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Abstract
The Abu Dhabi Ports Company is currently experiencing an upsurge in maritime traffic. The development exerts pressure on its core functions and affects the efficacy of non-core functions like procurement. The overall performance of the organisation depends on the collective improvement of the companys operations. In the current paper, it was proposed that the functions of ADPCs procurement department should be outsourced to Teraji. It was found that outsourcing is essential in reducing operational costs and improving overall performance at ADPC. The study employed a quantitative and qualitative approach. To this end, secondary and primary sources of information were used. It was concluded that ADPC stands to benefit if it outsources the aforementioned operations to Teraji. The reason is that Teraji has a proven record of efficient procurement in the market.
Introduction
Overview
Outsourcing involves the process where one company contracts another firm to provide services or goods that are not core to its business operations. In light of this, procurement outsourcing can be viewed as the situation where purchasing and other services involved in procuring inputs is carried out by an external agent on behalf of another company. There are various reasons why business organisations opt to outsource some of their operations. For example, the process allows the firm to concentrate its resources on its core business. As a result, outsourcing is seen as one way of enhancing the efficiency of the organisation. Another reason is that contracting another company to provide non-core services may be cheaper for the firm than engaging in those undertakings. As such, the profit margins of the outsourcing firm are increased. In addition, the contracted organisation may be experienced in the provision of the outsourced services. The development improves the quality of services offered by the contracting entity.
The current study examines the benefits of outsourcing in a company operating in the Middle East. The analysis revolves around Teraji, which is a leading procurement company in the region. According to Huber and Minahan, a comprehensive assessment of the operations undertaken by such procurement firms allows a company to make an informed decision before outsourcing (5). In this case, the organisation that intends to outsource its procurement operations is Abu Dhabi Ports Company (ADPC).
Background Information
The process of outsourcing procurement operations requires insight into the general framework of this undertaking. To address this objective, the current study primarily investigates the need to outsource. The investigation is made with reference to ADPC, which is experiencing an increase in maritime activities. The increased maritime undertakings have exerted pressure on the core operations of the port. The situation has led stakeholders to explore whether outsourcing some non-core functions is a viable option for the company or not (Huber and Minahan 3). To this end, Teraji is regarded as the suitable company in terms of procurement outsourcing. However, a conclusive decision can only be realised once an assessment of Terajis efficiency has been conducted to determine its merit.
It is important for ADPC to consider outsourcing its procurement activities to an external agent. The reason is that procurement plays an important role in the operations of the company. It supports the core competencies of the organisation. AlHammadi argues that procurement is not regarded as a core function in many organisations, meaning that it can be carried out by another firm (7). In addition, ADPC is largely a logistics based company, making procurement a subsidiary role. Nonetheless, the process remains an important function in the company as it is one of the activities that take place in all the three-core competencies.
Procurement processes tend to be very complex by nature. Given that they are not core to the running of the organisation, they may impede the overall performance of the company. The best way through which ADPC can focus on its primary goals involves outsourcing the procurement functions as suggested in this report. In light of this, the current research undertaking seeks to investigate the feasibility of outsourcing ADPCs procurement operations to Teraji Services.
In procurement outsourcing, a company transfers all (or a major part) of its logistics functions to third party companies (Huber and Minahan 3). In this case, Teraji acts as the third party entity in reference to the procurement functions carried out on behalf of ADPC. The primary objective of this form of outsourcing is to cut down on operational costs. Huber and Minahan argue that the undertaking is essential to the running of an organisation as it gives the company the opportunity to concentrate on other important business operations (3). The core operations of a company like ADPC are measurable. The efficiency of such activities depends on the companys ability to effectively manage its fleet in all commercial seaports around the world. As a result, it is necessary to outsource some of the activities that are not closely related to the organisations key performance indicators.
The major functions of ADPC involve swift response to maintenance, refurbishment, and improvement of all the ports under its jurisdiction. Considering the size and capacity of the ports in Abu Dhabi, such operations are extremely strenuous to the company involved. They may drain the resources of the organisation if they are not properly managed. Such operations also require high levels of procurement and inventory management. Jaunie argues that in such situations, the procurement and inventory operations mentioned earlier become supplementary activities (4). Such operations can be carried out by a third party as envisioned in the intended outsourcing program to Teraji.
ADPC can only effectively focus on its core operations by contracting a third party to handle its procurement activities. The contracted company should be a reputable and formidable entity in the procurement field. Such a company should be capable of carrying out the outsourced operations using modern technology. Teraji is an electronic marketplace that facilitates real time trading between different companies. The transactions between the various parties are conducted over the internet. Teraji has an experience of more than ten years in internet procurement and offers excellent services to many companies located in the Arab Gulf (AlHammadi 45). In addition, the company offers extensive internet based procurement and logistic services to its clients. A recent market survey indicates that over 100000 clients are currently using Terajis internet-based purchasing systems. As a result, the company is well known for its honest, cost-efficient, and excellent procurement procedures.
When ADPC outsources its procurement activities to Teraji, it will get more time to focus on its core operational activities. The management will be able to channel the resources available to the company into these core undertakings. As already mentioned, procurement is a major element that is need for ADPC to accomplish its core operations. Kalakota and Marcia argue that sourcing for goods and services regarded as more of a secondary than primary operational function (90). Nonetheless, the activity is an important driver of the companys success. Consequently, there are no considerable risks associated with outsourcing the procurement operations of Abu Dhabi Ports Company to Teraji.
Thesis Statement
Over the past number of years, Abu Dhabi economic growth has put a strain on the management of the countrys fleet of ocean vessels. The companies operating in this sector have experienced tremendous growth as a result. According to Kalakota and Marcia, it is important for organisations in the maritime industry to focus on accomplishing their core competency activities (10). Huber and Minahan refer to procurement as an element of company logistics (2). Huber and Minahan are of the opinion that sourcing for inputs can be considered as a non-core activity in a firm (2). When a company focuses on such activities, it ends up straining put a strain on its resources. As a result, the overall performance of such an organisation is affected negatively. The thesis statement adopted in this study revolves around this reality. To this end, the author of this paper holds that outsourcing of procurement activities improves the overall performance of a given company.
Rationale for ADPCs Outsourcing of its Procurement Operations
The major functions of ADPC, as mentioned earlier, involve the maintenance and development of seaports around the country. Functions like customer care, procurement, and marketing may be regarded as essential operations informing the performance of the firm. However, these activities are not at the centre of the companys operations. On the contrary, they revolve around the periphery of ADPCs commercial undertakings. In light of this, Huber and Minahan recommend that such non-core operations should be outsourced to third parties (3). Such a move has the potential to improve the companys overall performance. Increased maritime activities in the region imply that expansion and such other functions are inevitable. As a result, it is important to outsource to save the resources that can be used for the intended expansion.
The effective implementation of the proposed outsourcing program will ensure that Abu Dhabi Ports Company maximises on its resources. Wastage will be curbed as the organisation will be able to focus on other activities. As a result, the companys core operations of will be enhanced (Jaunie 4). In essence, outsourcing of procurement activities will enable ADPC to realise its intended growth objective in the future.
It is noted that fleet flow in Abu Dhabi has increased with the expanding economy of the nation. As a result, the management of ADPC should put in place measures to improve the companys performance. The aim is to ensure that the organisation can effectively handle the increased businesses in the ports. One of the ways to achieve this is to ensure that the company limits its key performance indicators to the available resources (Kalakota and Marcia 56). To this end, ADPC should contract third parties to handle some of the activities that are time consuming on its behalf. Evidently, the procurement department appears to be one of the major agencies involved in non-core activities that can be handled externally at less costs to the company. Teraji has a wide presence in the Middle East and other regions. As such, it is best suited to provide the outsourced services.
Objectives of the Study
The current study has one major objective and two specific objectives. The specific objectives are used to accomplish the major goal of the paper.
Major objective
To analyse how ADPC stands to benefit by outsourcing its procurement operations to Teraji.
Specific objectives
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To illustrate the importance of outsourcing.
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To achieve this objective, the study will analyse existing literature on outsourcing and present the benefits and costs associated with such an undertaking. Depending on the needs identified at ADPC, the specific importance of outsourcing to this firm will be outlined. According to AlHammadi, contracting third parties to provide functional activities is necessary if a company stands to benefit from the process (12). Consequently, the importance of outsourcing with regards to ADPC will be highlighted in the paper.
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To determine the efficiency of Teraji as the preferred company to outsource to.
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Teraji will be assessed in terms of its procurement capabilities. The study will examine existing literature on the performance of Teraji in previous outsourcing contracts. After a thorough analysis, the necessary recommendations will be made to ADPC in relation to the suitability of Teraji.
Research Questions
Any research undertaking should respond to the objectives identified for the study. According to Creswell, structured research questions are important in addressing the said objectives (170). In point form, the following are the questions formulated for this study:
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What is implied by outsourcing?
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What are the different kinds of outsourcing?
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Does ADPC need to outsource some of its operations?
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What operations require outsourcing at ADPC?
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What companies are best suited to handle the operations to be outsourced by ADPC?
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How efficient is the proposed company in handling the outsourced operations?
Structure of the Paper
The study has five chapters. The first chapter is the introduction and it lays the foundation for the orientation of the study. The literature review is covered in the second chapter. In this section, fundamental aspects of the study are illustrated based on the findings made in previous studies in this field. For instance, the overall benefits of outsourcing and the track record of the selected company are analysed. In the third chapter, a presentation of the research methodology is laid out. The research design is clearly outlined.
In the fourth chapter, the results of the study are presented. The findings are presented together with discussions on the same. The final chapter incorporates the recommendations made regarding the efficiency of Teraji. The recommendations are intended to help ADPC to make an informed decision with regards to the proposed outsourcing of procurement operations. The chapter concludes by providing a rationale for outsourcing and how it can be used in other companies.
Chapter Summary
Chapter one is an introduction of the research to be carried out in this paper. The chapter begins by providing background information on the research involved. Details touching on the viability of outsourcing operations on the part of ADPC are outlined. In the background section, an outline of procurement and potential to outsource is provided. Further, a link between ADPC and Teraji is established. The idea is to illustrate the importance of contracting external agents on the part of ADPC while portraying Teraji as a suitable option for the same. In addition, chapter one outlines the problem statement where the actual need for ADPC to outsource is highlighted. The objectives of the study are provided in this chapter.
The next chapter is a literature review. The findings made in previous studies touching on the subject matter are reviewed. The literature review builds on the research to be conducted in this paper.
Literature Review
Overview
There is an expansive database of literature touching on outsourcing in general and among maritime companies in particular. According to Huber and Minahan (2), external contracting is an effective way to cut down on operational costs without affecting the overall quality of service delivery in a given company. In this section, an insight into the world of outsourcing is provided. The intention of this literature review is to determine the suitability of Teraji as a suitable firm for procuring on behalf of ADPC. According to Huber and Minahan, the selling point of procurement outsourcing involves the effectiveness of the company in handling e-procurement (5). To this end, e-procurement and Terajis capability to carry out these functions are outlined with the help of the available literature in this field. The literature review will also help to highlight the major benefits associated with outsourcing among companies that have done it in the past.
Outsourcing: A Brief Summary
There are instances where an organisation finds it necessary to contract another company to carry out some of its operations. AlHammadi refers to such a business proposition as outsourcing (10). Under such contractual terms, the company awarded the tender has its own workforce who carry out the operations in reference. In most cases, the contracted organisation is a specialist in the particular area of outsourcing. In their study, AlHammadi found that outsourcing is regarded as an independent niche in the market (10). AlHammadi observes that some industries record higher instances of contracting external agents than others (10). For example, companies that outsource services are mostly those involved in information technology and human resource management. Tibbo (as cited in AlHammadi) points out that engaging a third party is also a common phenomenon among businesses that have large facilities, such as those operating in the healthcare sector (10).
In most cases, the companies involved in outsourcing contract external operators to provide services related to customer care. Lin, Pervan, and McDermid are of the opinion that most organisations lack employees skilled enough to deal with the provision of customer care services (166). Consequently, the customer care aspect of business operations is outsourced to companies with an excellent track record in this field. Plunkett Research (as cited in AlHammadi) found that third party contracting is a common phenomenon in most mid to large sized enterprises (11). Such companies are interested in making sure that their core operations are not affected by fringe activities, creating the need for outsourcing.
As already mentioned, companies that outsource do so based on the need to increase their performance in main operations. Cole and Stratton (as cited in AlHammadi) carried out a survey in London to determine the impacts of outsourcing on companies (4). Most of the organisations included in the survey were operating in the information technology sector. The study revealed that 4 out of the 7 firms surveyed recorded increased sales after outsourcing their call centres. From the studies cited above, it becomes clear that contracting third parties is one of the best ways of improving the companys overall performance.
Types of Outsourcing
Engaging the services of an external agent is a construct of contemporary business world that can be broken down into different categories. Quayle (as cited in AlHammadi) carried out a study to find out the effects of outsourcing on different firms (23). In the course of the study, Quayle found that this procedure is a structured concept with different classes. Figure 1 is an illustration of the types of outsourcing available:
As illustrated in figure 1, outsourcing has three main categories. AlHammadi suggests that the undertaking can be determined depending on location, depth, and work involved (32). For example, a company can decide to outsource given operations depending on the location where the services are needed or where they are generated from. Such activities can either be carried out within the precincts of the company (onsite) or elsewhere (offsite). Notwithstanding the location selected, the outsourcing company retains its workforce. Their employees are separated from those of the contracted firm.
Powers (as cited in AlHammadi) found that offsite outsourcing can further be categorised into three (32). The three are onshore, near-shore, and offshore outsourcing. Powers found that onshore type of outsourcing was beneficial in a number of ways. For instance, AlHammadi holds that problems related to cultural barriers are avoided when onshore contracting is adopted (32). In addition, AlHammadi found that the variance in geographical locations brings about time zone related challenges (32). Onshore outsourcing overcomes these shortcomings. Lin et al. argue that most Middle Eastern Companies prefer this form of outsourcing (167). To this end, Terajis capabilities to carry out onshore outsourcing make it an ideal choice for ADPC.
The second category, as illustrated in figure 1, is depth-based outsourcing. While analysing the importance of outsourcing, AlHammadi found that this form of external contracting can be further categorised into three (33). The categories are based on competency, individuality, and functionality of the process. Companies carry out their operations through different departments. The individual type of outsourcing is noted when the organisation decides to outsource the person who runs a particular department. According to AlHammadi, companies like Etihad and Jumeirah have outsourced individual heads, bringing about positive results (33).
When a company decides to outsource a functional department like procurement of IT support, such a move can be referred to as functional outsourcing. To illustrate this element, Huxley and Morntes (as cited in Lin et al.) carried out a survey on the efficiency of maritime operations in Singapore (179). They found that one of the reasons behind the countrys efficient maritime sector is the outsourcing of container freight services. According to Huxley and Morntes, Maersk, one of the worlds most popular logistics company, was contracted to handle containers in the countrys sea ports. As a result, the Singaporean Port Company was able to effectively handle the core berth operations. ADPC can adopt such a functional form of outsourcing. The move will enable the company to concentrate on its core functions. The other type of outsourcing, which is referred to as work, has 2 categories. It is illustrated in figure 1 above.
E-Procurement in Maritime Business
Overview
Efficiency in contemporary business landscape has received a major boost from the emergence and subsequent advancement of the internet. According to Jaunie, today, the emergent ideas, connected with quality, responsiveness and the elimination of waste, have focused attention on the supply-chain, and hence on supply (p. 14). Jaunie points out that the procurement department in most large organisations has some value addition connotations (14). The term procurement can be loosely defined as the purchase of goods from a supplier. Jaunie argues that process also includes the logistics involved in the transportation of the said goods and their handling while in storage (14).
E-procurement involves the use of technology to facilitate the process described above. In a study to examine chain management and procurement, Chaffey (as cited in Jaunie 15) provides a working definition of e-procurement. Chaffey defines the concept as the electronic integration and management of all procurement activities (Jaunie p. 15). The activities referred to in the definition include purchase request and authorisation. They also involve placing orders, making deliveries, and ensuring that all payments (between the supplier and the purchaser) are settled. When settling for an outsourcing company, one of the factors taken into consideration is their technological base. E-procurement is considered as an advanced form of technology.
The concept of e-procurement is associated with a number of characteristics. As the name suggests, the system operates purely on electronic media. Jaunie outlines the essentials of e-procurement by making reference to Electronic Data Interchange (EDI) applications (14). The applications are regarded as the earliest forms of electronic procurement. Features like the internet and advanced software have made this form of sourcing a more flexible and affordable alternative. AlHammadi gives examples of companies that have adopted in-house e-procurement systems (54). Such organisations include Rolls and HP. Teraji, a leading company in the procurement industry, is also one of the companies that have adopted the e-procurement system.
Benefits of e-procurement
A number of studies have found that e-procurement is associated with various benefits. The implication is that an organisation stands to benefit variously from the adoption of this form of sourcing. Jaunie argues that most of the literature on such benefits covers the wide areas of chain management and logistics (43). The advantages of e-procurement are attributed to the efficiency and effectiveness of this method. According to Kalakota and Marcia, this form of procuring is regarded as efficient due to the following reasons:
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It has faster time cycles compared to other methods.
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It helps in the reduction of unauthorised and unwanted purchases.
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It cuts down on procurement costs.
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It helps the company to coordinate all the systems associated with procurement.
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The effectiveness of e-procurement is brought about by a number of factors. For instance, it leads to increased control over a companys chain supply mechanism. In their study, AlHammadi provides more insight into the effectiveness of e-procurement (45). AlHammadi hypothesises that this form of sourcing has an effect on management (45). After examining five companies in the Middle East, AlHammadi found that e-procurement allowed for a proactive management of information relating to all procurements carried out (45). E-procurement has a valuation element that helps companies to acquire the best equipment for their operations.
Procurement outsourcing companies make use of e-procurement systems to enhance the quality of their clients functionalities. In a study by Kalakota and Marcia, it was observed that companies resort to outsource procurement to improve the processing of the related information (88). AlHammadi holds that there is an emerging trend in the Middle East where companies and governments are sourcing out certain functional operations (45). The factor behind such undertakings is the inability of the said organisations to efficiently and effectively handle large volumes of procurement related information.
In general, e-procurement ensures that the purchasing process is streamlined. Huber and Minahan cite the port of Singapore as an example of how a streamlined purchasing process hastens the entire procurement cycle (4). Sourcing out procurement operations to a company with e-procurement capabilities reduces administrative costs. Companies like Total and HP have realised the benefits of e-procurement. Organisations like ADPC should follow suit owing to their lack of capacity to handle procurement on their own.
The Competency of Teraji in Relation to Procurement Outsourcing
Companies that involved in procurement outsourcing are required to meet certain criteria set out by their clients. AlHammadi argues that the first consideration made with regards to the selection of a procuring company involves its financial capabilities (56). Jaunie evaluated leading companies in the industry to illustrate this point further (56). Teraji is one of the companies whose impacts in the area of procurement outsourcing cannot be ignored. In their study, Jaunie found that Teraji has a presence in 11 countries across the globe (56). The only way a company can spread its operations to this level is by drawing on its financial muscle. An analysis of the companys financial records revealed that it has over $80 million in revenues.
The strength of a company is determined to a large extent by its financial prowess. Lin et al. argue that in most cases, large corporations have huge procurement demands (171). A company that lacks sufficient operating capital cannot manage the tasks envisioned in the procurement contract drawn by these large corporations. In their evaluation of procurement outsourcing companies, Jaunie found that Teraji has a sound financial record (56). The record was made apparent after a review of an earlier deal entered into between Teraji and Dubai Airports. A separate study by AlHammadi mentions Dubai Airports as one of the busiest hubs in the Middle East region (64). The procurement requirements of such an organisation are equally many. Jaunie credits the success of Teraji in securing the procuring deal to its sound financial backbone (56).
As already mentioned, e-procurement is essential to the operations of a company involved in procurement outsourcing. Huber and Minahan attribute this requirement to technological advances (4). Several studies have intimated on the important role that a companys technological capabilities play in its operations. Teraji has in the past demonstrated such capabilities in relation to the efficiency and effectiveness of its activities. The study by AlHammadi mentions how the Government of Dubai commended Teraji for its adoption of e-procurement (67). According to AlHammadi, the software employed by Teraji is one of the best in the industry (57). The implication is that the company is up to date with advancements in technology.
The technological advancements notwithstanding, procurement still requires a human interface. According to Jaunie, e-procurement is only as effective as the workforce trained to carry out its activities (43). In relation to Teraji, AlHammadi cites that the company has a workforce of 550 individuals (67). The employees are scattered all over the world. An audit by the Dubai government (as cited in Jaunie) makes reference to the highly skilled labour at Teraji (43). Lin et al. suggest that procurement outsourcing deals with large corporations and requires a highly skilled workforce (180). Such a labour force is important as it guarantees the quality of the said outsourcing.
Outsourcing in the United Arab Emirates
The economic might of the United Arab Emirates (UAE) in relation to the global economy cannot be ignored. AlHammadi refers to the region as an important economic hub in the world (19). In 2010, the World Bank estimated that UAE market has a net worth of about $1 billion (AlHammadi 18). Consequently, most of the sectors in the countrys economy have embraced technological advancements to keep up with the growth. Of particular interest is the upsurge in the number of IT companies setting up shop in the region. The increased activity in this sector is attributed to the rise in the demand for both hardware and software. AlHammadi suggests that the technological undertakings in the region may be higher than those recorded in developed countries (19). The realisation has led to the emergence of IT outsourcing.
The progressive growth of the UAE market has made it possible for I.T. outsourcing to thrive in the region. Lin et al. estimates that the country entered into the frenzy of outsourcing as early as 2002 (163). At the time, Lin et al. estimated the size of I.T. expenditure in the region to be more than $200 million (163). The economic boom in this sector was witnessed in 2005 (Lin et al. 163). The increased growth led to an unprecedented increase in I.T. expenditure to the tune of $400 million. The increased business activities in the industry saw clients demanding for better services, necessitating the outsourcing of certain operations.
In the UAE, there is goodwill from the government as far as outsourcing is concerned. Kalakota and Marcia argue that companies operating in the region are obsessed with the provision of high quality goods and services (34). Outsourcing enables various government organisations to focus on their core duties. AlHammadi points out that in 2005, 30% of public organisations in Dubai had outsourced some of their peripheral functions (33). AlHammadi attributes this to the support given by the government to the outsourcing industry (33).
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