Competence-Based Decision Support for the Offshoring of Automotive Product Development Processes to India

Master's Thesis, 2006

166 Pages, Grade: 1.3



1 Introduction

2 State-of-the-Art Analysis
2.1 Insourcing, Offutsourcing and Off shoring
2.2 Theories About the Off shoring Decision
2.2.1 Macro Economics
2.2.2 Market Forces
2.2.3 Resources and Competencies
2.2.4 Transactions, Contracts and Firm Boundaries
2.2.5 Summary of Available Theories
2.3 Existing Decision Tools and Models
2.3.1 Financial Tools
2.3.2 Strategic Tools
2.3.3 Benchmarking/Certi cation Tools
2.3.4 Summary of Existing Decision Tools and Models

3 Problem Statement and Goal of Present Work
3.1 Problem Statement
3.2 Goals of Present Work

4 Background to the Client Company and the Drivers of Off - shoring
4.1 The Company
4.2 Identi cation of the Major Drivers of Off shoring
4.2.1 Reducing Costs: The Global Cost Mix
4.2.2 New Markets
4.2.3 Learning and Growth: The Global Competency Mix
4.3 Summary: Drivers of Off shoring

5 Product Development Processes at the Client Company
5.1 Modeling the Product Development Process
5.2 Deriving Necessary Competencies for Each Process Step . . .
5.3 Identi cation of Cost Drivers and Success Critical Process Steps
5.4 Analysis of the Internal-External Customer Mix: Possible Problems
5.4.1 Di erence of Interests
5.4.2 Di used Decision Process
5.4.3 Di ering Requirements
5.4.4 Conclusion and Final Remarks
5.5 Summary

6 Competence-Based Decision Model for the Off shoring of Product Development Processes to India
6.1 Goals and Success Factors for the Proposed Decision Model
6.1.1 Goals of the Proposed Decision Model
6.1.2 Success Criteria for the Proposed Decision Model . . .
6.1.3 Summary of Goals and Success Criteria
6.2 Analysis of Off shoring Goals at the Client Company
6.2.1 Financial Goals
6.2.2 Customer Goals
6.2.3 Business Process Goals
6.2.4 Learning and Growth Goals
6.2.5 Offverview: Off shoring Goals
6.3 Off shoreability Study and the Analysis of Expected Bene tsfrom Off shoring
6.3.1 The Off shoreability of Processes
6.3.2 The Process Off shoreability Questionnaire
6.3.3 Financial Bene ts from Off shoring
6.3.4 The Off shoreability Study: Conclusions
6.3.5 The Off shoreability Study: Summary and Final Remarks
6.3.6 Evaluation of the Off shoreability Study
6.4 Development of the Balanced Scorecard Magnifying Glass for the Evaluation of Possible Off shoring Partners
6.4.1 The Resource-Based View Applied to the Off shoring Decision
6.4.2 Mapping Off shoring Goals to Vendor Competencies . .
6.4.3 The Balanced Scorecard Magnifying Glass for Evaluating Possible Off shoring Partners
6.5 Development and Implementation of an Evaluation Methodology for Prospective Partner Companies in India
6.5.1 Development of the Evaluation Methodology
6.5.2 The Competency Map
6.5.3 Implementation of the Evaluation Methodology at Possible Partner Companies in India
6.5.4 Findings and Conclusions
6.5.5 Evaluation of the Partner Selection Methodology . . .
6.6 Final Suggestions Based on Above Study

7 Summary and Conclusions


I would like to thank Prof. Dr. Christian Nedeÿ and Mr. Mathias Kurzewitz from the Institute of Production Management and Technology at the Hamburg University of Technology (TUHH) for acting as guide during the writing of this work. The attention to scienti c detail provided at the department helped me gain a deeper understanding of scienti c writing.

I would like to thank Mr. Nigel Westwood, International R&D Man- ager at Webasto AG, for guiding the practical part of the work, and for his valuable insights into main issues that drive the will to o shore at engineer- ing services companies, and also into major obstacles that such companies face. I would also like to thank Ms. Anneliese Moser from HS Genion for supporting the practical part of the work through inputs, suggestions and other friendly help.

I would also like to express my gratitude towards the various managers from engineering services providers in India who consented to participate in the data-collection phase of this work. Various insights that I received during these interviews were valuable in enriching both my understanding of the Indian automotive engineering services market and the quality of this work.

List of Abbreviations

illustration not visible in this excerpt

List of Figures

2.1 Di erent Types of Offutsourcing Decisions

2.2 Firm as an Offpen System Comprising of Capabilities

2.3 Key Elements of a Competency

2.4 Interactions Between Two Firms Offperating in Di erent Markets

2.5 Application of the Discussed Theoretical Constructs to the Off shoring Decision

2.6 The Balanced Scorecard Applied to the Off shoring Decision .

2.7 Coverage of Certi cation Models Across Contractual Phases

4.1 Approximate Expected Savings through Off shoring of Activities to India

4.2 Off shoring Attractiveness Index 2004

4.3 The Drivers of Off shoring

5.1 Activity Groups Comprising the Product Development Process at the Client Company

5.2 Activity Groups with Umbrella Processes and Secondary Processes

5.3 Competency Element: Product Areas

5.4 Cost Structure for Engineering Services at Client Company .

5.5 Firm Structure of Client Firm

6.1 Goals and Success Factors for Proposed Decision Model

6.2 Off shoring Goals at the Client Company

6.3 Criticality Rating of Goals based on Time Period and Importance

6.4 Off shoreability Questionnaire Sample Page (Internet Platform QuestionProTM)

6.5 Results: Off shoreability Questionnaire

6.6 Factor Availability in India: A Summary

6.7 The Off shoreability-Bene t Matrix for the Identi cation of Off shoreable Processes

6.8 The Two Components of the Off shoreability Study

6.9 Target Extent of Off shore-Engineering (German Engineering Service Providers)

6.10 Mapping Off shoring Goals to Vendor Competencies

6.11 The Balanced Scorecard Magnifying Glass for Evaluating Possible Off shoring Partners

6.12 The Balanced Scorecard Magnifying Glass with Contracting Costs

6.13 Step 1: Breaking Down Off shoring Goals into Competency Types and Decision Criteria

6.14 Step 2: De ning Possible Measurement Tools for the Decision Criteria with the Extent of De nition

6.15 Comparison Matrix for Comparing Competency Levels of Firms

6.16 Step 3: Assigning the Competency Ratings and Quality of Data Available for Various Decision Criteria

6.17 Step 4: Inclusion of Contracting Factors and Strategic Measures to Maximize Off shoring Bene t

6.18 Step 5: The Goal-Speci c Competency Rating and Average Error Value

6.19 Comparative Competency Map: Evaluated Companies

6.20 Weighted Average Competency Ratings of Prospective Off - shore Partners (with Average Error Values)

7.1 Summary of Present Work

List of Tables

2.1 Inputs for the Off shoring Decision from Various Competence Modes

4.1 Expected Cost-Savings of a Joint Engineering Services Project (Based on Calculations at the Client Company)

5.1 Comparison of Traditional and Business Process Modeling (BPM)- based Methods for Process Modeling

5.2 Factors that De ne Process Step Competency

5.3 Competency Element: Personnel

5.4 Comptency Element: Technology

5.5 Competency Element: Sub-Activities

5.6 Comparison of Critical Success Factor De nition: Project- Based vs Process-Based

5.7 Project Characteristics As Critical Success Factors

5.8 Approximate Per-Hour Costs at the Client Firm, Cost Groups

6.1 Derivation of Success Criteria from Goals of Proposed Decision Model

6.2 The Two Dimensions of the Criticality of Off shoring Goals . .

6.3 The Five-Level Criticality Rating System for Off shoring Goals

6.4 Off shoring Goals Ranked According to Criticality

6.5 Process Characteristics and Complexity Metrics

6.6 Measurement Factors for the Off shoreability Questionnaire . .

6.7 Cost Di erentials: India and Germany

6.8 Activity-Speci c Hourly Costs of the Client Company (Representative Figures)

6.9 Evaluation of the Off shoreability Questionnaire

6.10 Scale for Extent of De nition of Decision Criteria

6.11 Evaluation of Absolute and Relative Scales for Competency Rating

6.12 The Five-Level Competency Scale

6.13 Evaluation Scale for the Quality of Data Available

6.14 The Various Competency Rating Metrics Used

6.15 Offverview of Companies Visited in India

6.16 Evaluated Competency Ratings for Prospective Off shore Partners

6.17 Evaluation of the Partner Selection Methodology based on Success Criteria

Note to Terminology

The term o shoring has been used to indicate the process of shifting business activity to another country. Where the general process of shifting part of the business activity to a partner/supplier company, not necessarily located in another country, has been referred to, the term outsourcing has been used [60].

The term client company, client rm or just client has been used to signify the company looking to o shore business activity to India. The term may also be used as a representative for any automotive engineering services company located (primarily) in a developed country (in Western Europe or North America). Similarly, the term vendor or possible partner company in this case signi es an engineering services provider which might be a candidate to receive the o shored engineering activity from the client. Thus, such a company would be based in, or at least possess a substantial engineering resources base in, India.

The term engineering services refers to the engineering activity, including the management of such activity, that comprises what has in generic terms been called the product development process within this work. Both these terms are used to de ne the process that is the subject of this work, and the candidate for being o shored to India.

Chapter 1 Introduction

The Phenomenon of Off shoring

In recent years, the topic of o shore-outsourcing, or simply o shoring, has received elaborate and sometimes passionate attention from many sections of the society in many countries.

The corporate quarter adopted the o shoring of processes or parts of their processes as the most widely talked about and implemented manage- ment tool for organizational change in the 1990s (Fortune Magazine 1994 ). The prime reason for the popularity of this tool was cost-advantage. La- bor was as much as 70% cheaper in low-wage countries. Off shoring became a source for comparative advantage for many large companies, both multi- national companies (MNCs) as well as other companies based in high-cost industrialized nations, that could e ectively have part of their business pro- cesses done in a low-wage country. The trend intensi ed and gathered more justi cation even for smaller companies along with lowering investment and trade barriers both at home and in target low-wage countries. A direct e ect of this intensi cation was the growth of infrastructure around the o shoring process. The role of information and communication technology in reduc- ing the concomitant costs of managing work internationally[1] has also been noticably immense.

Off shoring is a phenomenon that has had major in uence on governmental and legal activities in many countries, as a direct result of general public interest in the phenomenon. Off shoring has aroused public passions in the USA and in the developed economies of Western Europe in the last decade. Off shoring was equated to loss of jobs to workers in foreign countries, igniting wide discussion of the topic in the media and in public forums. Widespread public attention on o shoring has thus sparked a string of legislations in these countries.

Lastly, o shoring has huge economic rami cations, and has thus drawn huge amounts of attention from economists and from the scienti c community in general. Economic studies discussing the trends and explanations for the phenomenon of o shoring have been numerous in recent years. In general, it is IT o shoring and Business Process Offutsourcing (BPOff) that have received most attention, but there has been considerable research in the eld of manufacturing, logistics and services o shoring as well. In any case, both descriptive and normative studies abound in this eld.

Background to Work

The auto industry, being one of the most intensively e ciency- and cost- di erentiated, was one of the earliest international industries to adopt the tool of o shoring to achieve lower costs. Though the move towards foreign markets for automotive suppliers happened in many cases in a trickledown fashion, where suppliers down the supply chain followed OffEM`s into foreign markets[42], o shoring by international automotive suppliers maintained its independent rationale of lower-costs and access to expanding new markets.

Within automotive supplier companies, o shoring started out initially in the form of o shore-sourcing, with companies using foreign low-cost sources for raw material and semi- nished goods. These rst instances of o shore- sourcing have led to the further movement of manufacturing-related activities to low-cost locations. This trend continues today and is expected to further intensify due to various economic, legal and demographic factors. Following the shifting of o shored activities up the value chain, from sourcing to manu- facturing, more and more developmental activities are being o shored today to countries like India, Thailand, Philipinnes, China and Brazil.

Today most auto supplier companies based in developed markets face pressures to o shore processes, in part or in whole, to markets with lower factor costs. It is taken as a necessity in the industry to have at least con- sidered the o shoring option. In such an environment with a large-scale trend towards o shoring, it is obvious that rms that are able to manage the o shoring process most e ciently will be the ones that will be most competitive in the market. The o shoring decision is thus one which has an ever-increasing strategic importance to automotive supplier rms. This situation has strengthened the need for scienti c discussion of this issue.

Since o shoring activities for lower costs in the present context is a rel- atively new phenomenon, there is a relative dearth of practical literature in the eld. There has of course been extensive discussion of the phenomenon in the past decade in a general sense. But scienti c literature on the subject consists of only of some normative briefs which have been written with the

aim of helping companies make a superior decision [74] [6]; only a handful of books have been published which deal with the o shoring decision in the present context [60] [46]. Most of the literature amounts to a discussion of the pros and cons, and at best, risks and opportunities of o shoring. Morover, it has been IT o shoring and BPOff that has been the topic of most published literature in the eld. The o shoring decision for technology manufacturing industries has largely been neglected. An o shoring decision model, which is both holistic and practical, is thus required in this new and increasingly important context.

Aim of Present Work

This paper aims to discuss issues surrounding the decision for the o shoring of engineering services by engineering and manufacturing supplier rms in the auto industry, and to develop a framework to support the management of the concerned company involved in such a decision. For this purpose the speci c example of a Tier I automobile supplier with headquarters in Munich, Germany, with multiple international production locations and an annual revenue of more than Euro 1 billion, is used. The o shoring location studied here is India.

The model for the o shoring decision that will be developed in this work will be based on a scienti c discussion of various theoretical groups that may be applied to the construction of such a model. To date, the the- ory of resources and competences [10] [66] and the theory of contracts and transactions [5] have both been used extensively in the attempts to model o shoring. There have also been attempts to unify these theories in de n- ing the o shoring decision [30]. The advantages and disadvantages of these approaches and others, will be discussed in coming up with the theoretical base that helps us achieve the objectives of the present work.

Based on the discussion and scienti c choice of a theoretical base, the construction of the theoretical framework for the construction of the decision model will be undertaken, and various components that deal with the various facets of the o shoring decision will be dealt with in the following chapters. Off shoring issues like the choice of activities which are better o shored, and tools for the selection of possible o shoring partners will be outlined. The construction of each of these decision model components will be followed by a real-life implementation of the designed tool to the situation at the client company. Similarly, an investigation of various possible partner companies in India will also be carried out, and initial results will be reported, re ecting on the usefulness of the decision model. Thus, though the discussion and the construction of the decision model will be based on factors picked out at the

client company, a general perspective of the engineering services industry will be the norm, with an aim to enhance the usefulness of the present model to a wide range of rms operating within this industry.

That the paper deals with the outsourcing decision of engineering ser- vices, an activity fairly high up in the value chain for an automotive supplier anywhere in the world, makes the extremely pertinent to the current in- ternational situation. There is a new realization in western industrialized nations, particularly in the o shoring debate in the USA, that increasingly more 'sophisticated' activities are becoming candidates for o shoring[31]. In this speci c case, it is doubly so since the company in question places de- velopment and engineering services very close to its core competence. Thus, in today's dynamic o shoring environment, this speci c case illustrates both the increasing importance of o shoring as a strategic tool in the automo- tive industry and the increasingly critical business processes that are being considered for o shoring by leading companies in the industry.

Chapter 2 State-of-the-Art Analysis

Offutsourcing decisions by rms all over the world have been discussed in many circles over the last decade. An ever increasing frequency of outsourcing activity to low-cost countries, not just among companies engaged in market activity, but also among other process-driven organizations including public authorities is an indication of the shifting equations in the world's economic structure. Though many authors have pointed out that outsourcing is by no means a new phenomenon; companies have outsourced non-core services almost since the early days of the corporate culture, most attention in recent times has been devoted to the outsourcing of activities to supplier companies in other countries, especially to countries with lower factors-of-production costs: a process called o shore-outsourcing, or simply o shoring .

Offutsourcing has been de ned in various ways, but in its popular usage outsourcing is the act of arranging somebody outside a company to do work or provide goods for that company. Based on the de nition by Grossman and Helpman [35], outsourcing will be de ned as nding a partner with which a rm can establish a bilateral relationship which would produce goods or services that t the rm's particular needs . The prerequisite for an in- vestment in the process of outsourcing from that de nition is intentionally left out since outsourcing need not always involve investment in a tangible way. Many de nitions include the low-cost motivation of outsourcing in the de nition. Marcia Robinson and Ravi Kalakota de ne o shore-outsourcing, outsourcing to a partner in another country, as the migration of part or all of the value chain to a low-cost location [60]. This is obviously certainly not always the case; o shoring is often done for non- nancial reasons. Though, since this work deals with the outsourcing decision of a European automobile supplier to India, a low-cost location, and the main but certainly not the only motivation for the decision is the cost factor, the above de nition may be taken as su cient for the purpose of this work.

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Figure 2.1: Di erent Types of Offutsourcing Decisions

Source: Marcia Robinson and Ravi Kalakota [60]

2.1 Insourcing, Offutsourcing and Off shoring

Offutsourcing decisions have traditionally been classi ed over two axes: whether work is outsourced or done in-house, and whether outsourcing is done within the country or outside of it (See Fig. 2.1). This typology is a simpli ed way of looking at decisions which may in a general way be classi ed as Make- or-Buy decisions. In general, there are very di erent factors involved in simple outsourcing decisions, and a decision to outsource activity to another country. In this work, the term outsourcing will be used to mean the gen- eral decision to contract-out an activity previously done by agents employed with the company, and o shoring to mean the outsourcing of activities to another physical location.

2.2 Theories About the Off shoring Decision

There are various theoretical areas that describe the driving factors behind the outsourcing and o shoring decisions which are the main focus of this work. As an introduction to the following work, four of the most important categories of theoretical work that have been produced in the past few decades, will be discussed. All of these theoretical groups are useful while looking at the o shoring decision of rms. These theories fall into correspond- ing categories of macro-economics (the large-scale forces that force companies to look at o shoring decisions) [31], market-forces (the market-level forces that decide industry structures and critical competing factors) [56][57], the- ory of the rm as consisting of particular resources and competencies (the internal view of an individual rm) [55] [63], and the theory of the interac- tions between rms (broadly termed as transaction economics and contract theory in the past) [75] [20]. A synthesis of these major theory groups into an overall model of the o shoring situation will then be carried out.

2.2.1 Macro Economics

Economists, policy makers and the general public in many industrialized nations have been involved in an ongoing discussion about the large-scale e ects of the trend to o shore activities to low-cost countries. The most discussed-about factors in these debates have been the shifting of economic activity from industrialized nations to developing nations, the concomitant loss of jobs, the level and quality of jobs being exported , and normative briefs of economic policy that industrialized nations should adopt to hold on to economic power. As an answer to the raising of these issues, there has been considerable literature highlighting the economic rationale behind the trend of o shoring [31, 12]. Much of this placating literature can be summed up by Harvard professor, N. Gregory Mankiw's assertion that o shoring is but a form of trade between nations, and is in the long-term interest of all parties involved.

There are clearly two sides to the coin of the o shoring debate: the ra- tional, based on economic theory, the gains of trade and the theory of the division of labor, and the irrational (the word irrational is used stripped entirely of its negative connotations. The irrational side of the o shoring debate is at least as important as its rational side, and decidedly more impor- tant, since such little scienti c attention has been received by it), based on factors ranging from the fear of loss of jobs, fear of economic downturn, and the fear of loss of economic power by industrialized nations [12]. Since fear and other such emotions evoked by the o shoring of jobs have hardly been dealt with even in behavioral economics, these factors, though they play an important role in in uencing the o shoring decision by rms, protest against inclusion in an o shoring decision model.

The application of economic theory to o shoring decisions may be dis- cussed in some detail here. Adam Smith may himself be quoted on the subject; he summed up the forces that lead to the outsourcing and, in today's case o shoring, of business activities thus:

...If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage. [71]

Following the Ricardian (after the famous economist, David Ricardo [59]) idea of employment markets being similar to commodity markets, inasmuch as they follow the rules of supply and demand, the act of o shoring activ- ities abroad may be thought of as being equivalent to a commodity being purchased from abroad, since it is available at a lower price there. Thus, according to this school of economics, an operating manager faced with the decision to o shore faces similar pressures as a manager who has to decide whether to produce his own raw material ( insourcing ), buy it from a com- pany in the same market ( outsourcing ), or from a company in another country ( o shoring ). There are at least two factors which are markedly di erent for a company facing a decision to o shore engineering services.

Firstly, the services market is a substantially di erent market than a commodity market. The availability of the factors of production , which are mostly related to the labor pool of a country for services, can vary sub- stantially within the time frame of decades. For example, the opening-up of huge economies like China, India and Russia have caused the phenomenon of the entrance of a huge pool of quali ed labor into the world economy over the past few decades. Factors that in uence this market are as varied as government policies, national culture, demographics, the presence of educa- tional institutions etc. The non-quanti able nature of many of these factors, as opposed to factors that a ect commodity markets, like the number of suppliers, evolution of technology etc., make the modeling of the o shoring decision with any amount of reasonable success a tricky business, and most models that strive to explain the o shoring decision are at best limited [49].

Another area where the decision to o shore activities di ers from the purchase of a commodity from another market is in its long-term implications. The fact that the o shoring of an entire activity has far-reaching and in most cases, non-quanti able e ects makes the o shoring decision a controversial one for most companies in western nations. Anti-o shoring activists often cite reasons like loss of jobs, loss of the capacity to innovate and overall degradation of the country's economy in such debates [72]. Many of these factors are not really understood even in academic circles.

In any case, there is a macro-economic perspective to the phenomenon of the increasing trend of o shoring in the last decade which cannot be captured by micro-economic theories of the rm and the market. The salient factors that represent the macro-economic view, some of which have already been mentioned, are globalization trends, liberalization initiatives, demographic imbalances and the de-skilling of labor pools. Macroeconomic considerations can aid managers of huge multinational conglomerates in long-term planning, but are di cult to integrate into a micro-economic decision model without making it extremely cumbersome. For the purpose of de ning a method for taking the o shoring decision, the manager's general awareness of the macroeconomic trends that are unique to a time and place in the history of human interaction will have to be taken for granted.

2.2.2 Market Forces

There is much that the market forces theory can o er by way of explana- tion of the need for o shoring that many companies face today. The theory of strategic management which holds that strategies of rms should re ect market structure, which itself may be de ned by analyzing the ve forces of Porter [56], thus helps the top management of rms facing the o shoring decision in de ning o shoring strategy. The evaluation of the suitability of the destination market, here India, would certainly be near-complete using the ve-forces structure. The decision about which activities should be o - shored might also be de ned using the core-competence argument [58], which itself may be taken as an o spring of strategic management. Also, the selec- tion of suitable o shoring partners, if there are to be any, might be left upto strategic management, using tools de ned by Anso [3] and Chandler [19]. That is to say o shore partners which might help a rm create value, while helping the client rm retain its competitive advantage, might be preferred. Thus, an o shoring decision model could certainly be imagined that would be based upon the market forces theory, and on strategic management.

There are a few serious shortcomings in using this theory (or rather, in using only this theory) to de ne an o shoring decision model. The biggest shortcoming is the inability to de ne, with any measure of objectivity and reliability, the market forces that are the basis of this theory. Though strate- gic managers, and strategic consulting rms regularly release their analyses of markets, and suitable strategies for these markets, it can never be asserted that an analysis be deemed perfect, or even correct. Strategy is, in the end, a subjective decision, though based on facts and gures. Let us look at this theoretical cluster for its ability to provide these facts and gures.

The theory of market forces is essentially an external view of the rm. Where it does prescribe how a rm should be in order to succeed in a certain industry or market, it does not often describe what a rm is. A perfect example would be the stress on core competencies that strategic management insists upon. The market forces analysis could certainly indicate to managers which core competencies would be valuable to the rm, keeping in mind in- dustry and market structures, but it fails to de ne competencies, and the way to measure these (though there has been a movement towards econometric tools within strategic management in the 1990's [40]). Thus, such failures of the market forces literature to look inside a rm, make it unsuitable to be used for an o shoring decision framework, as is the goal of the present work. This view is similar to the one expressed by Paul Shrivastava [69], who de ned strategic management as being too ideological .

However, many of the concepts within strategic management are extremely useful, even essential, for such a framework, and will be included. The boundaries of strategic management are thus not well de ned, and many works [40] take strategic management to encompass other theoretical areas including the Resource-Based View and Transactional Cost Economics. Some of these theoretical areas will now be discussed.

2.2.3 Resources and Competencies

The visualization of resources and competencies that a rm possesses as a source of comparative advantage is a relatively new point-of-view in manage- ment science. The resource-based view was developed in the 1980's, based on the hypothesis by Penrose[55] that the physical and human resources avail- able within a rm are the direct cause of rm strategy. But real application of competence-based management began only a decade back, when the focus on core competencies [58] became a catchword both with managers and management scientists. In the 1990's there was widespread agreement of Barney's[10] conjecture that imperfectly mobile and inimitable resources act as a source of lasting competitive advantage for rms.

There is much that the resource-based view can contribute to an o - shoring decision model. The foremost advantage of using the resource-based view to de ne the structure of such a model is its natural tendency to fo- cus on the internal competencies and resources of rms. Competencies and resources relate directly to the abilities of a rm to carry out a process efciently, and this factor is the foremost judging criterion for any partner selection methodology [22]. The reasons for the resource-based view (and speci cally competence-management) to be appropriate to construct an o - shoring decision model will be discussed in this section, and later in Section 6.4.1, but a beginning will be made here by de ning the terms involved and by discussing the critical issues while modeling resources and competencies of rms. Speci c applications of the theory of competencies and resources to the o shoring decision will then be discussed.

The literature which tries to de ne competencies uses various concepts like assets, skills, capabilities, knowledge and learning. In general, the output of a rm can be seen to be caused by its collection of tangible and intangible assets. Sanchez et al [65] de ne assets as anything that can be used by the rm in its process for creating, producing and o ering its products (goods or services) to the consumer. Capabilities are de ned as intangible assets comprising of repeatable patterns of action that the rm uses to create, pro- duce and distribute products. Capabilities are seen as intangible assets that determine the use of tangible and other intangible assets. Skills, on the other hand, are specialized forms of capabilities, embedded in individuals or teams, that help the rm achieve a superior outcome in specialized situations, or in the use of a specialized asset. Thus Sanchez et al achieve a hierarchical or- dering for the description of competencies as consisting of assets, capabilities and skills. This de nition is not very useful for the purpose of a practical competence-based decision model since it su ers from the lack of a clear def- inition for the consisting elements. The de nition of competencies remains incomplete due to a failure to de ne categorically the constituent elements of assets, capabilities and skills.

Sanchez and Heene [64] further combined the above de nitions with the ow of strategic logic of a rm. They propounded the Firm as an Offpen Sys- tem view, where assets, capabilities and skills were viewed as integrated in the strategic logic ow in the rm (see Fig. 2.2). Here, capabilities and skills within a rm are seen as undergoing vital interactions with other important elements that characterize a rm: management processes and strategic logic. Thus the criterium of usefulness that a resource must ful l to be termed a rm's competence is an important introduction by Sanchez and Heene. A resource may thus only be categorized as a competence if it is useful for the organization in meeting its strategic objectives.

This view of competence-based management can help a manager faced with the o shoring decision in two ways. Firstly, it may provide clues about the extent of o shoring that may be desirable for a rm. The search and selection of a suitable o shoring partner is the central element in the decisionmaking process. The selection of a suitable o shoring partner has to be done using suitable criteria that are:

a) in line with the strategy of the organization, and

b) causes a good t between resources and competencies of the two

rms involved, to achieve organizational goals.

Thus a resonance between the assets and operations of the two rms involved

illustration not visible in this excerpt

Figure 2.2: Firm as an Offpen System Comprising of Capabilities

Source: Sanchez (2004)

Table 2.1: Inputs for the Off shoring Decision from Various Competence Modes

illustration not visible in this excerpt

Source: Based on Sachez (2004) [64]

in the o shoring contract is a prerequisite for a successful partnership. During the phase of due diligence prior to the selection of a suitable o shoring partner, this resonance can thus be tested by the responsible manager, helping her make a superior selection.

Another way in which this view may help a manager faced with an o - shoring decision is to help her in organizing the process of decision making. Inputs for taking the o shoring decision may arise from di erent levels in the rm, and this view of the rm can provide a way of synthesising these various inputs for a superior decision. The ability to make a superior o shoring decision is, after all, also a competence! Possible inputs from various levels of the open system are listed in Table 2.1.

The open system model thus has its advantages and disadvantages. The main disadvantage is that it fails to provide a concrete de nition of compe- tencies. Though there are a number of simple de nitions of competencies available in literature, a competency is best seen as a combination of ele- ments [48] that come together to generate the value-adding output. Drejer [27] suggests human beings, technology, organization and culture as the key elements that de ne a competence. Drejer's elements have been synthesized and enumerated in gure 2.3). Drejer's elements taken as the basis of the open system proposed by Sanchez thus complete the competence-based view of the rm.

To sum up, the competence-based view of the rm thus focuses on capa- bilities and resources, both tangible and intangible, that exist within a rm, and help it achieve an output that is superior to that of its competitors in the market. The view, as opposed to the market forces and industry struc- ture view, is strictly an internal view. Whereas the study of market forces and industry structures aids the top management of the company in making long-term decisions, the competence-based view can help middle managers develop and deploy existing competencies in the short- and medium-term. Thus, the theory of competence management is considered appropriate to act as the structure for an o shoring decision model which will be developed within this work.

2.2.4 Transactions, Contracts and Firm Boundaries

Ronald Coase's seminal work, The Nature of the Firm [20] may be taken as the basis for explaining the forces that lead to the outsourcing decision. In his work, Coase explains the reason for the existence of rms on the basis of transaction costs. He argues that we see the formation of rms, as opposed to individuals contracting out their services in an independent manner, due to the presence of contracting and transaction costs. These costs act as market frictional forces , and may be viewed as the cost of using the price mechanism . He carries the same argument to explain the various partnership agreements that rms form with each other. These agreements decide the boundary of activities of the rm. The agreements may take di erent forms, from spot purchasing to long-term supply contracts, and from loose cooperations to joint ventures. All agreements, whether they be between rms, or between employees and the rm, aim to reduce transaction costs by substituting fewer contracts for multiple contracts.

Nevertheless, it is at the other end of the transaction cost spectrum that we nd the motivation for rms to outsource activities [5]. As this group of people called the rm grows, the cost of arranging activities internally increases. Offne of the reasons for this increase is the increasing amount of

illustration not visible in this excerpt

Figure 2.3: Key Elements of a Competency

Source: Modi ed from Drejer (2001)

complexity that comes with the organization of multiple activities by a handful of managers. This phenomenon may be taken as the explanation of the focus on core competencies that has been used by organizations as a strategic rule-of-thumb lately.

Thus the boundary of the rm is decided by its internal e ciencies as compared to e ciencies of other players in the market engaged in the same activity. Therefore the idea of comparative advantage that runs through the works of Adam Smith [71], David Ricardo [59] and Michael Porter [56] may be applied to transactional economics by arguing that the boundaries of the rm are directly in uenced by market forces such as the ones discussed in Section 2.2.2. Market structures thus decide rm structures. This is a self-evident fact with many available examples.

In any case, outsourcing is thus a balancing act between transaction costs incurred through interactions with internal and external players. Kotabe[47] con rms this e ect by establishing emperically a negative curvilinear relation- ship between the degree of outsourcing and the nancial performance of rms in Holland. This equation is often interpreted by managers as the equation between the costs and bene ts of outsourcing [47]. The same phenomenon of an optimum is experienced by companies faced with the o shoring decision, though with largely di erent in uencing factors (see Fig. 2.4).

The forces that decide the boundary of activities of a rm when transac- tions with rms in other markets take place are very unique, and often very di erent from a normal outsourcing scenario. It may be interesting to explore the application of the above model to the o shoring decision in our present context. Off shoring of activities, which has become a substantial trend with rms based in western industrialized nations, may itself be explained by discussing these factors. The pressure to o shore activities may be taken as a combination of two trends: the trend to contract-out activities and the trend to move activities to low-cost locations, viz. developing countries.

The trend to contract-out activities has been noticeable lately, with an increasing focus on core competencies by many rms. This trend has been extremely noticeable in the automobile industry, with its cost pressures, mass-producing nature and di erentiation based on e ciencies. The trend to contract-out e ciently is exempli ed in Toyota's supplier partnership pro- grams (Cole and Yakushiji (1984) [21] estimated a $300-$600 cost advantage per car through superior supplier relations by Japanese car manufacturers), and in the increased sharing of capacities within the auto industry. These are nothing but activities that companies undertake to reduce transaction costs in environments of uncertainty.

The o shoring of activities to low-cost locations, on the other hand, is a rm's attempt to decrease its internal costs of production , which may be

illustration not visible in this excerpt

Figure 2.4: Interactions Between Two Firms Offperating in Di erent Markets

de ned as the internal costs that a rm faces in producing the product or service that it then sells to the nal customer. But the process of o shoring increases the transaction and contracting costs for the rm. The degree to which these costs are incurred depends on many factors. It depends on the kind of contract that the two rms decide to undertake, ranging from joint ventures to loose cooperations. But in any case, these costs increase with the uncertainty of the environment in which the contract is made. Uncertainty may arise from such varied factors as the lack of knowledge of new markets, false expectations from possible partner rms, cultural di erences and the presence of negative attitudes within the management of the rm towards the process of o shoring. In any case, the decision to o shore, like any other economic decision, is taken and implemented by managers at both ends, who are but human actors with traits of bounded rationality and opportunism[76].

The uncertainty in the transaction environment is also contributed by the nature of work being outsourced. The uncertainty is lower in the case of clearly-de ned work packages. Knowledge-based partnerships are more di cult to contract because of the lack of the ability to de ne the boundaries of the contractor-supplier relationship [41]. This factor explains the tendency of rms to outsource simpler, more manual work. This trend is of course extremely visible in the Business Process Offutsourcing (BPOff) industry, of which countries like India have been major recepients in the recent past. The movement of production activities to locations like China, Thailand and India by automobile OffEM's based in the USA and Europe, while retaining research, development and design activities in home countries, also re ects the di culty of partnering with new players in more intellectual and thus, intangible elds. Thus, in the present context, the o shoring of product development and engineering services is expected to present problems best described by the incomplete contracts theory[34][7].

Williamson [76] shows the presence of uncontractable factors present in the agreements between rms. These factors can range from, for ex- ample, the requirement for innovative design to the adapting of technology obtained through association with a partner and then used for individual pro t. Such factors abound in any agreement, but there are special factors to be considered in the special case of outsourcing activities to foreign part- ners. Uncertainty and risk arising out of a lack of knowledge of new markets, new national and company cultures, new attitudes of possible future partners make many factors non-contractable, that would be contractable, or at least implicitly understood, under normal nearshoring conditions.

Ghoshal and Moran [32] have criticized the Transaciton Cost Theory for its assumption that organizations are substitutes for structuring e cient transactions when market fails. Contract theory's strong focus on reducing transactional costs, and actually comparing these costs with costs associated with, say, buying a product in the market, is to be avoided. That there is no contradiction in using contract theory for strategic and organizational decisions is substantiated by the fact that Ghoshal and Moran also admit the advantages that organizations have in organization certain types of eco- nomic activities through a logic that is very di erent form that of a mar- ket . Thus, components of the transactional cost economics, if used for an o shoring decision model, may still prove to be useful and, more importantly, relevant.

The foremost application of the incomple contracts theory is during nego- tiations or the writing of o shoring contracts, when one of the biggest points of contention is the payment type. In general, client companies (the com- panies that o shore activities) prefer xed price contracts whereas vendor companies (companies to which work is o shored) prefer time- or material- based payments. These are common strategies that both rms follow to reduce own risk. Gopal et al [33] take the special case of the Indian IT and BPOff Industry to discuss many factors that have an in uence on the pay- ment type decided in the nal contract. Among these factors are such varied factors as requirement uncertainty of the client rm, the size of the project teams, resource shortages, previous o shoring experience of the client com- pany and even the maturity of the Management Information System (MIS) available at the client.

Contracting factors thus promise to deliver important criteria which may be used in selecting possible o shoring partners successfully. The presence of these contracting issues could also clearly be seen in the previous experience of the client company which is the subject of this work. Thus an o shoring decision model that would include beforehand, factors that will decide the success of the o shoring agreement would certainly prove to be more e cient than a model that does not.

2.2.5 Summary of Available Theories

Each of the above theories may be seen as explaining a di erent facet of the o shoring decision, or, for that matter, of the functioning of any rm. These facets are represented in Fig. 2.5. Thus, the theory of macro-economic forces describes the globalized economy that is the background for the o shoring decision. Market forces within the two markets (the onshore market, and the o shore market) de ne market and industry structures. The resources and competencies of the two rms (the client and the prospective partner) are described by the resource-based veiw. The interactions between the rms during o shoring collaboration are described by Transactional Economics and Contract Theory.

illustration not visible in this excerpt

Figure 2.5: Application of the Discussed Theoretical Constructs to the Off - shoring Decision

As discussed before, the theoretical construct of the resource-based view is best suited for the exercise of constructing an o shoring decision method, and this would be taken as the base of the model which will be constructed in this work. But certain components from the theories discussed above may also be applied to explain the phenomenon of o shore-outsourcing, and to derive a successful decision model for the same, with varying degrees of success. The success of such a decision model would certainly depend upon the inclusion of the critical factors, but the usefulness of each inclusion needs to be tested. A framework to test such factors for inclusion will be constructed in Chapter 5, in order to justify and create the proposed decision model.

2.3 Existing Decision Tools and Models

There do not exist any standard holistic tools for o shore partner selec- tion, speci c to the automotive engineering services industry. There do exist numerous tools for outsourcing partner selection, or vendor selection. Such tools which may prove useful in de ning the o shoring decision in the present context will be discussed in this section. Additionally, there is a strong need today to understand the speci c requirements of rms in an IT-enabled, globalized o shoring world. The applicability of existing decision tools in this speci c context also needs to be tested.

In introducing the need for such an o shore partner selection model, Jane Siegel, the Director at the School of Computer Sciences at Carnegie Mellon University (which founded the basis for both the People Capability Matu- rity Model and the e-Sourcing Capability Model, important developments in o shoring study) said, The outsourcing business involves billions of dollars, but right now companies that use these services have no consistent basis for making their selection .

The current practice for o shoring decisions at most companies can be de- scribed as being business tool-based. These management tools can be divided into nancial tools (Cost-bene t Analysis, Return on Investment, Return on Capital Employed), strategic tools (Balanced Scorecard, Total Quality Management) and certi cation tools (People Capability Maturity Model, e- Sourcing Capability Model). These tools will be discussed in brief here, and their relevance and possible use in the model will be discussed.

2.3.1 Financial Tools

The use of nancial tools to carry through o shoring decisions is certainly an e ective and widely-used method. Managers at companies facing the o - shoring decision often rely upon nancial criteria to make strategic decisions [60]. Thus, decisions which would increase the nancial performance of rms are preferred (the bottom-line approach). The e ectiveness of these tools has been proved, and is well-established.

Thus, nancial tools can aid the o shoring decision at many steps. The need to o shore may be established using cost or pro t criteria. Off shoring goals may be set in cost-reduction or return on investment (RoI) terms. Off shoring partner selection may also be done on the basis of cost and RoI measures.

What many discussions in the last decades have warned against is the over-emphasis of nancial tools for decision making [44] [9]. The main cri- tique of nancial tools has been their inability to account for critical asset creation like competencies, know-how, intellectual capital, internal processes and customer goodwill to name a few [15]. An implementation of holistic strategic tools like Total Quality Management (TQM), on the other hand, has been proved to increase the nancial results of rms [38]. Thus, not a displacement but an augmentation of nancial tools is the prescribed norm today [67]. The same rationale will be followed in this work, where nancial tools will be used, but a holistic viewpoint will be the goal.

2.3.2 Strategic Tools

Strategic management tools nd e ective implementation in o shore deci- sions at rms today. Thus, the o shoring decision is broken down into normal strategic issues, which might also normally be faced by top management. An industry analysis might provide the impetus to initiate an o shoring initiative and provide input about the attractiveness of the target market, processes that may provide a competitive advantage if o shored may be earmarked, and negotiating power studies may in uence o shoring partner selection.

The most important development in the shift towards holistic perfor- mance measures in the last decade has been the development of the Balanced Scorecard (BSC) methodology. The superiority of the BSC in de ning, im- plementing and controlling rm strategy has been tremendous. Its main advantages have been cited as being its long-term view, strategic empha- sis, and its ability to translate strategy into action [44]. The di erentiation of goals on the four perspectives ( nancial, customer, process, learning and growth) has also been widely attested as being useful. Moreover, due to its wide-ranging popularity, the BSC o ers further advantages of being widely- understood, and thus easy to implement.

The application of the BSC to the o shoring decision may thus be found useful in not only formulating the overall o shoring strategy, but also in delineating o shoring goals, in ascertaining evaluation criteria for possible o shore partners, in de ning Key Performance Indicators (KPI's) to mea- sure o shoring success, and to implement organizational change which might be required for the new o shored organization. Thus, the BSC is a promising tool which covers aspects across the whole range of the o shoring process. The BSC will be used later in Section 6.2 to de ne and structure the o - shoring goals of the client company.

2.3.3 Benchmarking/Certi cation Tools

In keeping with the growing importance of o shoring as a management trend, and in the special context of o shoring of IT-intensive business process, there

illustration not visible in this excerpt

Figure 2.6: The Balanced Scorecard Applied to the Off shoring Decision

Source: Modi ed from Kaplan/Norton, 1992

illustration not visible in this excerpt

Figure 2.7: Coverage of Certi cation Models Across Contractual Phases

Source: School of Computer Sciences, Carnegie Mellon University [43]

has been an attempt in the past ve years to create the basis of an o shore- readiness evaluation/certi cation methodology. The two most important certi cation methodologies in this eld have been created at the Software Engineering Institute (SEI) and the School of Computer Sciences (SCS) at the Carnegie Mellon University. These two methodologies are the People Ca- pability Maturity Model (PCMM) [37] and the e-Sourcing Capability Model (e-SCM) [43].

The PCMM, though initiated as a certi cation for software suppliers, is now the fast emerging standard for many other development service providers, including providers of engineering services work. The PCMM focuses on the maturity of workforce practices, which are de ned to be the industry bench- mark [23]. Thus, service providers may be certi ed based on the maturity level of processes on a ve-point scale, ranging from the initial level, the man- aged level, the de ned level, the predictable level, and nally, the optimizing level. Today, most leading engineering service provider rms in India have either already implemented the PCMM, or are in the process of doing so.

The e-SCM is a new model and was developed in 2003, also at the Carnegie Mellon University. Offne of the main collaborators in the develop- ment of this model was an Indian software service provider, Sathyam Tech- nologies, which is now also a major engineering service provider. The e-SCM is basically a best-practices benchmarking model, which helps de ne the ca- pability of rms to deliver o shore services. The e-SCM has been described as a capability model, as opposed to a maturity model like the PCMM. Thus, a higher level of e-SCM certi cation does not necessarily require the comple- tion of a lower-level certi cation rst. This is an advantage of the e-SCM, as this distinction provides for a more exible decision background, the ba- sic premise being that various processes at the same level might be more bene cial for various clients, and there need not necessarily exist absolutely better or worse processes. Another advantage of the e-SCM when compared to other certi cation methodologies like generic CMM models or the ISOff certi cation, is its emphasis on the various contractual phases in the o shoring agreement. Thus, processes that de ne the capability of the organization to carry out processes during these various phases have been kept in mind. Figure 2.7 compares the e ectiveness of the various certi cation methodologies across various contractual phases.

Despite the close t and apparent advantages of the e-SCM model, it still su ers from the same drawbacks as other benchmarking/certi cation models. The benchmarking models fail to take into account speci c criteria that de ne the need to collaborate with o shore partners- a need that is speci c for each client company. A certi cation model like the e-SCM de nes general best practices that re ect the ability of o shore partners to deliver quality processes, but it fails to provide an evaluation mechanism for speci c client requirements. Thus, a high certi cation rating will certainly re ect the higher competency level at the company, an evaluation method that accounts for competency levels required for speci c client needs is required. Herein the certi cation rating of possible partners might be one of the evaluation criteria, but certainly not the only one.

2.3.4 Summary of Existing Decision Tools and Models

Thus, decision tools that are presently used at di erent rms to deal with the o shoring question can be broadly classi ed into nancial, strategic and benchmarking tools. The important decision tools described above under each category are all used in o shoring practice today. But, no one tool can be credited as being capable of substantially capturing the various issues that de ne the decision to o shore. The absence of any standardized methodol- ogy to support the o shoring decision is mainly due to the newness of the large-scale global phenomenon that is o shoring. Special factors like market liberalization in many countries, the development of IT and communication technologies, and changing market structures in western countries have come together to create a very special global situation. Thus, though many models exist which deal with traditional outsourcing decisions, or generic strategic decisions, none can be transplanted to the o shoring scenario with a rea- sonable degree of success. Any successful o shoring decision model should be able to capture the factors that de ne the speci c situation described above. Though the above-described tools may be certainly useful in de ning certain facets of an o shoring decision, a holistic model which combines and surpasses the above described tools is required.

In Chapter 3, the problem statement and the goals of the present work will be discussed while keeping this situation in mind. The later chapters will go on to describe the present situation in greater detail, set speci c criteria that a successful o shoring decision support model should ful l, and create an o shoring decision methodology.

Chapter 3 Problem Statement and Goal of Present Work

3.1 Problem Statement

The problem that presents itself to any scienti c examination of the o shoring decision is two-pronged: one of theory, and the other practical. Management science has provided managers (though often, it is also the other way round) with a few theories that can give clues to the forces-at-play. Most of these theories are, and understandably so, general rm and market theories which can also be applied to the o shoring decision. Here, the decision to o shore is seen as another strategic decision that a company must take to meet its organizational goals. The importance of the theory or world-view used for taking an e ective strategic decision is, of course, supremely important. The choice of the correct theoretical base on which a decision model can be based for the particular case of o shoring of automotive engineering services work in today's unique economic, political and sociological environment is thus the problem that faces any CEOff who wants to make a rigorous o shoring decision.

The practical problem of this investigation arises from the following three groups:

1. The application of the relevant theoretical base to construct the deci- sion model,
2. Enforcing the development of a useful and usable decision model, and
3. Achieving the ability to test the model in the real world

The construction of the decision model is of course the core problem of this work. A considerable amount of work, both scienti c and non-scienti c, has been achieved in this area. Especially in the last decade, there has been a spate of decision tools and scienti c literature in the area of IT outsourcing and BPOff, speci cally targeted at the phenomenon of outsourcing to India. Offn the other hand, the output in the area of o shoring of engineering ser- vices has been limited, due to the lack of any substantial business activity in this area in the recent past. Now, as engineering services companies with op- erations in the western world look increasingly towards Asia as a viable pool of resources at a fraction of a cost, and with ever-increasing activity in the area of engineering services o shoring, there is a great need to understand and guide the phenomenon. The need to understand the issues surrounding this move and to implement the understanding in a decision model far sur- passes the scienti c attention that it has received, and there do not exist any speci c decision tools for the o shoring of engineering services problem.

The problems of constructing a decision model that is both useful and usable are also immense. A theoretical construct has not been aimed for here. The usability of the proposed decision model at a real-world company is a critical success factor for this piece of work. This will be ensured through the integration of real-world companies into the creation of the model. Inputs from managers at both the client European supplier and possible Indian vendors will be used as bricks of the construct, where theory would be the binding cement. The proposed tools that would constitute the model will themselves be implemented for the speci c case, and results presented, either within the main text or as appendices.

Testability is bound to present problems which are only to be expected in a scienti c study lasting only six months. Due to the ex-post nature of real-life feedback, validation of the model can truly be done only once the model has been implemented at a company and measurable target values of parameters like revenues, pro t and market share are made available. Thus, long-term validation of the model will not be made possible within the body of this work. Short-term validation, however will be collected as a direct result of implementation of the decision tools, and the feedback obtained from the companies involved. Certain results obtained from various studies that form part of this work would also be compared with real-world examples, or benchmarked with recent trends.

3.2 Goals of Present Work

Based on the above requirements, the present work aims to:

1. Understand, collect and model demands for a successful method to sup- port the decision to o shore automotive engineering services, with the help of a speci c example of a European automotive supplier company, and the speci c o shoring location India.
2. Based on a critical evaluation, choose from various theoretical clusters elments which would help design an o shoring decision model which is both e ective, insofar as it helps organizations make a superior decision, and implementable.
3. Construct and outline practical tools and methods that comprise the proposed decision model, and propose a solution for the o shoring prob- lem outlined above.
4. Provide hints for implementation of the constructed decision method, and suggest areas of further scienti c studies.


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Competence-Based Decision Support for the Offshoring of Automotive Product Development Processes to India
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competence-based, decision, support, offshoring, automotive, product, development, processes, india
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Master of Science and MBA Sanket Bhatia (Author), 2006, Competence-Based Decision Support for the Offshoring of Automotive Product Development Processes to India, Munich, GRIN Verlag,


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