Describe about the Logistics and Operation Management of Shell's Outsourcing?
In today’s business organization, Planning has the same significance with the operation. Planning is as important as the operational process of a company. In their operating process, the business organizations found many departments and task which has more operational significance than strategic significance. In those cases, business organizations are adopting a different approach towards the completion of that task. This approach is known as outsourcing. With the help of outsourcing process a business organization, complete their task by the help of some other parties who are experts in that particular field. The strategies to outsource help in many ways such as task will be done by some expert company so the quality of the job will be maintained. When an expert company is outsourced, then they will be able to do that in minimum price so the cost can be minimized. According to Forbs Global 2000 in the industry of oil manufacturing about 36% companies restored to outsourcing policies. The firm’s strategy to outsource their IT and back-office operation has proven a sustainable way. Shell has outsourced their IT infrastructure that is considered as one of the most complicated as well as the most innovative decision taken by the company. This decision resulted to streamline and standardized the services at the end and cost of operation become low that help the company to become sharper and leaner in this competitive environment (Bozarth and Handfield, 2015).
The companies is outsourcing that task that are unimportant strategically but important in operational performance. For example, a company that manufactures consumer goods will outsource a logistic company to supply their goods to the market. In this case, the delivery of the goods have less strategic importance but have more operational activity. The logistic company will distribute the goods more smoothly than the manufacturer. This will lower the operating cost of the manufacturer. In the oil manufacturing industry companies, outsource their IT department to gain efficiency and improvements in productivity (Pienaar and Vogt, 2012). The company also outsources their entire technological verticals to a specialized company who provide the services to them in the most efficient way. Shell is also outsourcing their back office, IT department and engineering technology to gain smoother operation in this segment. Shell has sophisticated their policies in cost minimization like the realization of portfolio application and applying the infrastructure in cloud computing to reduce their cost further more. The below picture helps to understand the overall operational performance of the strategic importance that help the decision-making process (Caunhye and Pokharel, 2012).
Figure: Outsourcing Decision Matrix
Source: (Mindtools.com, 2015)
Shell decided to outsource their global IT infrastructure, so Royal Dutch Shell entered into a deal of 4 billion dollars with EDS and AT&T as their multi-supplier outsourcing to enhance their customer service in the next level. This deal with EDS is considered to cover 150000 users throughout the globe where Shell is operating their business, and that will help EDS to manage the entire computing services of Shell (Chavis, Klapper, and Love, 2011). EDS is offering their services in this segment and they will act as the operating company as they will bring a change in the companies information technology such as in Emails, internets, service that will be experiencing a change in the achieving of effectiveness of integration of other departments within one system that will increase the productivity of the company (Quinn and Strategy, 2013). In the team of IT infrastructure, there will be a huge restructuring with 600 workers who will stay within Shell’s in-house operation and the rest of 3000 workers will be outsourced from the IT consulting firm. To remain competitive in the market this is very volatile with the price of crude oil, Shell decides to increase their reserve of hydrocarbon to sustain in the market. Shell decides to keep their distribution and marketing with them to make their service more efficient.
Shell tries their best to outsource from information technology companies emphasizes the oil giant's desire to innovate new technologies to become a winner. This will happen by implementing an entire IT solution that starts from discovering of oil to the human capital management. In this process, the company will be able to transform the entire need of the company, which will help to perform various functions successfully. This activity of IT solution will result into better streamlining of the operational procedure with increased productivity with lowering cost and increasing the bottom line. AT&T gained the contract from Shell Global for managing the voice communication and mobility. The AT&T gets the contract to operate Shell’s data centers around the world. This contract also includes the Netherlands, Malaysia, and US . with this contract AT&T will also manage the SAP application to maintain and operate more than 7400 application servers (Lacity and Hirschheim, 2012).
In the year of 2012, Shell renewed their contract of outsourcing with Deutsche Telekom’s and announced for another five-year hosting and storage services with them globally. The integration of T-system has allowed the company to boost their productivity and to lower the cost of operation by the company. Shell signed another contract with Logica that holds for ten years. Logica will handle the Shell’s in-house IT delivery team in 35 countries across Europe and Asia. This move was decided by Shell’s management for better efficiency and cost reduction (Hirschheim Heinzl and Dibbern, 2013).
A company outsources their job to a different company due to certain reasons. This kind of outsourcing process will help the company to increase their productivity and reduce the operational cost. According to the industry, the character of the job outsourcing also differs from company to company. The process of outsourcing is generally influenced by the certain factor that is described below (Fritsch and Görg, 2013).
• The first factor, which influences the decision of outsourcing, is the political factor. The local government of a certain area can make an intervention with various legal activities, rules, tax policy restrictions that will force the company to implement the process of outsourcing in their business activities. This kind of situation forces the company to outsource their back office department to an experienced company who are comfortable with the local rule and tax guideline (Sena Ferreira, Shamsuzzoha, Toscano and Cunha, 2012). Malaysia government changes their policy for the oil and gas production in the year of 2010. This policy was guided by Shell, which involves less tax implementation and regulation for the companies producing oil in the country. This kind of activity recently helps to reduce the overall cost of production. Another political factor that was noticeable for the Malaysian government was the subsidy. The government was providing the subsidy to those companies who was involved with the production of oil and energy. Shell was strategic in their decision to establish their business in Malaysia because it will help to reduce the cost of the company that will help to increase the profitability of the company (Lake, Stevenson and Viscusi, 2014).
• The next factor that will influence the decision of outsourcing is the economic factor. The economic factors, which handle the decision, are the rate of interest, unemployment and the global inflation. These factors affect directly in the profitability of the company. The growth rate of the country, where they are operating their business, will also influence the decision of operation. If the country is growing then, there will be a change in the buying habit of the customer and cash flow will be more in the market. This increase in cash flow will help to increase the profitability of the operating company. Shell has invested in different countries keeping in mind of this factor. The inflation also affects the company’s growth. If the inflation is kept low, then the companies can plan for a long term because Shell did not want to waste their resources rather they plan to keep for future help (Willcocks and Cullen, 2013).
• The social factor also influences the investment of the company in a particular area or country. Social factor generally decides the attitude of the customer because it depends on the demographic characteristic of the people. The size of the market is also characterized by this factor because it is very important for any business organization to invest in the best potential area where they will be able to bring the return on investment. Since the unimportant operations of the company are outsourced, so it also depends on the social and cultural character of the local area (Quinn and Strategy, 2013).
• There is another factor that influence the change in the organization is the technology. Technology is very important in today’s business context. Shell also outsources their technological support from a different company. Technological outsource includes, research and development activities. The decision of outsourcing handles entry-level barrier and the effectiveness of the production area (van Geenhuizen, Filippov and Enserink, 2015).
• The last factor that influences the process of outsourcing is the ecological factor that is relation building with the human beings. Shell is involved with such a business that has a lot of adverse effect on the ecology. Petroleum is the main cause of acid rain and other various problems to the ecology. There is another adverse effect when petroleum is burnt. It produces carbon dioxide gas in the environment that is the main reason for the greenhouse effect. These kinds of factors handle the change in the organization and influence the outsourcing process. Suppose there is huge hazards that are produced during the production of petroleum. These hazards are useful to produce various petroleum byproducts. Shell outsources the manufacturing of those byproducts through other companies. These are the strategic decisions that are influenced by many factors for outsourcing (Haveckin, 2012).
Minimizing the risk is very important for the identification of the goals that are pre-planned in the contingency model. In this context, the best part is to minimize the risk for forecasting supply and demand that need to be connected directly to the supplier. The management of the risk should be properly structured that can be classified in three categories that are explained with proper justification (Sahoo, 2015).
• The focus of the management should remain in the strategy part. This focus will help to minimize the risk with the help of capacity to manage with the resources that are available with the company and the management.
• The other process of reducing the risk is to maintain the proper security. The proper security that can provide information that are private and have compliance in the most effective manner.
• A process that is involved with the risk management will have a continuous flow of information from the supplier to its customers that may help in building the better relation between them (Pellegrini, Lazzarotti and Pizzurno, 2012).
Outsourcing incorporates and enables multiplier effects in the productivity of the company and gain profits by reducing the risks. Minimizing the incidence of risk by the privacy rules plays an important role for the continuous operation, and uninterrupted information flow comprise the center of the attention in a successful outsourcing deal. Every big organization is reducing their cost of operation by various cost cutting initiatives that include outsourcing process. Many companies are outsourcing their marketing and distribution channels. Shell has also initiated their outsourcing process to increase productivity that has resulted in a win-win situation for them as they have also increased their profitability. Technology outsourcing with EDS and T system enabled them to achieve bigger equity in the industry of oil manufacturing. Shell has also gained a lot from the Malaysian government as they saved a lot of tax. This has a great impact in the political and economic development of the country towards a sustainable business environment. Shell’s outsourcing story has a success and becomes an example for others about how to decide the structure of outsourcing. The strategy of outsourcing and selecting the areas proved to be the success factor for Shell.
Bozarth, C. C., and Handfield, R. B. (2015). Introduction to operations and supply chain management. Prentice Hall.
Pienaar, W. J., and Vogt, J. J. (2012). Business Logistics Management: A value chain perspective. Oxford University Press.
Caunhye, A. M., Nie, X., and Pokharel, S. (2012). Optimization models in emergency logistics: A literature review. Socio-Economic Planning Sciences,46(1), 4-13.
Quinn, J. B., and Strategy, E. S. (2013). Strategic outsourcing: leveraging knowledge capabilities. Image, 34.
Lacity, M. C., and Hirschheim, R. (2012). The information systems outsourcing bandwagon. Sloan management review, 34.
Hirschheim, R., Heinzl, A., and Dibbern, J. (Eds.). (2013). Information Systems Outsourcing: enduring themes, emergent patterns and future directions. Springer Science and Business Media.
Fritsch, U., and Görg, H. (2013). DP9603 Outsourcing, Offshoring and Innovation: Evidence from Firm-level Data for Emerging Economies.
Lake, R. T., Stevenson, J. G., and Viscusi, E. R. (2014). A New Reality for the Practice Of Outsourcing Compounded Sterile Preparations.
Willcocks, L., and Cullen, S. (2013). Intelligent IT outsourcing. Routledge.
Quinn, J. B., and Strategy, E. S. (2013). Strategic outsourcing: leveraging knowledge capabilities. Image, 34.
van Geenhuizen, M., Filippov, S., and Enserink, B. (2015). Cost Reduction as Major Driver in Traditional Technology Business: Will Outsourcing Relations Come to an End?. Journal of Enterprise Transformation, 5(1), 30-51.
Haveckin, B. (2012). Information technology outsourcing by large Australian organisations (Doctoral dissertation, Victoria University).
Sahoo, S. (2015). Laminated Composite Stiffened Cylindrical Shell Panels with Cutouts under Free Vibration. International Journal of Manufacturing, Materials, and Mechanical Engineering (IJMMME), 5(3), 37-63.
Pellegrini, L., Lazzarotti, V., and Pizzurno, E. (2012). From outsourcing to open innovation: a case study in the oil industry. International journal of technology intelligence and planning, 8(2), 182-196.
Sena Ferreira, P., Shamsuzzoha, A. H. M., Toscano, C., and Cunha, P. (2012). Framework for performance measurement and management in a collaborative business environment. International Journal of Productivity and Performance Management, 61(6), 672-690.
Chavis, L. W., Klapper, L. F., and Love, I. (2011). The impact of the business environment on young firm financing. The world bank economic review, 25(3), 486-507.
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