase in production output will be achieved by decreasing takt times. With respect to respect to logistics this which will be enabled by increasing use of kitting. Kitting concerns bundled delivery of parts, needed for the assembly of a specific truck, from the warehouses to the assembly line. The use of kitting requires more floor space than the conventional racks used for other supply methods since for preparing kits more ground square meters per parts are needed. The increase in production output will be accompanied with an increase in the number of parts used for assembly of trucks with 21% in the next three yearsii, which means that extra warehouse space will be consumed. The increase of kitting and the increase in the number of parts both contribute to an increase of warehouse space consumption.

Three warehouses are available for performing materials handling activities. Two warehouses are adjacent and located next to the assembly lines and together called the logistics centre. One of those warehouses of the logistics centre is a former automatic warehouse (called high bay, HB), which is out of use since its throughput could not keep up with the increasing production rate. The other warehouse of the logistics centre (called low bay, LB) is used for all of the different materials handling activities. The third warehouse (called manual store, MS) is located at a distance from the assembly lines. For this warehouse adaptations are necessary to improve the ergonomic circumstances up to Scania’s standards. This includes improving floor and lighting quality, and insulation of the building, reflecting a high investment. Several alternatives have been developed in order to find optimal use of the current warehouses. Alternative 00 concerns the first developed option. It prepares for a future higher production output with minimal adaptations, and will continue to use a part of warehouse MS. Using only the warehouses of the logistics centre enables decreasing the workforce needed for performing materials handling activities due to shorter transport distances to the assembly line and a more efficient layout. However, costly adaptations to the logistics centre are needed to locate all materials handling at this location. The size of the investments is influenced by the limited space available in the logistics centre. For example, an investment for creating an extra floor is needed in the X alternative in order to store all parts in the logistics centre. The alternatives show a trade-off in personnel costs and costs for adapting the warehouses, as shown in table 4.

Alternative 00 0 X X2

Personnel needed at current p.o. 100% 89% 75% 80%

Personnel needed at future p.o. 125% 102% 89% 92%

Personnel % increase 25% 13% 18% 16%

Investments in warehouses 100% 149% 176% 70%

Using logistics centre X X X X

Using manual store X

Table 4. Alternatives for optimal use of warehouses taking into account increase in production output

To conclude, the necessity to make choices with respect to the use of warehouses and preparations for the increasing production output will decrease operational performance with respect to costs. A trade-off exists with respect to personnel costs or adaptation costs of warehouses.

The resource availability of in-house performed logistics is satisfactory at this moment, but in the future it will be lower with respect to space in the logistics centre. The resource availability of in-house performed logistics is currently satisfactory with respect to the resources input factors, assets, and capabilities. SPZ owns the logistics input factors and assets and has the logistics capabilities to produce the current amount of trucks per day with a satisfactory operational performance. However, at a higher production output the availability of space in the logistics centre becomes a limiting factor. The total warehouse space is satisfactory for the current production output and for the future higher production output as well. However, the warehouse space in the logistics centre is located optimally and the availability of this space is limited, as explained above.

Logistics is a critical success factor in the industry. Trucks are build to customer order which means that logistics is essential for truck manufacturers. Customers demand a broad range of products with specific requirements and call for short delivery times. Logistics enables short delivery lead times of

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12 trucks to the customer by assuring low overall logistics lead times. Just-in-time logistics achieves low lead times while using low inventories which limit costs. The combination of short lead times at limited costs is critical for success in the industry.

The business value of logistics to supply chain & competitive strategy is high. The strategy of SPZ is defined as producing the best trucks in a flexible process with a high productivity52. Logistics enables a flexible and highly productive production process by using low inventories and suitable ways to deliver parts to the assembly line and therefore is of high value to the competitive strategy. The supply chain in which SPZ operates is characterized by low inventories, short lead times, and a relatively level flow of parts. This is enabled by just-in-time logistics and is of value to all supply chain members.

The frameworks of Spear and Bolumole are used together to arrive at an assessment of the feasibility of outsourcing materials handling activities.

According to the framework of Spear, the option outsourcing functions, maintain process control is most suitable, as shown in figure 6. Logistics at SPZ is not a core competence, which clearly indicates outsourcing as the appropriate choice. Since logistics in general is an industry critical success factor, the framework of Spear recommends outsourcing functions only, while maintaining process control. Section 4.2 will further differentiate between different logistics activities.

According to the framework of Bolumole, the option smart source becomes feasible. The factors operational performance and resource availability are currently satisfactory. However, increasing costs at higher production outputs and limited floor space in the logistics centre cause lower operational performance and resource availability. The transition from satisfactory to insufficient is shown by the arrow and the circle. Logistics in general is of high business value to supply chain and competitive strategy. Section 4.2 provides further differentiation between different logistics activities.

Outsource functions, maintain control of processes Perform in-house Outsource Spin-off Is logistics an industry critical success factor? Yes No No Yes

Is logistics a core competence?

Smart source Perform

in-house Outsource Spin-off Business value of logistics to supply chain and competitive strategy High Low

Low / insufficient satisfactory / High Resource availability & operational performance

of in-house logistics Spear: Framework for evaluating

logistics outsourcing decisions

Bolumole: Decision support framework for logistics sourcing strategies

Figure 6. General logistics outsourcing assessment

The framework of Spear recommends outsourcing logistics functions but maintaining control of processes, while the framework of Bolumole recommends making a smart choice on outsourcing based on cost, resource, and supply chain control justifications. A similarity between the frameworks is the recommendation for a sophisticated way of outsourcing.

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4.2 Materials handling outsourcing methods assessment

This section assesses materials handling outsourcing methods using the framework presented in section 3.1. Relevant criteria used for assessing methods are determined first.

4.2.1 Operational performance criteria

Materials handling outsourcing methods are assessed on their operational performance because this type of performance relates to the productivity of the logistics process regarded as important in the 2008 mission of the logistics department53. Productivity is influenced both by the effectiveness and efficiency of processes54. Stock, Greis, and Kasarda55 discuss operational performance measures which relate to the efficiency and effectiveness of manufacturing and logistics processes. They propose four operational performance categories: cost, delivery reliability and speed, flexibility, and quality55. Of those categories, cost and delivery reliability are used as performance criteria for this research. The argumentation for using cost and delivery reliability is followed by the argumentation to exclude flexibility and quality as separate performance categories.

Cost as a performance criterion is suitable for assessing outsourcing logistics56. The criterion cost is used in the TCE approach and as such well documented. Costs are also included explicitly in the logistics key performance indicators (KPI’s) of SPZ57, which supports assessing materials handling outsourcing on this criterion. Different materials handling outsourcing methods can initially be assessed on main cost categories. Further assessment can be performed using more cost categories giving a more detailed analysis.

Delivery reliability influences the productivity of the logistics process due to the impact on efficiency and effectiveness. Rework and line stops caused by unreliable delivery for example decrease the both the effectiveness and efficiency of logistics. The importance of delivery reliability for SPZ is reflected by the fact that it is included in the KPI’s57. With respect to outsourcing materials handling activities, delivery speed is determined largely by the transport distance from the place where materials handling activities are performed to SPZ. Transport distance is used as one of the determinants of delivery reliability as will be explained in section 4.2.3 and therefore delivery speed is not used as a separate criterion. Reliable delivery is defined for this research as deliveries consistently at the right time, at the right place, in the right number, of the right specification, and of the right quality. Different materials handling outsourcing methods can be assessed on their ability to achieve high delivery reliability. The relevant type of flexibility in this context is delivery flexibility and refers to the ability of the system to shorten or lengthen its delivery lead time58. The ability to shorten or lengthen the delivery lead time is largely determined by the transport distance because this determines transport lead time which is generally much higher than materials handling process lead times. Transport distance is used as one of the determinants of delivery reliability and therefore delivery flexibility is not used as a separate criterion.

Quality as an operational performance criterion is regarded as largely related to manufacturing processes. Although materials handling activities can affect the quality of parts handled, this criterion has limited power to differentiate amongst different materials handling outsourcing methods. Therefore this criterion is not used in assessing outsourcing methods.

4.2.2 Determinants of costs

Relevant costs for making outsourcing decisions are costs that are actually influenced by the decision. Some costs will increase or decrease quickly; others will do only after a longer period of time. Relevant cost categories are determined in cooperation with the financial departmentiii. The relevant categories are personnel costs of the unit materials handling (TLM), inbound transport costs from external suppliers, asset costs, inventory costs, and diverse other costs. Inbound transport costs from internal suppliers (other Scania production units) are much higher than inbound transport costs from external suppliers, but represent transport costs for components and parts excluded from this research. Relevant cost categories and are given in table 5.

iii

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14 Relevant cost categories (Figures based on situation end 2007)

Personnel (TLM) 42,8%

Transport (inbound from external suppliers) 39,0%

Assets (TLM) 6,3%

Inventory 10,0%

Other TLM 1,9%

Total relevant costs 100%

Table 5. Relevant cost categories for outsourcing materials handling activities

Table 5 shows that mainly personnel costs and transport costs are relevant for assessing outsourcing on costs. Together they make up for more than 80% of the total relevant costs. Costs for personnel performing materials handling activities are incurred directly by SPZ. Costs for inbound transport from external suppliers are charged by a third party who performs the transportation function for SPZ. Since detailed cost information for outsourcing methods can not be given at this stage, only personnel costs and transport costs will be used for further initial cost considerations.

Transaction costs are not included in the categories above. Transaction costs for possible future outsourcing methods are unknown, however should be taken into account for decision making. Like asset costs, inventory costs, and other relevant costs, transaction costs need to be included in order to provide the level of detail needed when making final decisions with respect to materials handling outsourcing methods.

The costs of the category personnel could change due to outsourcing materials handling activities. Personnel costs at SPZ could probably be decreased due to a smaller workforce; however this could be offset by costs for personnel charged by a LSP. Total personnel costs for performing materials handling activities either by SPZ or by other parties are determined by the size of the workforce needed and their wages. The size of the workforce needed is determined by the number of materials handling activities to be performed and the effectiveness and efficiency of the workforce performing them. The number of activities to be performed for a materials handling outsourcing method strongly depends on the introduction of extra activities and the opportunity to avoid performing activities and differs for each of the methods.

The cost category inbound transport from external suppliers could change due to outsourcing materials handling activities as well. Transport costs for SPZ are determined by the transport distance, the loading factor, and the amount of empty running. The transport distance is determined by the location of the supplier, a possible cross-dock, or a possible intermediate facility. The loading factor is defined as the percentage into which a transport trailer is fully utilized, using either the maximum volume or the maximum weight which can be transported by a transport trailer. The higher the loading factor, the lower the transport costs per transported part. A loading factor of (nearly) 100% refers to a full truckload (FTL). Empty running refers to a return-journey of an empty transport trailer. Empty running can be reduced by finding loads which can be transported on the return-journey. These loads could be of other Scania productions units or of other companies. The loading factor is optimized by using milk runs and / or cross-docks to achieve FTLs. A milk run concerns a fixed route at which parts are loaded at several suppliers. By loading sequentially at several suppliers who each deliver less than truckloads (LTL) quantities, a FTL can be created for further transport. Cross-docks are used to combine LTL deliveries from several suppliers as well, using an often strategically located facility between the suppliers to combine LTLs into a FTL for transport to a Scania production unit. The transport distance from the cross-dock to the production units is often much longer than the transport distances from the suppliers to the cross-dock. The transport distance, loading factor, and amount of empty running could all be influenced by outsourcing materials handling activities due to the location where the activities are performed and the in which transport consolidation is carried out .

For assessing materials handling outsourcing methods the total costs for personnel and transports in the chain from the supplier to the assembly line will be compared to the current situation. This gives an initial cost comparison for the several methods.

4.2.3 Determinants of delivery reliability

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15 SPZ, the buffer size at SPZ, and the buffer type at SPZ. This is shown in figure 7. The causal relations between the four factors and delivery reliability are explained below.

Figure 7. Factors related to delivery reliability

Delivery reliability to SPZ largely determines the delivery reliability to the assembly line, since on the short term only buffers at SPZ can be used to cope with unreliable deliveries. Two factors strongly determine the delivery reliability to SPZ: the process performance of the logistics service provider and the transport distance from the location where materials handling activities are performed to SPZ. Materials handling activities performed by the LSP can influence the specification and number of delivered parts and therefore the delivery reliability. The delivery reliability to SPZ is determined as well by the transport distance from the location where materials handling activities are performed to SPZ. The longer the transport distances, the higher the chance of disruptions in delivery due to delays during transport59. A long transport distance also limits the opportunity to react in a short term on wrong delivery by delivering additional parts.

The delivery reliability to the assembly line is influenced by the buffer size and buffer type at SPZ. A buffer is defined here as a small inventory of parts belonging to a specific part group, used to cope with irregular or unreliable delivery. The names buffer and inventory can be used exchangeable. The buffer size determines how long supply can be continued in case of unreliable delivery. The type of buffer determines which aspects of unreliable delivery can be counteracted. The type of buffer is characterized by the position of the customer order decoupling point (CODP).

The buffer or inventory of parts upstream of (before the) CODP consists of parts which are not connected to a customer order. This buffer or inventory is called generic and consists of a batch of identical parts. The buffer or inventory of parts downstream of the CODP consists of parts which are connected to a customer order and is called specific. This buffer contains several part variants, and each part is related to a customer order. The number of part variants depends on the variety in products ordered by customers, and the relation between part variants and products.

Figure 8. Buffer / inventory types as determined by the CODP

A generic buffer can be used to cope with delivery of some parts with incorrect specification in one batch, late delivery, and delivery of some parts in a batch that don’t have the required quality. Instead of the wrong parts, other identical parts in the generic buffer can be used.

A specific buffer can be used only to cope with late delivery. A specific buffer can cope limitedly with delivery of wrong parts or delivery of parts below the required quality because parts in the buffer cannot be used exchangeable. Parts in the specific buffer cannot be used interchangeable because each part could be another variant. This means that a specific buffer / inventory is of less value in coping with irregular or unreliable delivery than a generic buffer / inventory.

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16 The limited value of specific buffers is mitigated by the fact that the number of part variants in a specific buffer can be limited which enables cannibalizing. This concerns the use of similar parts which are needed for production on a later moment instead of parts needed right away which are unavailable, have the wrong specification, or have a low quality. However, this asks for rush orders for the parts used earlier then planned. In the long run, cannibalizing is undesirable since it is a complex and time consuming way to react on unreliable delivery.

The current parts or components delivered in sequence to SPZ show some examples of specific buffers. Sequence deliveries concern parts or components delivered in the sequence of the production schedule and therefore are truck and customer specific, i.e. downstream of the CODP. The buffer of cabs at SPZ concerns a specific buffer with a very high number of variants, therefore cannibalizing is impossible. This buffer is only useful to cope with delayed deliveries. On the other hand, the buffer of tires has fewer variants which does enable cannibalizing. This means that the buffer can cope with several types of unreliable delivery.

The type of buffer is of large influence on the reliability of deliveries to the assembly line of SPZ, moreover because cannibalizing is undesirable. Specific buffers are of limited value in coping with unreliable deliveries to the site of SPZ and therefore of large importance in assessing materials handling outsourcing methods.

4.2.4 Assessment on operational performance criteria

The methods for outsourcing materials handling are assessed on the operational performance criteria cost and delivery reliability. The criterion cost is divided in the sub criteria personnel costs and transport costs because these two cost categories determine for a large share the relevant costs. The criterion delivery reliability is represented by transport distance, buffer type, and buffer size.

Process performance of the LSP is not used for assessing materials handling outsourcing methods because a high process performance is in fact a prerequisite for outsourcing materials handling activities. Because of the large impact on delivery reliability, only logistics service providers that can assure a high process performance should be considered for performing materials handling activities. The cost for, and delivery reliability of each materials handling outsourcing method will be compared with SPZ performing the materials handling activity self at the facility in Zwolle using current transport ways.

The several materials handling outsourcing methods are numbered in the cube as shown in figure 9.

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17 The materials handling locations supplier and cross-dock are combined because the large majority of SPZ’s suppliers are located remote from Zwolle. Only a few suppliers are located in the Netherlands, all other suppliers are located abroad. This is similar to the locations of cross-docks, which are located remote from Zwolle as well. The closest cross-dock is located at Duisburg, Germany, a 167 km drive from SPZ. By combining the supplier and cross-dock location, the number of distinguished outsourcing methods reduces which improves the clarity of the overview and assessment.

Repacking is not included in the materials handling types since SPZ will increasingly replace this activity by directly packing at the right packaging by the supplier. This prevents using resources for this non-value-adding activity.

The operational performance criterion cost is influenced about equally by the sub criteria personnel costs and transport cost, as these costs add to 42.8% respectively 39% of the total relevant costs. The operational performance criterion delivery reliability is influenced most strongly by the buffer type, as this sub criterion determines largely the usefulness of the buffer at SPZ. The next most influencing sub criterion is the transport distance from the location where materials handling activities are performed to SPZ. The least influencing sub criterion for assessing the outsourcing method is the buffer size at SPZ. The buffer size used has to be chosen for each method, and can be adapted in time.

The materials handling outsourcing methods are assessed on the 5 operational performance sub criteria. The assessment is presented in concise form in table 6.

Performance

sub criterion Comparison to current situation Methods

Decrease - stable. Depends largely on wage differences

between the LSP and SPZ. 13-18

Decrease - stable if activities are only performed at the supplier or cross-dock, depending on wage differences and margins. Increase if additional labour-intensive buffering is used at SPZ, for example buffering by using warehouses.

1-6 Personnel costs

Decrease - increase. Depends largely on the extent into which extra unloading and loading at the intermediate facility is compensated by less materials handling at SPZ.

7-12 Stable. Same transport methods can be used compared to the

current situation. 13-18

Stable - increase. Depends on current transport ways including current use of cross-docks. Using cross-docks while direct transport is more efficient increases costs, as well as using direct transport when use of cross-dock is more efficient.

1-6 Transport costs

Increase due to extra transport needed to deliver parts from the intermediate facility to SPZ. The extent depends on the distance from the intermediate facility to SPZ.

7-12 Still generic buffer / inventory at SPZ. This buffer is valuable

since it can cope with several forms of unreliable supply and therefore ensures high delivery reliability to the assembly line.

1-4; 7-10; 13-18

Buffer type

Becomes specific buffer / inventory at SPZ. This buffer is less valuable since it can only cope with late deliveries and therefore only limited ensures high delivery reliability to the assembly line.

5-6; 11-12 Stable. Activities are still performed at the site of SPZ. 13-18 Increase. The extent depends on location of the intermediate

facility. 7-12

Transport distance

Strong increase. Almost all suppliers and all x-docks are located

at larger distances. 1-6

Stable buffer size at SPZ. Buffer size can be maintained because only the party performing materials handling activities changes.

13-18 Buffer size Buffer sizes depend on the location where materials handling

activities are performed and on choices with respect to minimal sizes in order to ensure a certain level of delivery reliability to the assembly line.

1-6; 7-12

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18 A high level of uncertainty exists with respect to the assessment on costs. Due to many variables within a method and without exact calculations, costs can not be determined precisely. The assessment of costs at this stage is used only to give an indication. Final decisions on cost can only be taken after making specific choices within a method and by making detailed calculations. For these detailed calculations information on part group selection, locations of suppliers, current transport ways, and exact locations of materials handling locations are needed.

Whether materials handling activities are performed by a supplier or a 3PL provider does not differentiate in the assessment of methods on costs and delivery reliability. Nor are differences between warehousing and picking activities found. Therefore the following two dimensional matrix is used to summarize the results of the assessment.

Figure 10. Results assessment on operational performance

This matrix shows that methods 5-6 and 11-12 are unsuitable with respect to delivery reliability because the buffer at SPZ becomes specific, which means that the buffer is of less value to cope with unreliable deliveries. Delivery reliability most strongly decreases for methods 5 and 6 because the buffer at SPZ becomes specific and the more useful generic inventory at the location where the materials handling activities are performed is located at a large distance.

Methods 13-18 are most suitable based on operational performance criteria since cost will probably be stable or decrease, while the delivery reliability does not decrease in any respect. A distinction between warehousing / picking activities and order picking / kitting activities is absent due to the fact that the distance to the generic inventory is very small. This enables short response times when the specific inventory cannot cope with unreliable delivery.

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Figure 11. Supply chain options for methods 1-4 and 7-10

Figure 11 shows the options for methods 1-4 and 7-10 for delivery from the supplier to SPZ. Warehouse and picking activities can be performed at either the supplier, at a cross-dock, or at an intermediate facility. Parts are delivered to the assembly line or to order picking and kitting locations. Order picking and kitting activities are not outsourced for methods 1-4 and 7-10 and therefore still located at SPZ. Buffering at SPZ would still be used to cope with irregular or unreliable delivery. Several ways for buffering can be used: warehouses, buffers close to the assembly line, buffers in transport trailers, or a buffer along the assembly line. The choice depends amongst others on the minimal buffer size chosen, which in turn depends on the distance to the supplier, cross-dock, or intermediate facility. The options for materials handling locations, their distance to SPZ, and buffer methods results in different combinations of transport costs and personnel costs.

For methods 1-4 and 7-10 personnel costs depends largely on the type of buffering used at SPZ. When using a warehouse for buffering parts, personnel costs at SPZ additional to personnel costs at the supplier, cross-dock or intermediate facility will be considerable because of the labour hours necessary for internal transport and lifting packages to the correct warehouse locations. Buffers close to the assembly line require less labour hours because parts are unloaded from transport trailer and directly stored close to the assembly line or the place where parts are order picked or kitted. A buffer can be located in a transport trailer as well. In this case the transport trailer serves as a buffer. The transport trailer is decoupled from the truck and stands outside the building but close to the point at the assembly line or the order pick / kit location where the parts are needed. This reduces personnel cost even further, but could increase total transport cost because trailer rent has to be paid to the transport company. At last parts can be delivered directly to the assembly line or the order pick / kit location. This means that the buffer size at the assembly line will be small due to the limited space available.

The assessment on operational performance shows that on method group level personnel cost and transport cost cannot be determined exactly. For many methods a cost decrease to a cost increase is anticipated. More detailed cost information is needed for the identification of most suitable outsourcing methods and further decision making. Specific information on part selection provides more information, as part groups relate amongst others to supplier locations which strongly influences transport cost. The selection and analysis of part groups is performed in section 4.3.

4.2.5 Further assessment on other criteria

The characteristics of the materials handling outsourcing methods justify further assessment of several groups of methods on other criteria as well. The impact of outsourcing on cost flexibility will be discussed first.

OUTSOURCING LOGISTICS ACTIVITIES An exploration of outsourcing materials handling activities at Scania Production Zwolle