Factors that influence the outsourcing of maintenance activities …saama.org.za/wp-content/uploads/simple-file-list/Prof... · 2019-05-20 · Literature and Theory By outsourcing,

SMARTER approaches in Asset Management www.saama.org.za

Factors that influence the outsourcing of maintenance activities within the South African petrochemical industry

Wandile Maphanga and Krige Visser

Graduate School of Technology Management, University of Pretoria

SMARTER approaches in Asset Management

▪ Introduction

▪ Literature and Theory

▪ Conceptual Model

▪ Methodology

▪ Research Findings

▪ Conclusions

▪ Recommendations

Content

‘If you deprive yourself of outsourcing and your competitors do not, you're putting yourself out of business’

(Lee Kuan Yew)


INTRODUCTION


Introduction

▪ In asset intensive organisations, e.g. those in the petrochemical industry,

maintenance can account for 2/3 of the life-cycle cost of an asset

▪ The petrochemical industry accounts for ~R329 billion of South Africa’s

turnover

▪ This turnover is generated by six petrochemical plants across the country

▪ Asset Intensive Organisations typically spend more than 10% of the

operating budget on maintenance (Garg & Deshmukh 2006)

▪ Outsourcing is one of the methods the asset manager can use to

improve asset performance and/or to reduce cost

▪ The maintenance manager needs to consider the benefits, risks, decision

factors and performance measures before making the decision to

outsource a specific maintenance function


Research Objectives

▪ The objectives of this research were to determine:

• What maintenance managers and supervisors within the South African

petrochemical industry perceive as the deciding factors

• What are the expected benefits of outsourcing

• What are the expected risk associated with outsourcing

• What are the performance measures that need to be in place to monitor the

performance of the outsourced activity

▪ The literature shows that the current primary driver of outsourcing

decisions is cost reduction


LITERATURE AND THEORY

LITERATURE AND THEORY

▪ The literature identified 27 critical factors that must be taken into account

before deciding to outsource. These factors are grouped into 7 categories

• Strategic – core vs. non-core activities, competitive advantage, alignment with business strategy

• Economic – will outsourcing result in cost reduction, what are the indirect costs involved?

• Organisational – can the organisation structure support the outsourced maintenance activity, what will the interface with production involve

• Maintenance activity characteristics – what maintenance activities are amicable to outsourcing in terms of their nature, complexity, and maintenance planning required

• Employee impact – what happens to internal staff after an activity is outsourced, issues regarding training, redeployment due to operational requirements

• Supplier – availability of suppliers who can provide the outsourced maintenance at the required cost, schedule and quality, competence of the supplier, type of contract, performance of supplier

• Management – relationship management between organisation and supplier, performance management

Literature and Theory

▪ By outsourcing, the organisation is able to concentrate its resources on a

core set of competencies (Quinn and Hilmer, 1994)

▪ In the UK, outsourcing has helped to reduce the power of the trade unions.

This is relevant to the highly unionised South African workforce (Harland et al.

2005)

▪ Despite the potential benefits, outsourcing presents risks to the organisation

▪ Functions that are highly integrated into business processes may be

severely affected if outsourced to the “wrong” supplier

▪ Different organisational culture could present a challenge for other internal

functions (e.g. production) to effectively communicate with the outsourced

maintenance

▪ Loss of knowledge and organisational know-how, decrease in morale, loss

of control, and decreased performance are risks of outsourcing (Nili et al. 2013)


Literature - Performance

▪ The following items could be measured to determine a contractor’s

performance (Bertolini et al., 2004)

• Price of service

• Maintenance cost

• Equipment availability (MTBF)

• Safety and environmental performance (number of incidents, accidents)

• On-time performance (MTTR)

• Work quality (amount of re-work, infant failure rates)

• Schedule compliance

• Actual work completed against planned work (schedule attainment)


CONCEPTUAL MODEL

Conceptual Model for Outsourcing

▪ Outsourcing is often triggered by

both external and internal

environments such as government

legislation and increased

competition

▪ The six-step approach by

Campbell (1995) for the process to

follow before deciding to

outsource maintenance provided

the basis for the overall

conceptual model for the research


METHODOLOGY


METHODOLOGY

▪ Personnel from three business units (operating hubs) in the processing

industry were involved in gathering data on outsourcing

▪ Twenty one (21) mechanical senior managers and one-hundred and five

(105) foremen (or supervisors) from the three regional operating hubs

were selected and invited to participate in the study

▪ The justification for selecting this sample was that senior managers make

the final decision to outsource, whereas foremen will work closely with

the supplier for which the activity has been outsourced to.

▪ Some 43 questionnaires, fully completed by the respondents, were

returned


Data Collection

▪ Section 1 of the questionnaire collected demographic information such

as geographic location, and position (senior manager or foreman).

▪ Section 2 requested respondents to indicate the extent to which they

agree or disagree with 21 decision factors that were provided

▪ Section 3 required respondents to select 5 benefits and 5 risks from the

list of ten, and then rate these on a scale of 1 to 5, with 1 being most

importance, and 5 being least important

▪ Section 4 required respondents to rate the level of importance of 8

quantitative and 8 qualitative performance factors that were provided


RESEARCH FINDINGS


Factors that influence outsourcing decision

▪ The 21 decision factors of the

questionnaire were grouped into

seven categories and the total

scores of all respondents were

determined for each category

▪ ‘strategic’ and ‘supplier’

categories are the most

important to consider when

making the decision to

outsource maintenance activities

0

20

40

60

80

100

Ra

tio

of to

tal re

sp

on

se

s (

%)

Individual Factors for Outsourcing

0 10 20 30 40 50 60 70 80 90 100

Q8.4

Q8.3

Q8.2

Q8.1

Q7.3

Q7.2

Q7.1

Q6.3

Q6.2

Q6.1

Q5.4

Q5.3

Q5.2

Q5.1

Q4.3

Q4.2

Q4.1

Ratio of number of 'agree & fully agree' responses vs. total number

Strategic

Supplier


Most Important Decision Factors to be Considered

▪ The following five factors were deemed to be the most important in the

outsourcing decision

• The maintenance department forms part of the BU’s core competency (Q4.1)

• The maintenance department is aligned with the overall strategy of the BU (Q4.2)

• The maintenance department in the BU is flexible enough to meet changing

customer requirements (Q4.3)

• The type of maintenance contract that is established between the company and

service provider is critical to the success of the outsourced maintenance activity

(Q5.1)

• A performance contract, where the supplier is paid based on achieving key

performance indicators set by the client, is sufficient to manage the outsourced

maintenance activity (Q5.3)

Potential Benefits of Outsourcing

▪ Respondents were requested to

select the five most important

benefits of outsourcing from a list

of ten benefits.

▪ The total number of respondents

that selected a benefit was

calculated

▪ The most important benefits

were:

• Reduction in the power of trade

unions

• Discarding of problematic

maintenance tasks

• Reduced safety liability

11

11

12

13

13

15

16

18

19

20

0 5 10 15 20 25

Cost saving

Equipment leasing

Improved flexibility

Access to vendor expertise and…

Transfer fixed costs to variable costs

Increased focus on Production

Improved speed of service delivery

Reduced safety liability

Discard problematic maintenance…

Reduce power of the trade unions

Number of respondents

Potential Risks of Outsourcing

▪ Respondents were requested to

select the five most important

risks of outsourcing from a list of

ten risks.

▪ Highest perceived risks to

outsourcing were:

• Loss of organisational knowledge’

• Dependence on supplier

• Supplier selection

▪ Risk of loss of know-how can be

reduced by outsourcing those

activities that require non-core

competencies

3

8

8

13

15

16

18

21

22

25

0 5 10 15 20 25

Decreased flexibility

Poor integration internal departments

Damage to organizational brand

Unrealized cost savings or hidden…

Poor service, supplier performance

Employee issues and morale

Loss of control and core competence

Poor contracts, supplier selection

Dependence on the supplier

Loss of organizational know-how


Quantitative Performance Measures

▪ Respondents were asked to rate the

importance of each of seven

quantitative performance measures

as low (not essential), medium

(essential) and high (critical)

▪ Most important quantitative

measures were:

• Equipment reliability

• Safety & environmental

• Price of service

▪ In an asset intensive petrochemical

plant, reliability of the equipment is

an important contributor to the

organisation’s bottom line

.

3

4

2

3

3

2

1

12

8

13

8

7

12

11

14

17

14

18

19

15

17

0 5 10 15 20

Schedule compliance

Work quality

On-tme performance

Safety & Environmental

Equipment reliability

Maintenance Cost

Price of service

Number of Respondents

High Medium Low

Qualitative Performance Measures

▪ Respondents were also asked to

rate the importance of each of

eight qualitative performance

measures

▪ The most important qualitative

measures were:

• Competence of the service provider

• Clearly defined contract

• Service provider experience

▪ In the petrochemical environment,

an incompetent service provider

can lead to cost overruns, delays,

damage to equipment, and

increased risk of injury

2

3

5

8

3

7

3

2

9

8

9

13

10

13

5

12

18

18

15

8

16

9

21

15

0 5 10 15 20 25

Clearly defined contract

Service provider maintenanceexperience

ISO 9001 certification

Location-distance from plant

Resource availability

Knowledge of the plant

Competence of service provider

Satisfaction with service provider


High Medium Low


CONCLUSIONS


Conclusions

▪ The aim of this research was to explore the current perceptions that

maintenance managers and supervisors within the South African

petrochemical industry have towards the deciding factors, expected

benefits and risks, and performance measures towards outsourcing.

▪ The study showed that economic factors were not considered to be the

most important when making the decision to outsource.

▪ Respondents indicated that the ‘strategic’ and ‘supplier’ categories are

the key decision factors

▪ The biggest risk to outsourcing was perceived to be ‘loss of company-

specific knowledge’


Conclusions

▪ The biggest benefits of outsourcing as perceived by the respondents are

the ‘reduction of union powers’ and a ‘solution to problematic

maintenance tasks’

▪ Most important quantitative performance measure is equipment

reliability

▪ Most important qualitative performance measure is supplier

competence


RECOMMENDATIONS


Recommendations

▪ This study was performed in the process industry and similar studies in

other industries could provide more insight into the outsourcing

relationship

▪ The results for managers, foremen and planners were not compared due

to small numbers and a larger sample from industry might reveal

differences

▪ The study was only performed for the company and not the contractors

whose views could also be valuable for improving the relationship


QUESTIONS

Chevron refinery, Houston

Documents

Factors that influence the outsourcing of maintenance activities …saama.org.za/wp-content/uploads/simple-file-list/Prof... · 2019-05-20 · Literature and Theory By outsourcing,