RECOGNIZING THE NEED FOR OUTSOURCING PROCESS USING ROUGH SET THEORY Amir Kariznoee 1 Minoo Afshani 2 Somayeh Salmani 3

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1 RECOGNIZING THE NEED FOR OUTSOURCING PROCESS USING ROUGH SET THEORY Amir Kariznoee 1 Minoo Afshani 2 Somayeh Salmani 3 Abstract Given the increase in competitive environment,organizations are in search of new and better methods and strategies to reduce costs, increase productivity and gain competitive advantage. Outsourcing is one of the useful strategies to achieve this purpose. However, evaluation and control of outsourced activities is very important. Regarding the human error of judgment and lack of comprehensive vision in experts' opinions, evaluating the performance of contractor, who does the outsourced job, is too difficult, although it is necessary. Thus, doing a wrong outsourcing may cause many serious problems to the company and in some cases, may put the company in danger of collapse. The aim of this study is to represent some rules for outsourcing decision-makings process using Rough set theory through different experts' opinions. Key words: Outsourcing, Rough theory, Decision making 1- Introduction Over the past years, companies were based on the belief that they had to implement all their activities by their own and internal resources. This belief has led them to increase their resources capacity such as human resource, equipment, machines more and more. The different idea about using external sources and finding the resources that are outside the realm and control of the firm, introduced outsourcing to the large and small firms.so, all firms regardless of their size, type and field, choose this approach in order to improve and maintain themselves in the competitive environment (Fine, 2002). Today, given the turbulent situation in the market and competitive environment, organizations are always looking to maintain and develop their competitive advantages. The implementation of outsourcing process is one of the successful ways to obtain a 1 Master student of Industrial Management, Ferdowsi university of Mashhad. 2 Master student of Business Management, Ferdowsi university of Mashhad. 3 Master student of Operation Management, Allameh Tabatabaee university of Tehran. COPY RIGHT 2013 Institute of Interdisciplinary Business Research 30

2 competitive advantage. Outsourcing can improve competitive capability of organization through controlling and reducing operational costs, focusing on main and vital capabilities, using external expert's skills and improved work quality ( Bertolini, 2004). In the past time, outsourcing was limited to equipment manufacturing and information systems. Nevertheless, later, Organizations transfer more activities, such as administrative services, telecommunications and preparation of raw materials to external contractor through outsourcing process (Greaver, 1999). Lonsdule & Cox indicated in a study that outsourcing decisions often take without paying adequate attention to the strategic vision of the organization and its purpose is just to reduce the costs (McIvor, 2000).while, previous studies have shown that the most important factors in outsourcing projects failure are poor relationships with suppliers and also ignorance of organizational strategic planning (Weiss and Visioni, 2002). Although outsourcing has many advantages, it has some disadvantages too. Such as loss of managerial control over outsourced activity, a decline in flexibility and adverse effect of them on organization (Afshar, 1383). Although outsourcing, which is considered as a practice of contracting a business process out to a third party organization, could be very beneficial, it can cause irreparable harm to the company if it does not contain defined and transparent criteria and standards (Miltenburg, 2003). What makes companies to transfer some parts of their operational process to a third party? If external resources could carry out every stage of the value chain, with the maintenance of the other factors such as quality, performance, delivery snoitidnoc and customization htiw lower costs, outsourcing is a wise practice (McIvor, 2000). It seems that the only reason to outsourcing should be sought in the economic field. Nevertheless, do we can claim that managers can identify all the proper situations and all profits and losses at any time and they could make the best choice in all fields? If this is the case, how we can interpret the positive impact of management change in firms? The study of different organizations and firms, which faced fundamental changes as a result of managerial change, show that all managers are not aware of all loss and profit situations. To answer the question that if a firm can recognize economical advantage of all stages of value chain and transfer parts of the process to another, if it was essential, requires knowledge of the specific circumstances of the firm and internal capabilities, identification of opportunities and market factors, diagnosis of COPY RIGHT 2013 Institute of Interdisciplinary Business Research 31

3 snoitarepo that constitute the value chain and economic factors (Franceschini et al, 2003). In order to ensure managers about doing outsourcing process, a logical, correct, scientific, administrative outsourcing mechanism is needed. This is where the need for clear rules of outsourcing is felled. Due to the differences of opinion in the judgment of humanity and the difference in opinion of different experts, usually the probability of error in decision-making is very high. To reduce this possibility, the present study uses the Rough set theory to introduce the most important rules and diagnostic indicators for outsourcing requirements. 2- Literature review There are many definitions of outsourcing in previous studies. These definitions are differ and similar in some aspects. According to the Oxford dictionary, outsourcing means "the act of providing goods or services from outside sources through an agreement" (Meng, 2005). Lee and Hitt (1995) defined outsourcing as a process of reliance on outside sources in order to build production components and other value-added activities (Nayak et al, 2007). Lankford and Parsa (1999) introduced outsourcing as an activity to provide products or services from the sources outside the organization. Outsourcing Of services is typically about transferring service operational control to suppliers (Schniederjans et al, 2006). Hafeez et al (2006) determined non-core activities of organization for outsourcing through an AHP hierarchal analysis model. The factors that examined in this model includes competitiveness, the amount of Knowledge and assets involved in activities and processes, general and unique capabilities of organization (Hafeez et al, 2006). Campbell (1995) stated that management of maintenance activities has the highest potential for outsourcing (Campbell, 1995). Levery (2004) studied the reasons of an organization's failure to outsource Net activities and represented new solutions for these kinds of problems. The main problem of this organization was that the core activities had been outsourced in order to reducing costs and increasing efficiency. Another problem was missing experienced and skilled workforce because of retiring or leaving the organization. He mentioned that best selection of suppliers and effective communication with them can have a great impact on Net outsourcing (Levery, 2004). Ross and his colleagues (2005) examined outsourcing in terms of costs and Taylez and Drury (2001) outlined the capital COPY RIGHT 2013 Institute of Interdisciplinary Business Research 32

4 budgeting in this area and related it to the strategies decisions about building, buying or outsourcing activities. They are believed outsourcing strategy should be in line with the organizational main strategy. Finally, they presented a strategic sourcing model and decision-making process (Ross et al, 2005; Tayles and Drury, 2001). Bertrand and Sridharan (2001) Studied decision making process to outsource the activities and processes of a tailor-made organization. They have claimed through following some simple rules, which are determined by different parameters of system, the organization could reach its desired performance (Bertrand and Sridharan, 2001). 3- Types of outsourcing Outsourcing can be divided from different points of view. In one perspective, outsourcing can be reviewed in both "products" and "services" areas. In product or manufacturing area, technology development, production of parts, components and sub-assemblies are assigned to a supplier. In service area, some services such as support services and security guard, custodian, food service, information systems, planning and control of project, staff salaries, welfare services, temporary work force affairs, storage and inventory management, travel services and customer satisfaction services can be assigned to an outside supplier. From another perspective, outsourcing can divide into three classification: individual (replacement and transportation of specific situations), functional (such as assigning accounting department tasks) and processing (such as transferring whole manufacturing process of a production). Moreover, outsourcing can be divided into two operational and strategic levels. In general, strategic outsourcing is aligned with the organization's long-term strategy. When the benefits of outsourcing have a great influence on organization, whether positive or negative, and outsourcing results are very important for organization, it called strategic outsourcing (Mortazavi & chashm be rah, 1386). The types of outsourcing that has studied in this research are: 1. Repair and maintenance outsourcing 2. Staff education outsourcing 3. Marketing and advertising outsourcing 4.food affairs outsourcing 5. Transport and distribution outsourcing 6. IT outsourcing 7. Advisory and consultant outsourcing 8. Supplement of raw materials outsourcing COPY RIGHT 2013 Institute of Interdisciplinary Business Research 33

5 9. Research and development outsourcing 10. Outsourcing a part of manufacturing process Usually, organizations outsource some of their tasks or projects depending on their needs. As previous studied show, there are so many reasons for outsourcing. The most important reasons which convince managers to outsourcing include a) importance of product brand, b) Environmental requirements, c) the rate of technological progress, d) technological position of organization among competitors, e) organization position among competitors in terms of cost, f) organization position between competitors in terms of quality, g) organizational domain, h) number of production, i)technical capability, j) Ease of product replacement or change, k) organizational culture, l) staff. Since each of these criteria is measured differently, we have used Rough set theory in order to determine the impact of each of these criteria on choosing the type of outsourcing. 4- Rough set theory Rough set theory is a powerful mathematical tool, which is used for analyzing ambiguous, unreliable and inaccurate information. This theory was first proposed in 1991 by Pawlak (Pawlak, 1999). Rough set theory has been used to extract exist rules and lows from decision tables ( Skowron, 1995), to extract rules to predict the volume of water required (An et al, 1996), Information Processing and Management (Attoh-Okine, 1997). Rough set theory is a nonparametric statistical method to evaluate a variety of invisible and different factors. This approach is used in order to alteration set of information like accumulated experience and the things that has been observed in the past, into an informational structure and different categories according to the specific characteristics of each of them. The most important characteristics of this theory are: Optimum algorithms to find patterns in the data. Find the relationships that not be found by using statistical approach. Possible usage of qualitative and quantitative information. Finding the minimal set of data that is useful for classification (such as reducing the size and number of data). Evaluating the importance of data. Generating decision rules based on data. COPY RIGHT 2013 Institute of Interdisciplinary Business Research 34

6 Rough set theory is a new mathematical approach for intelligent data analysis and data mining that is used all around the world recently. Rough set theory philosophy is that every object of the universe can be used as information, data or knowledge. The objects that are described by the same and available information are indiscernible. This indiscernible (cause and effect) relations are the base of rough theory. Each set of indiscernible objects called a fundamental set that is one of the main components of knowledge about the universe and form a basic granule (atom) of knowledge about the universe. Any union of some fundamental sets is called crisp set- otherwise it is a vague and non-specific set that it is named a Rough Set. Rough sets theory is based on the classification concept. To clarify the issue, assume a group of patients who suffering from a certain disease. Each patient have a data file containing information such as name, address, age, gender, body temperature, blood pressure and so on. All patients with similar symptoms based on the available data - are alike. We can classify them into some bunches as a set of fundamental component of knowledge about patients. These components can be regarded as fundamental or basic concepts and as a construction of knowledge about patients. Fundamental concepts can combine with mixed concepts the concepts that are defined based on fundamental concepts. Each set of fundamental concepts is called a Crisp set - a set with precise definition and boundaries. Each set, which is not crisp set, is known as Rough set - a set with imprecise, uncertain or incomplete data. 5- Methodology As previously mentioned, the purpose of this study is to determine the rules and criteria for identifying the need for outsourcing. Therefore, using the previous research and literature, a questionnaire, which contained different criteria for determining the types of outsourcing, was designed. The questionnaire was sent to 180 managers of medium size manufacturing companies that 153 questionnaire were returned. The types of outsourcing are considered as dependent (decision) attribute and condition criteria are considered as independent attributes. They are shown in table 1. COPY RIGHT 2013 Institute of Interdisciplinary Business Research 35

7 Table 1. Classification of dependent and independent variables Decision Attributes) dependent attributes) Types of outsourcing: 1. Repair and maintenance outsourcing 2. Staff education outsourcing 3. Marketing and advertising outsourcing 4.food affairs outsourcing 5. Transport and distribution outsourcing 6. IT outsourcing 7. Advisory and consultant outsourcing 8. Supplement of raw materials outsourcing 9. Research and development outsourcing 10. Outsourcing a part of manufacturing process Condition Attributes) independent attributes) A) the importance B) environmental of brand requirements focus on regarding high 1-low standard regarding average standard 2-Average regarding low standard 3-high E) organization position among competitors in terms of cost Appropriate The same Inappropriate I) technical capability Weak Not bad good F) organization position between competitors in terms of quality Appropriate The same Inappropriate J) Ease of product replacement or change Slow Normal fast c)the rate of technological progress low Average high G) organizational domain Local Regional international K) organizational culture Developmental 2-hierarchal 3- Rational D) technological position of organization among competitors Appropriate The same Inappropriate H) number of production Lower than 1000 in year Between 1000 and Between and L) staff Capable Creative unqualified Collected information was prepared in an information table format as the input data for rough table. In each row of the table, there is an expert's opinion about the type and the reasons of outsourcing that has been done in their company. The empty rows means the expert did not answer to the questions. However, the rough theory could rectify this shortage. A sample of this information (input) is shown in table 2. COPY RIGHT 2013 Institute of Interdisciplinary Business Research 36

8 elpmas j a Table 2. Coded Table for Rough Set Analysis b c d e f g h i k l m Dependent attributes After analyzing, the data based on rough theory, using Excel software, the most important and effective parameters in determining the required type of outsourcing are recognized. Table 3. Table 3. Reducts and Cores sets Reducts: Algorithm1: { brand, environmental requirements, costs, quality, domain, capability, culture} Algorithm2: { brand, environmental requirements, costs, quality, domain, capability, staff} Algorithm3: { brand, environmental requirements, costs, quality, domain, capability, change of product} Algorithm4: { brand, environmental requirements, costs, quality, domain, number of product, staff} Algorithm5: { brand, environmental requirements, costs, quality, domain, culture, staff} Algorithm6: { brand, environmental requirements, costs, domain, capability, change of product} Cores: { brand, environmental requirements, costs, quality, domain} The Core attribute are a set of attributes that exists in all reduct algorithms of independent parameters. Therefore, without regarding these parameters it is not possible to evaluate independent parameter accurately. In other words, these parameters have a strong influence on the selection of experts. Rules express definite and regulated or sometimes uncertain relationships between descriptive and dependent attributes. A deterministic rule means that each level of decision or dependent attribute is always in the same level with an independent parameter. While, in an uncertain rule the amount of decision attribute is more than the same amount of independent attribute. COPY RIGHT 2013 Institute of Interdisciplinary Business Research 37

9 Therefore, only with using natural rules we can be sure that the result of decision exists in a distinct group. The rules that obtaining from rough theory is displayed in table 4. Table 4. Rules generated by set theory Deterministic Rules: Cost=1 environmental requirements=2 brand=3 => choice =1 Brand=3 quality=2 domain=3 => choice = 3 Cost=2 domain=3 environmental requirements=1=> choice = 7 domain=3 Cost=3 quality=3 => choice = 9 Cost=1 capability=2 technological progress=3=> choice = 6 Non-Deterministic Rules: domain=2 number of products=3 capability=3 => choice = 5 or 8 6- Conclusion According to data analysis, brand, environmental requirements, costs, quality and organizational domain are the most influential factors on choosing the type of outsourcing. However, core parameters are not sufficient to estimate the type of outsourcing. It means we need some more attributes to predict precisely. For example, algorithm 1 in table 5 considers capability and culture as an essential factor in addition to the core parameters. Table 5 algorithms are equal in terms of accuracy and quality. Indeed, each of these algorithms can be used in order to determine the type of required outsourcing. Generally, rough set theory has an extraordinary ability to identify the shortest possible decision making algorithms of the whole set of attributes defined in the system. Thus, this theory can be used as a powerful tool to simplify and solve decision-making problems. It should be considered that this study has been done based on limited number of expert's opinion and we need to increase data in order to obtain more reliable rules about outsourcing decisions. COPY RIGHT 2013 Institute of Interdisciplinary Business Research 38

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