Outsourcing decisions in reverse logistics: Sustainable balanced scorecard and graph theoretic approach
Introduction
The customer may return the products because of many known or unknown reasons such as defects or damages, or customer dissatisfaction (Barsky and Ellinger, 2001). Product returns are uncertain in terms of quantity, quality, and timing of returns; and they are difficult to manage in comparison to new products in forward logistics (Rogers and Tibben-Lembke, 1999). When worn out or obsolete products are remanufactured, “it's not uncommon for companies to realize higher margins on these remanufactured products than they do on new items” (Stock et al., 2002). Still, product returns are eminent in a competitive business environment and firms need to manage those returns effectively. One of the effective ways of dealing product returns efficiently is to adoption of reverse logistics system. Firms realized that the reverse logistics has a potential for being market differentiator through corporate social image and better customer satisfaction (Stock et al., 2002, Stock et al., 2006).
In Reverse logistics, the used or returned products are collected after their acquisition and inspected for sorting into the different categories. The next step is to disposition them for repair, remanufacturing, recycling, reuse or final disposal. Manufacturers may adopt reverse logistics by choice or by force but they have to decide whether performing the activities themselves or outsourcing to a third party (Martin et al., 2010). Kannan et al. (2012) observed that reverse logistics outsourcing may reduce costs as the third party can get the advantage of the economies of scale. Also, by outsourcing reverse logistics, firms can reduce their asset base, and deploy the capital released for other productive usage. Other advantages include low costs, less uncertainty, lower capital investment, more focussed on core competency, more flexibility, better customer responsiveness, and better excess to new technology (Kumari et al., 2015). However, some firms realized unexpected higher costs because of complexity, lack of flexibility, and other hidden problems with outsourced service providers (Tadelis, 2007). Therefore, it is important to make systematic analysis from various business perspectives before taking outsourcing decisions. In a literature review, Agrawal et al. (2015) emphasized on the need of developing a comprehensive decision making framework with respect to completely or partly outsourcing the reverse logistics activities.
Traditionally, organizations have considered the economic criteria like cost, investment, economies of scale; processing parameters like flexibility, capacity, capability; resource capacity; quality of service, core competency and other strategic, operational and tactical parameters for the outsourcing decisions. Although the concept of balanced scorecard (BSC) has been primarily designed for the measurement of the system performance, Authors have frequently utilized BSC perspectives as criteria for the selection of best outsourcing alternatives (Tjader et al., 2014, Ravi et al., 2005, Shaik and Kader, 2012). Merits of the BSC approach are to integrate strategic, operational, and financial attributes to consider the balanced key perspectives of the decision making. BSC approach allows managers to look at the business from four divergent important perspectives: customer, internal business, innovation and learning, and finance (Kaplan and Norton, 1992). However, this approach does not consider the important sustainable development of the organizations such as triple bottom line aspects of sustainability. Triple bottom line aspects include economic, environment, and social dimensions of the sustainability. It has been utilized by researchers for identification of criteria for various outsourcing decision making (Huang et al., 2012, Tuzkaya et al., 2009, Lu et al., 2007). However, it does not provide the holistic view of an organization. In order to have advantages of both the approaches, triple bottom line aspects of sustainability have been combined with BSC (known as sustainable balanced scorecard (SBSC)) for selecting the attributes and sub-attributes for the proposed study.
The proposed research is focused on exploring the various alternatives of outsourcing reverse logistics activities fully or partly and developing a decision making approach for selecting best alternative. Various multi criteria approaches including TOPSIS, AHP, ANP, and DEA, are available for such type problems. TOPSIS and AHP can be used if the attributes are independent, which is not the case with proposed problem. While ANP does not represent hierarchical relationship among attributes, DEA requires more computation and may be a poor discriminator of good and poor performers if the numbers of attributes are large (Rao and Padmanabhan, 2006). Graph Theory Approach (GTA) does not have such limitations. Therefore, GTA has been utilized for the selection of best outsourcing reverse logistic alternative based on “Outsourcing Index”. “Outsourcing Index” is the value of permanent function obtained through GTA for different alternatives. This study makes significant contribution to the very few available studies and also, the GTA is first time being used for such type of problem.
The remainder of the paper is organized as follows: Section 2 comprises a literature review on reverse logistics, outsourcing, and on SBSC. In Section 3, research methodology including GTA and step by step approach has been discussed for evaluation of “Outsourcing Index” for various alternatives. Subsequently, the proposed approach is validated through a case illustration of a mobile manufacturing firm in section 4. Results are also presented and discussed in section 4. Section 5 summarizes all the findings and concludes the study. Managerial implications along with future scope of the study are discussed in Section 6.
Section snippets
Literature review
An extensive literature review was carried out to understand the reverse logistics processes and to explore the previous research on outsourcing reverse logistics for the development of SBSC. The literature review is described in following subsections.
Research methodology
The proposed research has utilized GTA for the selection of best outsourcing reverse logistic alternative. Since, GTA maintains the hierarchical structure and at the same time utilize interdependencies among attributes; GTA has been applied for the proposed study. It is a systematic and logical decision making approach. The advanced theory of graphs have been used for modeling and analysis of various systems, and proved to be beneficial for solving real life problems in the field of science and
Case illustration
To illustrate application of GTA in outsourcing decision, a case of mobile manufacturing firm is considered.
Conclusion
Product returns are the part of business and it has become essential to manage them efficiently for the success of an organization. Reverse logistics adoption is one of effective way of dealing with product returns. Many firms prefer outsourcing reverse logistics activities because of number of reasons including low costs; lesser uncertainty, lower capital investment, more focussed on core competency, and better excess to new technology. The proposed study focussed on developing a framework for
Managerial Implications and Future scope for the study
Sustainable balanced scorecard will help the managers to achieve the operational and financial efficiency and will help them to make contribution to the sustainability efforts of the organization. The study will help managers in ensuring the sustainable development even when they are outsourcing the reverse logistics functions. The attributes and sub-attributes selected in the proposed study will guide the decision makers to visualize and analyze the impact of these attributes and
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