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Outsourcing or insourcing logistics activities: A Brazilian case study

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DOI: 10.1504/IJISM.2019.099702

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Int. J. Integrated Supply Management, Vol. 12, No. 3, 2019 167

Outsourcing or insourcing logistics activities:

a Brazilian case study

Lucas Eric da Silva*

Department of Production Engineering,
Federal University of São Carlos – UFSCar-CCGT,
Km 110 João Leme dos Santos,
Sorocaba, SP18052-780, Brazil
Email: lucaseric@ufscar.br

Kaique Doratiotto
University of São Paulo – USP,
128 Prof. Almeida Prado Avenue, Butantã,
São Paulo, SP 05508-280, Brazil
Email: kaique@usp.br

José Geraldo Vidal Vieira

Department of Production Engineering,
Federal University of São Carlos – UFSCar-CCGT,
Km 110 João Leme dos Santos,
Sorocaba, SP 18052-780, Brazil
Email: jose-vidal@ufscar.br

Abstract: Studies show that logistics outsourcing is a way to reduce costs,

enhance performance, increase service quality, and consequently improve
consumer satisfaction. However, the decision between outsourcing and
insourcing is a highly complex logistics procedure due to several criteria
concerning the selection of alternatives. This decision is also not easy to
address when we consider the activities of a distribution centre, where the
governance structure in Brazil regarding logistics operations must consider a
high use of workforce. We apply methods based on multicriteria decision
analysis (MCDA) to provide a recommendation to the decision-maker on
whether to insource or outsource the logistics operations of a Brazilian
company. Although there are few differences between the insourcing and
outsourcing of logistics operations, benefits based on flexibility, working
conditions, risks, reputation, innovation and responsiveness, encompassing
much more than only costs, were crucial for the decision-making of sustaining
insourcing of logistics activities.

Keywords: outsourcing; insourcing; decision; multicriteria decision analysis;

MCDA; logistics operations; distribution centre.

Reference to this paper should be made as follows: da Silva, L.E.,

Doratiotto, K. and Vieira, J.G.V. (2019) ‘Outsourcing or insourcing logistics
activities: a Brazilian case study’, Int. J. Integrated Supply Management,
Vol. 12, No. 3, pp.167–192.

Copyright © 2019 Inderscience Enterprises Ltd.

168 L.E. da Silva et al.

Biographical notes: Lucas Eric da Silva has experience in warehouse design

for wholesale and retail auto parts market. He holds a Bachelor in Agricultural
Engineering (2009) at the State University of Campinas (UNICAMP).
Currently, he is a Master’s student in the Department of Production
Engineering at Federal University of Sao Carlos (UFSCar-CCGT). His research
interests include warehouse design, layout evaluation, outsourcing and
insourcing logistics operations, applying simulation (SED) and MCDA
methods.

Kaique Doratiotto is a young professional who has experience in supply chain

analyses, focused on logistic solutions for agribusiness and other business. He
obtained his undergraduate degree in Business Administration in 2015 at the
Federal University of Sao Carlos (UFSCar). He is a Master’s student in
Logistics System Engineering at the Sao Paulo University (USP M-Log). His
research interests include supply chain management (SCM), logistics
distribution, outsourcing and insourcing.

José Geraldo Vidal Vieira is an Associate Professor in the Department of

Production Engineering at Federal University of Sao Carlos (UFSCar-CCGT).
His field of expertise and academic focus is supply chain management and
logistic of distribution in retail channel. His research interests are related to the
relationship among the supply chain partners; supplier selection, pooling in
multi-location inventory distribution systems and city logistics, focusing on
logistics problems in retail, CPG industry and logistics service providers. The
research applies multivariate statistics and multicriteria methods.

1 Introduction

According to Razzaque and Sheng (1998) and Wilding and Juriado (2004), the logistics
activities that are most commonly outsourced include transportation, distribution,
warehousing, inventory management, order processing and product handling. Hsiao et al.
(2010a, 2010b) provide a classification in four levels of logistics activities that can be
outsourced: the first level refers to basic activities such as transportation and storage; the
second level refers to value-added activities, such as packaging; the third level refers to
planning and control activities, such as inventory and transportation management; and the
fourth level refers to distribution network design, which is at a strategic decision level,
such as the location of a warehouse. Regardless of the level, the study of logistics
outsourcing has focused on cost reduction, enhancing performance, increasing service
quality and consequent consumer satisfaction (Andersson and Norrman, 2002; Hwang
et al., 2016; Murphy and Daley, 1997; Qureshi et al., 2007; Torres and Mahmoodi, 2008;
Yang, 2014). On the other hand, logistics insourcing has emerged as a counter-point
(Ghose and Murphy, 2012), as financial gains obtained from centralising management
may make a company more competitive (Hartman et al., 2017), especially for large
companies (Rezaeisaray et al., 2016).
In the literature, advantages and disadvantages of logistics outsourcing are mentioned.
The advantages are related to cost reduction of operations, transportation and
investments, turning permanent costs into variable costs, increased service quality, access
to modern technologies and infrastructure, access to better expertise, potential focus on
basic skills and major issues, freeing resources, eradicating problematic operations,
 Outsourcing or insourcing logistics activities 169

increasing flexibility, decreasing lead time, and increased customer satisfaction (Attari
et al., 2012; Azzi et al., 2013; Razzaque and Sheng, 1998; Solakivi et al., 2013; Wilding
and Juriado, 2004). Disadvantages and potential risks are also mentioned, such as: loss of
business control to the logistics operator, losing important information, failure to select
providers properly, the inability of suppliers to meet possible changes in demand and
difficulty in switching suppliers when necessary (Attari et al., 2012; Azzi et al., 2013;
Bhatti et al., 2010; Kremic et al., 2006; Rezaeisaray et al., 2016; Solakivi et al., 2013).
Moreover, Zailani et al. (2017) state that the lack of human assets and business
uncertainty are the major influencing factors in outsourcing logistics activities. Logistics
activities at different levels of different companies are outsourced for different reasons
considering the factors elucidated by Hsiao et al. (2010b), such as: asset specificity
(existence of structure and investments made in human capital), proximity and value of
the activity to be outsourced to the end-of-company activity, and complexity of the
supply chain. While Vijayvargiya and Dey (2010) point to the fact that if the company
has a well-managed and efficient distribution system, no cost reduction should be
expected from outsourcing, Solakivi et al. (2013) state that cost reduction is not the main
force that drives a company to outsource, but rather the need for flexibility followed by
improved customer service. Therefore, the decision between outsourcing or insourcing
the structure covers all the structural levels of an organisation, i.e., the operational,
tactical and strategic level, which becomes a highly complex problem to resolve.
This paper is based on an empirical study that evaluates logistics outsourcing within
the scope of a distribution centre (DC) at a company located in São Paulo state, Brazil. A
literature review was carried out on the topic, evaluating the criteria for logistics
outsourcing and applications through decision models. In this empirical study, interviews
were conducted with high level managers from the organisation. The decision process (to
outsource or not a logistics activity) was performed using simple multi-attribute rating
technique (SMART) according to the steps proposed by Goodwin and Wright, (2004),
and weight elicitation is used according to the rank order distribution (ROD) method
proposed by Roberts and Goodwin (2002), as a contribution of the paper. Finally, to
obtain a comparative analysis, the SMARTER (SMART exploiting ranks) method was
applied following the recommendations from Edwards and Barron (1994), and sensitivity
analyses were performed.

2 Literature review

2.1 Make or buy: a decision overview

Outsourcing has moved its focus from peripheral activities such as cleaning, catering and
security to more critical business activities such as design, manufacturing, marketing,
human resources management and logistics (McIvor, 2000, 2009). When deciding
between insourcing or outsourcing, one must take into account economic considerations,
market issues, dependence and the availability of personnel and equipment (van Damme
and Amstel, 1996). This type of decision has been investigated from different
perspectives, such as: transaction cost economics (TCE) and resource-based view (RBV)
(Holcomb and Hitt, 2007; Hsiao et al., 2010a; McIvor, 2000, 2008, 2009; de Neves et al.,
2014).
170 L.E. da Silva et al.

TCE specifies which economic conditions a company should manage activities

internally within its limits, or which they should manage externally, i.e., outsourcing
(Williamson, 1975, 1985). TCE views the company more as a governance structure than
as a production function, emphasising the minimisation of production costs and
transaction costs by determining an appropriate governance structure (Williamson, 1979,
1985). Transaction costs refer to expenses related to supplier selection, price negotiation,
drawing up contracts, performance monitoring, and supplier opportunism (McIvor,
2008). The three forms of governance structure are: market (outsourcing); hierarchical
(insourcing); and hybrid, which is an intermediate point between the market and
hierarchical governances, which can be characterised by various types of contracts
determining the relationship between companies and service operators (Williamson,
1991, 2008). Williamson (1975) identifies four factors that lead to transaction costs:
bounded rationality, opportunism, small numbers bargaining, and information
impactedness. The same author identifies three characteristics related to transaction cost:
uncertainty, frequency trading, and asset specificity. Moreover, TCE suggests that due to
‘opportunism’ and ‘bounded rationality’, transactions characterised by a high degree of
‘asset specificity’, ‘uncertainty’ and low frequency of occurrences tend to favour
hierarchical governance, i.e., insourcing. In contrast, transactions with a low degree of
‘asset specificity’, ‘uncertainty’ and high frequency of occurrence favour market
governance, i.e., buying from suppliers (Dabhilkar, 2011; McIvor, 2008; McIvor and
Humphreys, 2000). The middle ground between these conditions tends to favour the
hybrid model of governance, managed through a relationship contract (McIvor and
Humphreys, 2000).
Another prominent theory adopted in outsourcing decision-making is RBV (McIvor,
2008). RBV sees the company as a whole, comparing the available resources internally
with those available on the market, searching for the few resources of the company that
lead to a long-term competitive advantage (Neves et al., 2014). A resource means
anything that can be thought of as a strength or weakness of a particular company
(Wernerfelt et al., 1984). Barney (1991) reports that a resource for creating competitive
advantage should be evaluated according to the following criteria: value, rarity,
imitability, and organisation. However, the author states that a company must be
organised in order to exploit its resources and capabilities. Quinn and Hilmer (1994)
argue that the company should focus its resources on a set of core competences where
one can achieve superior advantage and unique value to the customer. According to
Prahalad and Hamel (1990), core competence can be identified through three tests: (1st) a
core competence provides potential access to a wide variety of markets, (2nd) a
competence should contribute significantly to the perceived customer benefits of the end
product, and (3rd) a core competence should be difficult for competitors to imitate.
Therefore, core competence is a strategic factor that firms use to sustain a competitive
advantage and, in turn, utilise core functions (Kremic et al., 2006). Activities that are not
core competences should be strategically outsourced if they also do not have a critical
strategic need or any special capabilities (Quinn and Hilmer, 1994). Regarding RBV,
logistics, and core competence, Bolumole et al. (2007) state that logistics core
competences refer to better internal routines and better management of activities
(transportation, warehousing, inventory management, and questions related to batch
quantity, order processing, and customer service issues), which can provide an important
source of competitive advantage, satisfying the customers’ needs better than their rivals.
 Outsourcing or insourcing logistics activities 171

Thus, McIvor (2008) sums up that the greatest interest of RBV is to understand how the
company’s capabilities develop and affect its position and competitive performance.
One reason for combining the two theories, based on TCE and RBV, is that
companies compete for competitive advantage in factors other than just low costs, and
that TCE only addresses cost minimisation, hence the purpose of the RBV approach
(Dabhilkar, 2011). Another reason pointed out by the author is that TCE presumes that
capabilities pre-exist or can be developed equally among all companies in a certain
industry, which means that all companies must also act in relation to vertical integration,
which is known to be untrue. An interesting point to note is that, while TCE perspectives
typically limit outsourcing to repetitive and specialised activities (manufacturing and
logistics), RBV provides a context for explaining strategic outsourcing arrangements for
more visible and potentially sensitive functions such as research and development,
engineering design, and consumer support (Holcomb and Hitt, 2007).
McIvor (2008) warns that the combined use of these two theories must be carried out
with caution due to possible contradictions. Dabhilkar (2011) points out that there are
trade-offs in ‘make or buy’ decision-making regarding their main reasons (costs, quality,
core activity focus, flexibility, and innovation) that often conflict and imply that a
company cannot have all these reasons when outsourcing an activity. In addition,
Moschuris (2015) reports that due to the characteristics of each company and each branch
of business that focuses on outsourcing public activities (Serrato et al., 2007), general
decision models and decision-making between outsourcing or not tend to be fruitless.
However, there is vast body of research in the literature that offers a ‘make or buy’
decision support model or an outsourcing flowchart, such as: Attari et al. (2012), Kremic
and Tukel (2006), McIvor (2000, 2008), McIvor and Humphreys (2000) and Serrato et al.
(2007). Most models essentially consist of a limited and similar number of steps, for
example:
1 defining core competencies and strategy
2 full cost evaluation
3 evaluation of suppliers and competitors (de Boer et al., 2006; Serrato et al., 2007).

2.2 Outsourcing logistics

In logistics, specifically, the decision to outsource (or not) an activity ends up considering
the possibility of giving greater added value to the company’s activities, as with better
logistics performance, the value perceived by customers increases (Christopher, 1998).
Along these lines, the concept of third party logistics (3PLs) arises, i.e., organisations
specialised in a particular activity that add value to the product or service (Lieb et al.,
1993).
By outsourcing logistics activities to 3PL, a company can derive a number of
benefits, such as customer satisfaction, improved operations efficiency, minimum
operational investment, access to various distribution networks, etc. (Bask, 2001).
However, for the decision-maker to actually decide whether or not an activity should be
outsourced, several criteria must be taken into account, and the decision-making criterion
might not necessarily be cost reduction (David, 2009).
 172

Table 1

Hwang et al. Andersson and Bhatnagar et al. Murphy and Qureshi et al. Qureshi et al.
Criteria Yang (2014)
(2007) Norrman (2002) (1999) Daley (1997) (2007) (2008)
Costs Continuous cost reduction x
Minimum cost x x x x x x
Operating and pricing flexibility x
Operating and pricing flexibility x
Criteria for 3PLs
L.E. da Silva et al.

Price x
Profitability x
Intangible Cultural compatibility x x
Flexibility in operation and x x
delivery dependence
Information sharing and trust x
Innovation x
Long-term relationship x x
Past experience x
Professionalism x
Reliability x
Reputation x x x
Responsiveness x x
Word of mouth x
Performance Capability x
Operational performance x
Delivery performance x x x
Performance operation x
 Table 1
Hwang et al. Andersson and Bhatnagar et al. Murphy and Qureshi et al. Qureshi et al.
Criteria Yang (2014)
(2007) Norrman (2002) (1999) Daley (1997) (2007) (2008)
Quality Document accuracy x
assurance Experience x x
Financial stability x x x
Geographic spread and range of x
services
IT capability x
Key performance indicators x
tracking
Problem solving capability x
Criteria for 3PLs (continued)

Shipment error data x

Size and quality of fixed assets x
Transportation safety x
Service Commitment matching x
Customer references x
Outsourcing or insourcing logistics activities

Customer service recovery x

Customer support service x x
Global scope x
Service quality x x x
Range of service x x
Service effectiveness x
Surge capacity x x
Track and trace x
Value-added service x
173
174 L.E. da Silva et al.

Qualitative and quantitative criteria can be considered in the 3PL selection process.
Considering this, some relevant studies regarding logistics outsourcing were considered
in this review, showing different approaches of the subject. Although there are several
criteria presented in the literature, and each criterion tends to be shaped according to
cultural and regional characteristics (Aguezzoul, 2014; Bolumole et al., 2007;
van Damme and Amstel, 1996), there is, however, overlapping of some criteria that are
too often cited by three or more authors, namely: minimum cost, reputation, delivery
performance, financial stability, and service quality.
In total, 42 different criteria were identified in the literature review, having extracted
a qualitative analysis and classifying them according to the proposed study model. Thus,
for this study, a combination of the selection criteria was used, dividing them into five
categories. Criteria that did not fit any dimension were classified as ‘intangible’. A
summary of the criteria cited by each author is shown in Table 1. The criteria choice and
their classification by relevance order is a particular subject for the decision-making
objective, for the internal and external factors that influence the decision-making and,
finally, for the subjectivity from either the decision-maker or from a group of
decision-makers; thus, the cost criterion is not always the most relevant one (Aguezzoul,
2014; Ho et al., 2010; Kumar and Singh, 2012; Rezaeisaray et al., 2016).

2.3 Outsourcing or insourcing: decision models

The decision between outsourcing and insourcing is a highly complex logistics
procedure. It is characterised by multiple objectives whose trade-offs should be evaluated
regarding their main reasons (cost, quality, focus on the main activity, flexibility and
innovation), which are commonly conflicting and result from the fact that a company is
not able to achieve them all if one of its activities is outsourced (Dabhilkar, 2011). The
criteria can be quantitative and qualitative. Another point is that it is a long-term decision
that affects many other company departments, not only the department whose function is
desired to be outsourced, thus, there are many decision-makers from different areas.
Furthermore, there are risks and uncertainties inherent to decision-making (Zailani et al.,
2017) due to the difficulty in predicting outcomes.
Hence, to decide between outsourcing and insourcing an activity implies an approach
based on decision analysis techniques, such as an multicriteria decision analysis (MCDA)
problem, which considers quantitative and qualitative factors, as well as simultaneous
assessment criteria (Attari et al., 2012). MCDA is a methodological structure that aims to
provide a recommendation for decision-makers with a finite range of alternatives
(actions, objects, solutions or candidates), and is evaluated from multiple points of view,
called criteria (attributes, resources or objectives) (Aguezzoul, 2014; Chai et al., 2013).
Approaches based on MCDA are widely used for supplier selection and the main
methods used are: analytic hierarchy process (AHP), analytic network process (ANP),
case-based reasoning (CBR), data envelopment analysis (DEA), fuzzy set theory, genetic
algorithm (GA), mathematical programming, SMART, and their hybrids (Aguezzoul,
2014; Chai et al., 2013; Ho et al., 2010). There has been a growing importance in hybrid
models and fuzzy logic in 3PL evaluation and selection studies (Haldar et al., 2018). The
fuzzy set theory deals with subjectivity and ambiguity in human judgment (Kishore and
Padmanabhan, 2016; Prakash and Barua, 2016; Yazdani et al., 2017).
Table 2 lists some recent multi criteria decision making (MCDM) approaches for 3PL
evaluation and selection (Aguezzoul and Pires, 2016; Alkhatib et al., 2015b; Bianchini,
 Outsourcing or insourcing logistics activities 175

2018; Cirpin and Kabadayi, 2015; Haldar et al., 2018; Kishore and Padmanabhan, 2016;
Raut et al., 2018; Singh et al., 2018; Yazdani et al., 2017), as well as third-party reverse
logistics 3PRL) evaluation and selection (Bai and Sarkis, 2018; Prakash and Barua, 2016)
and for the decision to outsource reverse logistics (Tavana et al., 2016). Reverse logistics
has far fewer published studies in terms of outsourcing (Akbari, 2018). As we do not
intend to carry out a comprehensive and thorough literature review on studies related to
MCDM and logistical outsourcing, for more information we refer to the studies of
Aguezzoul (2014), Akbari (2018) and Alkhatib et al. (2015a).
Table 2 Recent MCDM approaches for 3PL and 3PRL evaluation and selection

Reference MCDM approach Contributions

Bai and Sarkis (2018) NRS and TOPSIS A neighbourhood rough set (NRS) reduces a
and VIKOR larger set of third-party reverse logistics
providers (3PRLPs) into a smaller set of
candidate preferred 3PRLPs. Technique for
order of preference by similarity to ideal
solution (TOPSIS) combined with the VIKOR
method (multi-criteria optimisation and
compromise solution) rank the alternatives and
identify a preferred 3PRLP.
Bianchini (2018) AHP and TOPSIS AHP calculates the criteria weights and
TOPSIS is used to rank the alternatives.
Raut et al. (2018) DEA and ANP DEA evaluates the efficiency of each 3PL
according to the identified criteria and screens
the maximally efficient 3PLs. Afterwards, the
ANP technique is applied to determine and
prioritise the evaluation criteria and rank the
maximally efficient 3PLs given by the previous
step.
Singh et al. (2018) Fuzzy AHP and Fuzzy AHP is used to determine the relative
fuzzy TOPSIS weights of the different criteria for 3PL
selection in the cold chain and fuzzy TOPSIS is
used to rank the available alternatives for
selecting the best 3PL in a fuzzy
decision-making environment.
Haldar et al. (2018) DEA and TOPSIS DEA is used to evaluate the efficiency of each
and LP 3PL according to the identified criteria. Then,
TOPSIS is applied to rank the maximally
efficient vendors. Afterwards, the linear
programming (LP) problem is stated and solved
to ascertain the quantities to be allocated to
each maximally efficient 3PL in the context of
the multiple logistics provider.
Yazdani et al. (2017) Fuzzy QFD and Fuzzy quality function deployment (QFD)
Fuzzy TOPSIS determines the weights of the decision criteria
and fuzzy TOPSIS generates the rank of
alternative logistic providers.
Kishore and Fuzzy AHP and Fuzzy AHP is used to calculate relative weights
Padmanabhan (2016) fuzzy TOPSIS of each coordination criterion. Then, through
closeness coefficient logistics service provider
(LSP) alternatives are ranked by fuzzy TOPSIS.
176 L.E. da Silva et al.

Table 2 Recent MCDM approaches for 3PL and 3PRL evaluation and selection (continued)

Tavana et al. (2016) SWOT and fuzzy Strengths, weakness, opportunities, threats
AHP (SWOT) analysis identifies the relevant criteria
and sub-criteria for the problem. Afterwards,
intuitionistic fuzzy AHP is used to evaluate the
relative importance weights among the criteria
and the corresponding sub-criteria to decide
between insourcing or outsourcing the reverse
logistic.
Aguezzoul and Pires ELECTRE Applied elimination and choice expressing
(2016) reality (ELECTRE) method.
Prakash and Barua Fuzzy AHP and Criteria and sub-criteria are evaluated by fuzzy
(2016) fuzzy TOPSIS AHP and fuzzy TOPSIS performs the rank of
3PRL alternatives by observing the highest
closeness coefficient.
Alkhatib et al. Fuzzy DEMATEL Fuzzy decision-making trial and evaluation
(2015b) and fuzzy TOPSIS laboratory (DEMATEL) is used to analyse the
causal relationships of the LSPs’ resources and
capabilities. After all, the fuzzy TOPSIS
method was used to evaluate LSP alternatives
against weighted logistics resources and
capabilities.
Cirpin and Kabadayi AHP The AHP is used to evaluate the importance
(2015) value of the criteria in the selection process of
3PL service providers.

SMART is a prominent methodology because its analysis includes a wide variety of

quantitative and qualitative criteria (Chou and Chang, 2008), and Aguezzoul (2014)
recommends using it in subjects related to outsourcing decisions, since, in this case, its
occurrence is reduced when compared to methodologies such as AHP or DEA.
According to Goodwin and Wright (2004), SMART was created in 1971 and due to its
simplicity; it guarantees a transparent analysis to improve understanding of the problems
faced by decision-makers.
SMARTS (SMART using swings) remedies a SMART intellectual error by using
swing weights (Edwards and Barron, 1994). The following steps should be taken to apply
it:
Step 1 Identify the purpose of the decision support model and the decision makers
(Edwards and Barron, 1994; Goodwin and Wright, 2004).
Step 2 Identify alternatives for analysis (Goodwin and Wright, 2004), which may be
real or hypothetical (Edwards and Barron, 1994).
Step 3 Identify the criteria that are relevant to the decision problem (value tree)
(Goodwin and Wright, 2004).
Step 4 For each criteria, assign values to measure the performance of the alternatives of
that criteria, in other words, find out how well the different alternatives perform
on each of the lowest-level attributes in the value tree (Goodwin and Wright,
2004); this can be done by scores or physical value-related measures that
represent the criteria, if available (Edwards and Barron, 1994). Otherwise by
 Outsourcing or insourcing logistics activities 177

direct rating or using value functions through the bisection method (Goodwin
and Wright, 2004).
Step 5 Determine the weights of the criteria through the swing weighting method
(Edwards and Barron, 1994; Goodwin and Wright, 2004). The authors report
that this technique consists of proposing to decision makers to think of all the
criteria in their worst conditions for a hypothetical alternative, and later (if they
can) change one of these criteria to their best condition, and so as to order the
criteria successively up to the last criterion of preference. Afterwards, weights
are assigned to the criteria, based on the first criterion listed and then
normalised. For further details of the method, we refer to the last authors.
Step 6 For each alternative, take a weighted average of the values assigned to that
alternative, considering the last two steps (Goodwin and Wright, 2004). This
allows us to see how an alternative performs on all criteria together.
Step 7 Make a provisional decision (Goodwin and Wright, 2004).
Step 8 Perform a sensitivity analysis to see how robust the decision is to changes in the
figures supplied by the decision making (Goodwin and Wright, 2004).
Goodwin and Wright (2004) state that the criteria listed by decision makers may be vague
and not allow a numerical scale measurement, and should be broken down into more
specific criteria that allow this measurement. Therefore, a value tree is useful to make the
structure of criteria clear by which the alternatives will be evaluated and ranked. The
value tree must be built by addressing the criteria that represent the general concerns of
the decision makers, and then, if necessary, be broken down into criteria that allow their
evaluation. Although the construction of a value tree requires several attempts before an
acceptable structure is reached, to make sure the tree is an accurate and useful
representation of the concerns of decision makers, Keeney and Raiffa (1993) suggested
meeting the five points to follow: completeness: all criteria that are of concern to the
decision maker should be included; operationality: the tree-level criteria should be
sufficiently specific for the decision-maker to evaluate and compare them for the
different alternatives; decomposability: the performance of an alternative over a criteria
should be considered regardless of its outcome over the other criteria; absence of
redundancy: two criteria cannot represent the same thing, and therefore there is no double
counting in the final score of the alternatives, thus leading to a wrong decision; and
minimum size: a large tree can make an analysis impossible, therefore the criteria should
not be decomposed beyond the level they can be evaluated.
However, a key point in developing a multi-criteria decision model to select the
recommended alternative is the weight attainment criteria (Barron and Barrett, 1996a,
1996b). At this point, the swing weighting method proposed in SMARTS for assigning
the weights to the criteria captures the relative preferences of decision makers for swings
between the worst and the best option in each criterion (Goodwin and Wright, 2004),
making the SMARTS method unattractive in this case because it generates difficulties for
the DMs having to make these choices for many alternatives and many criteria. To avoid
MCDA weight attribution difficulties, rank-based weight substitution, such as rank order
centroid (ROC), rank sum (RS), rank reciprocal (RR) and ROD are used, leading to a
satisfactory result approximation of the standard method (for example: point allocation)
(Barron and Barrett, 1996a, 1996b; Edwards and Barron, 1994; Roberts and Goodwin,
178 L.E. da Silva et al.

2002). According to Roberts and Goodwin (2002), ROD performs better, mainly when
there is an increased number of alternatives and criteria under analysis. As ROD weights
are based on the assumption of uniform distribution of unrestricted weights and their
weights are difficult to calculate (requiring calculations of probability density functions),
Roberts and Goodwin (2002) provided a table of their values for up to ten criteria (see
Table 3).
Table 3 ROD weights

Quantity of criteria
Rank
2 3 4 5 6 7 8 9 10
1 0.6932 0.5232 0.4180 0.3471 0.2966 0.2590 0.2292 0.2058 0.1867
2 0.3068 0.3240 0.2986 0.2686 0.2410 0.2174 0.1977 0.1808 0.1667
3 0.1528 0.1912 0.1955 0.1884 0.1781 0.1672 0.1565 0.1466
4 0.0922 0.1269 0.1387 0.1406 0.1375 0.1332 0.1271
5 0.0619 0.0908 0.1038 0.1084 0.1095 0.1081
6 0.0445 0.0679 0.0805 0.0867 0.0893
7 0.0334 0.0531 0.0644 0.0709
8 0.0263 0.0425 0.0527
9 0.0211 0.0349
10 0.0173

The combination of SMART with simpler weight attribution methodologies was

proposed by Edwards and Barron (1994), when combining SMARTS (using swing
weight) and ROC, which was called SMARTER. However, SMARTER not only differs
in characteristics because of using ROC, but also because of using the linear value
functions to evaluate the given alternatives for the criteria (Goodwin and Wright, 2004).
Thus, SMARTER is a simpler application of SMART, but the combination of SMART
and ROD can also be simple, and its application in real decision-making cases can help
DMs in complex cases, such as the decision to outsource or insource their logistics
operations.

3 Methodology approach

This work uses a single study case with a descriptive approach to comprehend the criteria
adopted by a company in the decision process of insourcing or maintaining part of its
distribution logistics operation outsourced. This method is appropriate when the focus is
on the study of contemporary phenomena such as the outsourcing decision, through
detailed reporting of the processes of the company that could result in new and creative
perceptions about the phenomenon and achieve high enforceability with professionals
(Flynn et al., 1990; Voss et al., 2002; Yin, 2001).
The W company is located inland in São Paulo state, Brazil. It is a chemical industry
with an average annual income around US$350,000,000, disclosing 300 stock keeping
units (SKUs) into the market, with a distribution based on six outsourced subsidiaries
located around the country. In this context, it recently faced the issue of outsourcing or
insourcing part of its distribution operations. Thus, the objective of this study is to
 Outsourcing or insourcing logistics activities 179

evaluate logistics outsourcing by checking and prioritising the criteria that company W
(through a single case study) considers in the decision process between insourcing or
outsourcing its logistic distribution operations. The research followed the eight steps
shown in the flow diagram in Figure 1.

Figure 1 Flow diagram showing project steps

A bibliographic survey was carried out in step 1. The aim was to become familiar with
the subject and establish most of the common criteria adopted in the decision process of
outsourcing a certain logistics activity. During steps 2 and 3, the study case data were
acquired from documents, interviews and questionnaires drawn on three participants of
the decision process (see Tables A1, A2 – Appendix) in order to obtain higher accuracy
of the information obtained and collect facts that are not contained in the analysed
documents, thus ensuring some validity and reliability through triangulation (Voss et al.,
2002; Yin, 2001). The following individuals were interviewed: the operations general
manager, the logistics manager and the logistics supervisor. In step 4, the criteria
surveyed in step 1 and the criteria identified in steps 2 and 3 were compared. In step 5,
the value tree model was structured with the criteria and sub-criteria selected in the last
step. The chosen method was SMARTS and its structure was built based on
recommendations from Goodwin and Wright (2004). The model evaluation was
performed in step 6 by interviewing the decision makers about tree structure, criteria and
sub-criteria. Afterwards, decision maker 1 (DM1) was asked to evaluate the criteria and
sub-criteria concerning their order of preference. Afterwards, according to the ROD
weight table (see Table 3) the criteria and sub-criteria received their weights. In step 7,
the DM1 was asked to evaluate the alternatives, which was also conducted through
interviews at a later stage from step 6. The DM1 was asked about insourcing or
outsourcing within the sub-criteria listed in the model. In step 8, a sensitivity analysis was
done to verify the decision robustness of step 7 as described by Goodwin and Wright
(2004). To increase the reliability in our results, a comparison between the applied model
and two other methods was made: SMARTER following recommendations from
Edwards and Barron (1994). To perform steps 5 to 8, visual interactive sensitivity
analysis (VISA) software was used for SMART + ROD and SMARTER.

3.1 Criteria evaluation

According to Aguezzoul (2014), the criteria often used to select suppliers are in this order
of importance: cost, relationship/cooperation, services, quality, information system/
equipment, flexibility and delivery capability. The authors also mention others:
professionalism, financial position, location and reputation. Ho et al. (2010) also report
that for logistics suppliers/operator selection, the most common criteria are, in this order
180 L.E. da Silva et al.

of importance: quality, delivery capability, price/cost, manufacturing capability, service,

management, technology, research and development, finance, flexibility, reputation,
relationship, risk, and safety and environment.
The criteria established by Rezaeisaray et al. (2016) for logistics suppliers selection
are the following in order of importance: business development, focus on basic activities,
order delays, bad performance history and reputation, cost/price, on-time delivery,
transportation cost, supplier’s capacity limit, geographical distance, product quality,
flexibility and agility, facility and technical capability. This highlights that cost is not
always the most relevant criterion, but it can be as mentioned in Kumar and Singh
(2012). For this study, four main criteria were identified and branched into 22 sub-criteria
(see Figure 2). The structure of this value tree was made after conducting a literature
review, as well as analysing decision makers’ considerations and validation through a
structured interview (see Table A2 – Appendix) in order to address the decision makers’
concerns in a useful way, ensuring recommendations put forward by Keeney and Raiffa
(1993).

Figure 2 Value tree model

After the DM1 listed their order of preference (from the most important to the least
important) in relation to the sub-criteria and criteria, the weights were assigned according
to the following example: as for the cost criterion the order of preference of the four
sub-criteria were profitability, minimum cost, price and return. Table 3 (ROD weights)
assigns the weights 0.419, 0.298, 0.191 and 0.092, respectively, to the four sub-criteria.
 Outsourcing or insourcing logistics activities 181

This was repeated until a weight was assigned to each sub-criteria and criteria, as can be
seen in Figure 2.

3.1.1 Costs
To analyse this criterion, the financial analysis prepared by the company’s controllership
department was considered, compared to the costs incurred by 3PL; i.e., the costs
inherent to insourcing and outsourcing of the process.
First, for financial analysis, the necessary operation was performed for the
aforementioned centralisation of the structure over the ten-year period. Based on
projected sales volumes for 2018 and other years, the construction of a DC with an area
of 11,500 m2 was calculated, which would be operated by 36 logistics operators, eight
administrative analysts and comprise nine pieces of equipment, mostly forklifts, electric
pallets and manual pallets. For the purpose of analysis, the market land cost of
approximately R$1,200.00/m2 was considered to construct a new DC. In addition, the
analysis considered, from a financial point of view, the opportunity cost of the land from
20,000 m2 to R$70.00/m2 based on the real estate market of the region. The operation
design was based on concepts of chronoanalysis and productivity, keeping in mind the
profile of the operation, the product weight and type of storage. As a result, we reached
an operating cost of R$2,453,824.00 per year, already considering the depreciation of
investments in equipment and building construction.
Secondly, the cost of the current structure of the company was analysed, considering
that it operates with an outsourced logistics provider. Using the same assumptions of the
previous case, the annual cost of operation was calculated. The total cost was around
R$8,994,000.00, resulting in 357% higher than the insourcing alternative. On the other
hand, for the insourcing alternative to materialise, R$18,178,466.00 needs to be invested
in building the DC, purchasing equipment, land and a logistics structure (pallets, metal
structure and signalling). Thus, although there is a significant reduction in annual
operating costs, the investment would only generate a return 5.7 years after its
construction and operation.
Considering the overall result, an average indicator was created by dividing the cost
of each alternative with the projected weight of the goods to be transported and stored,
provided by the business intelligence system of the company, which was identified as
price. This criterion is widely used in logistic cost analyses (Turkensteen et al., 2011).
Regarding the minimum cost and profitability sub-criterion, the fixed cost required to
meet each proposal and the monetary difference obtained by switching to the least costly
system (verticalisation) were considered. For the return sub-criterion, a qualitative scale
of five positions was considered: very bad (low or no return), bad (low return), regular
(expected return), good (return above expected) and very good (return much higher than
expected).

3.1.2 Benefits
For this criterion, six sub-criteria were evaluated, within a qualitative scale based on the
decision-makers’ opinions. Their weights were also attributed respecting the opinion of
the most experienced professionals. Among the evaluated sub-criteria are: flexibility,
working conditions, risk, reputation, innovation, and responsiveness. The scales adopted
for such criteria are: very bad, bad, regular, good and very good.
182 L.E. da Silva et al.

For the flexibility criterion, how much flexibility there is in the insourcing and
outsourcing operation was evaluated. In the working condition criterion, the number of
labour lawsuits related to working conditions was compared, which was divided by the
number of employees of each logistic operator and the company. Risks were measured in
two ways: firstly the legal risks inherent to each operation and, secondly, work risks,
comparing each alternative according to its characteristics. Reputation was applied by the
decision makers considering the reputation perceived by the client, using satisfaction
surveys previously performed by the company. Finally, the innovation and
responsiveness criteria were based on the perception of the respondents (decision-
makers) who judged the performance according to the current characteristics of the hired
logistic operator compared with the performance of the organisation.

3.1.3 Performance
For this criterion, three sub-criteria directly related to the logistics operation performance
of a DC were considered, namely: operational performance, delivery performance and
capability. To measure operational performance, the number of pallets received and
shipped at the expected time was considered, according to the information provided by
the current company logistics operator. For the potential scenario of insourcing the DC,
the average receipt and dispatch of the plant was considered, also considering the
potential risks related to managerial inexperience.
With regards to delivery performance, the delivery assertiveness was evaluated, i.e.,
how many pallets were delivered to customers and distributors at the expected time. The
information considered is based on the current logistics operator performance and, for the
scenario analysed (DC insourcing), the average shipping from the plant to the outsourced
logistics operators was evaluated.
Finally, for capability, the possibility of increasing the operation for specific periods
was evaluated. In the market W company belongs to, for some periods during the year,
delivery flow increases to 85% due to the specific climate that increases its demand.
Some logistics operators are not able to handle such a demand increase, having an impact
on many indexes. For this evaluation, a qualitative scale was considered, regarding the
decision maker’s assessment on the current logistics operator and the future scenario:
very bad (low or almost zero capability of demand increase), bad (low capability of
demand increase), regular (regular capability), good (expected capability of demand
increase) and very good (higher capability of demand increase).

3.1.4 Service
For the service criterion, which evaluates the service level of an operation, five
sub-criteria were considered, divided into four more evaluation sub-criteria, which are:
quality; stock accuracy; service effectiveness; lead time, surge capacity, deadline,
deadline offered, expansion and opening of new DCs.
For stock accuracy, service effectiveness, lead time, deadline offered and deadline
sub-criteria, the current level of the logistics operator employed by the company was
considered compared with the service level provided by the plant in its reception and
shipping operations.
For quality, expansion and opening new DC sub-criteria, a qualitative scale was
adopted also based on the performance level of the current operator and the plant service
 Outsourcing or insourcing logistics activities 183

level assessment. The scales considered for such sub-criteria were: very bad, bad, regular,
good and very good, respecting their weight in the global analysis within the most
experienced decision maker’s decision.

4 Results and discussion

4.1 Company current scenario

Currently, the company concentrates its production on eight production plants, all located
at the same site in the city of Sorocaba. All feedstock reception, stocking and supplying is
local. Finished products are firstly stocked in an internal DC, and then distributed to the
subsidiaries located in the states of Paraná (PR), Rio Grande do Sul (RS), Santa Catarina
(SC), Mato Grosso (MT), Bahia (BA), São Paulo (SP) and Goiás (GO), and then
delivered to the customers through outsourced transportation (see Figure 3). In the
industrial complex, there is enough room to build more DCs.

Figure 3 Macro operating flow of the studied company

4.2 Evaluated assumptions

Before developing an analysis on the main subject of this article (outsourcing/
insourcing), regarding product distribution of the company, some important issues must
be discussed to continue this analysis. These issues are perceptions of interviewed DM1
expertise that were not listed neither in the original questionnaire nor in the surveyed
documents (Flynn et al., 1990; Voss et al., 2002). Figure 4 presents an illustrative
scheme, and these questions were positively answered by the company. The DM1 stated
that when deciding between insourcing or outsourcing, one must take into account
184 L.E. da Silva et al.

resource availability (capital and physical), management model, and market trends, which
is in accordance with van Damme and Amstel (1996).

Figure 4 Analysis assumptions flow

x Resources availability
In any project or development, the need for financial expenditure is inherent to its
accomplishment. Thus, the capital expenditure (CAPEX) concept arises, which is the
amount of money spent on buying assets from a specific company and/or the
invested capital to develop a project. For this reason, the available funding of the
company needs to be evaluated so that the study can progress. Physical availability
may also be considered. Many projects or expansions often do not happen due to a
lack of space available, requiring the company to take the decision to move to a new
site or to maintain the current structure, and outsource it.
x Management model
Each company is managed based on characteristics of values and beliefs that are
established by its main director. Some companies tend to develop centralised
control, whereas other companies tend to develop decentralised management, which
supports the acceptance or not of outsourcing some activities as the preferred
governance structure of the company, as addressed in TCE (Dabhilkar, 2011;
McIvor, 2008). Therefore, a previous evaluation on the distribution centralisation or
decentralisation willingness is required in order to continue with the analysis and
studies.
x Market trends
A market trend identified in the CEL/COPPEAD (2009) survey describes how
economic expansion or retraction influences centralisation or decentralisation of the
company. In an entirely booming market, where economic growth is increasing, the
trend to centralise activities prevails, as the indirect profit margins coming from
outsourced activities end up affecting the company’s financial result. In a shrinking
market, outsourced activities stand out, since fixed costs to keep the core activities
lead to low-return additional costs, and within RBV, companies seek competitive
advantages in their core competences, comparing their internal available resources
with the ones available on the market (de Neves et al., 2014; Prahalad and Hamel,
1990).
 Outsourcing or insourcing logistics activities 185

4.3 Results and sensitivity analysis

The weight of each criterion and sub-criterion was obtained through steps 7 and 8,
respecting the DM1’s opinions (Figure 5). The benefits and costs criteria presented the
highest weights, followed by performance and service.

Figure 5 Weights for criteria

It was observed that the insourcing alternative was the recommendation to be

implemented, with a general score of 60 points (Table 4). The insourcing alternative had
a better performance in the costs (9 points) and benefits (25 points) criteria, but tied with
outsourcing in the performance (17 points) and service (9 points) criteria, suggesting the
well-known conflicting trade-off pointed out by Dabhilkar (2011), costs against benefits
in outsourcing decisions. However, it is important to note that the application of the
proposed model for this analysis is influenced by market trends and the experiences and
knowledge of the decision maker, and other boundary conditions, such as a group of
decision makers, which can change the result as pointed out by (Goodwin and Wright,
2004).
Table 4 Outsourcing and insourcing alternatives scores

Criteria
Method Alternative
Costs Benefits Performance Service Total
SMART + ROD Insourcing 9 25 17 9 60
Outsourcing 3 21 17 9 49
SMARTER Insourcing 8 26 13 6 53
Outsourcing 2 28 13 6 49

Goodwin and Wright (2004) describe that sensitivity analysis is used to examine how
robust the choice of an alternative is to changes, in the figures used in the analysis.
Therefore, sensitivity analysis was performed between the sub-criterion: risks (the second
most weighted); and the criterion: benefits (the most weighted). Thus, the risks weights
ranged from 0 to 100, and the results can be seen in Figure 5(a). To obtain a change in the
alternative chosen for the benefit criterion, the risks weight needs to be higher than 0.38
points. However, in order for the outsourcing alternative to become more attractive than
186 L.E. da Silva et al.

insourcing, the risks weight needs to overcome the 0.51 units, as can be seen in
Figure 5(b), which is an increase of 0.21 units from the current weight (0.29).

Figure 5 Sensitivity analysis

(a) (b)

To verify alternative performances and increase the reliability of the model proposed
(SMART + ROD), the SMARTER model was applied, considering the same criteria and
sub-criteria, respecting the DM1’s preferences. Figure 5 demonstrates that the ROC
method of elicitation produces a higher value of the risks criterion, given the higher
importance attributed to this criterion over other ones. Even though the insource
alternative was higher than outsourcing, considering the sum of all criteria, the difference
was 53 compared to 49 points. In the SMART + ROD method, the performance and
service criteria remained tied in the SMARTER method, thus confirming the trade-off
pointed out by Dabhilkar (2011). Despite differences in the final weights in both
methods, Roberts and Goodwin (2002) state that ROD overcomes ROC because it offers
a better approximation to the original weights when determined without any initial
restrictions, as occurs in the direct rating method, and is then normalised, which is a
common procedure in SMARTS analysis.
The validation of the proposed method was performed with the comparative basis
between two methods of analysis, SMART + ROD described here and SMARTER
following recommendations from Edwards and Barron (1994). The comparison between
two methods is important to increase the system’s trust base, since the databases are
similar and reinforce the results (Jalalvand et al., 2011). In addition, the decision to
insource the warehouse activities taken by the decision makers in the current case
corroborates with the decision supported by the proposed model. One of the decision
makers has 29 years of experience (see Table A1 – Appendix), which is a remarkable
time to consider his evaluation. Another point is that the data collection and validation of
the decision model occurred through the triangulation of sources (interviews, personal
observation, informal conversations, questionnaires and conversations by e-mail, as well
as company system reports) considering the steps used in the methodology (Voss et al.,
2002).
 Outsourcing or insourcing logistics activities 187

5 Conclusions

To help the decision-making process in company W, between outsourcing its DC

activities or not, a decision structure with four criteria and 22 sub-criteria (qualitative and
quantitative) was created, taking the literature and considerations of company W’s
employees related decision-making into account. Evaluation of the criteria showed that
costs are not always the most relevant criteria, in agreement with the studies by Ho et al.
(2010) and Rezaeisaray et al. (2016). A SMARTS decision model was applied with the
ROD elicitation weight method due to it being easy to use compared to the swing weight
method, commonly applied in SMARTS. The comparison with SMARTER showed that
the applied model is viable and provides a robust choice.
Thus, the W company decided to build and maintain a DC, insourcing all of its
operations. Based on financial analysis and consolidated statement of cash flows (CSCF),
this kind of investment would generate return in 5.7 years. In practice, however, the
investment in the DC generated return in 2.4 years, also achieving flexibility and quality
improvements of the delivered material. Nevertheless, the score difference between
insourcing and outsourcing an operation is not so significant (11 points), and their
benefits are characterised as the key point for decision-making. We suggest careful
evaluation of its impacts and gains throughout the whole operation.
We believe that the main contribution of our work is to describe the implementation
of the SMART + ROD methodology as a tool help make decisions to outsource or not a
logistics activity. For future research, the adoption of grouping weights allied to
SMARTS is welcome, if this decision is strategic, and if the opinion of more managers is
considered in order to avoid some bias from one decision maker. Mathematical
aggregation seems to be the best way to do this (Goodwin and Wright, 2004). Moreover,
the model can be improved by using direct rating together with the value functions for
criteria such as service level and risks in order to better assess the alternatives according
to the decision makers’ preferences.

Acknowledgements

This work was supported by FAPESP (Grant #2017/06074-7), CNPq (Grant

#309516/2016-1) and CAPES.

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Appendix

Table A1 Characterisation of the interviewees

Decision makers DM1 DM2 DM3

Age (years) 51 46 41
Experience (years) 29 23 17
Current position/ General manager of Logistics manager/2 Logistics supervisor/3
time (years) logistics operation/3
Main function Warehouse Production planning Warehouse
management planning inventory management inventory
management cost management freight management
reduction projects management production planning
Previous Finance manager/2 business analyst/8 Logistics analyst/5
experience/time operations manager/8 logistics supervisor/4 cost analyst/3
(years) road and rail project
manager/3
Interview duration 5h 3h 3h

Table A2 Questionnaire applied to DMs

Structured interview – Step 3

1 Could you give us a brief description of your curriculum, as well as the position that you
currently occupy in the company?
2 What are the current processes like in the company logistics department?
3 Are these processes outsourced or is the company responsible for their effectiveness?
4 Considering potential outsourcing of the company distribution centre, which criteria would
be evaluated for this decision?
5 Which external factors would you consider relevant for further studies to outsource the
distribution department?
Structured interview – Step 6
1 Within this criteria tree (previously drawn up, based on the existing literature and on
specialists’ opinions), do you agree or disagree with the criteria selected for evaluating
potential outsourcing of the distribution centre?
2 If you disagree, what are the reasons?
3 Would you add any other criteria to this analysis? If yes, which ones and why?
Structured interview – Step7
1 In your opinion, and based on your previous experience, how do you evaluate the criteria
and sub-criteria mentioned below, considering the following alternatives: outsourcing or
insourcing?
2 According to the chosen alternative (outsourcing or insourcing) and based on the criteria
tree attached, what would your final decision be, considering the company you are currently
working for? – would you add any other criteria to this analysis? If yes, which ones and
why?

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