Chapter 2, Problem 8P

a)

Summary Introduction

To determine: The suitable outsourcing provider using factor- rating method.

Introduction:

Factor-rating method:

The factor-rating method is a quantitative approach to make a decision from various alternatives such that the decision is beneficial to the firm involved. This method is utilized to decide on new layout, new locations, best supplier, outsourcing providers etc.

Answer to Problem 8P

The suitable outsourcing provider is Canada.

Explanation of Solution

Given information:

Selection criterion	Weight	England	Canada
Price of service from outsourcer	0.1	2	3
Nearness of facilities to client	0.6	3	1
Level of technology	0.2	1	3
History of successful outsourcing	0.1	1	2

Low Risk = 1

High Risk = 3

Formula to calculate weighted risk:

$\text{Weighted Risk = Weight × Risk rating}$

Formula to calculate Total weighted risk:

$\text{Total weighted risk = }{\displaystyle \sum \text{Individual}\text{weighted}\text{risk}}$

Excel Formula:

Calculation of weighted risk for England:

The weighted risk is calculated my multiplying the weights with risk rating of each criteria.

The weighted risk is calculated as follows:

Service from outsourcer:

$\begin{array}{c}\text{Price of service from outsourcer = 0}\text{.1 }\times \text{ 2}\\ =\text{0}\text{.2}\end{array}$

The weighted risk for price of service from outsourcer is 0.2.

Nearness of facilities to client:

$\begin{array}{c}\text{Nearness of facilities to client = 0}\text{.6 }\times \text{ 3}\\ =1.8\end{array}$

The weighted risk for Nearness of facilities to client is 1.8.

Level of Technology:

$\begin{array}{c}\text{Level of Technology = 0}\text{.2 }\times \text{ 1}\\ =\text{0}\text{.2}\end{array}$

The weighted risk for Level of Technology is 0.2.

History of successful outsourcing:

$\begin{array}{c}\text{History of successful outsourcing = 0}\text{.1 }\times \text{ 1}\\ =\text{0}\text{.1}\end{array}$

The weighted risk for History of successful outsourcing is 0.1.

Calculation of Total weighted risk:

The total weighted risk is calculated be summing all the weighted risk values.

$\begin{array}{c}\text{Total weighted risk = 0}\text{.2 + 1}\text{.8 + 0}\text{.2 + 0}\text{.1}\\ \text{= 2}\text{.3}\end{array}$

The total weighted risk for England is 2.3.

Calculation of weighted risk for Canada:

The weighted risk is calculated my multiplying the weights with risk rating of each criteria.

The weighted risk is calculated as follows:

Price of service from outsourcer:

$\begin{array}{c}\text{Price of service from outsourcer = 0}\text{.1 }\times \text{ 3}\\ =\text{0}\text{.3}\end{array}$

The weighted risk for price of service from outsourcer is 0.3.

Nearness of facilities to client:

$\begin{array}{c}\text{Nearness of facilities to client = 0}\text{.6 }\times \text{ 1}\\ =0.6\end{array}$

The weighted risk for nearness of facilities to client is 0.6.

Level of Technology:

$\begin{array}{c}\text{Level of Technology = 0}\text{.2 }\times \text{ 3}\\ =\text{0}\text{.6}\end{array}$

The weighted risk for Level of Technology is 0.6.

History of successful outsourcing:

$\begin{array}{c}\text{History of successful outsourcing = 0}\text{.1 }\times \text{ 2}\\ =\text{0}\text{.2}\end{array}$

The weighted risk for History of successful outsourcing is 0.2.

Calculation of Total weighted risk:

The total weighted risk is calculated be summing all the weighted risk values.

$\begin{array}{c}\text{Total weighted risk = 0}\text{.3 + 0}\text{.6 + 0}\text{.6 + 0}\text{.2}\\ \text{= 1}\text{.7}\end{array}$

The total weighted risk for Canada is 1.7.

The weighted risk value for England is 2.3. The weighted risk value for Canada is 1.7. Since, the risk value for Canada is less for England (1.7 < 2.3), Canada is selected.

The suitable outsourcing provider is Canada.

b)

Summary Introduction

To determine: The impact of doubling the weights used in part (a).

Introduction:

Factor-rating method:

The factor-rating method is a quantitative approach to make a decision from various alternatives such that the decision is beneficial to the firm involved. This method is utilized to decide on new layout, new locations, best supplier, outsourcing providers etc.

Answer to Problem 8P

The Doubling of weights will have No Change.

Explanation of Solution

Given information:

Selection criterion	Weight	England	Canada
Price of service from outsourcer	0.2	2	3
Nearness of facilities to client	1.2	3	1
Level of technology	0.4	1	3
History of successful outsourcing	0.2	1	2

Low Risk = 1

High Risk = 3

Formula to calculate weighted risk:

$\text{Weighted Risk = Weight × Risk rating}$

Formula to calculate Total weighted risk:

$\text{Total weighted risk = }{\displaystyle \sum \text{Individual}\text{weighted}\text{risk}}$

Excel Formula:

Calculation of weighted risk for England:

The weighted risk is calculated my multiplying the weights with risk rating of each criteria.

The weighted risk is calculated as follows:

Price of service from outsourcer:

$\begin{array}{c}\text{Price of service from outsourcer = 0}\text{.2 }\times \text{ 2}\\ =\text{0}\text{.4}\end{array}$

The weighted risk for price of service from outsourcer is 0.4.

Nearness of facilities to client:

$\begin{array}{c}\text{Nearness of facilities to client = 1}\text{.2 }\times \text{ 3}\\ =3.6\end{array}$

The weighted risk for nearness of facilities to client is 3.6.

Level of Technology:

$\begin{array}{c}\text{Level of Technology = 0}\text{.4 }\times \text{ 1}\\ =\text{0}\text{.4}\end{array}$

The weighted risk for Level of Technology is 0.4.

History of successful outsourcing:

$\begin{array}{c}\text{History of successful outsourcing = 0}\text{.2 }\times \text{ 1}\\ =\text{0}\text{.2}\end{array}$

The weighted risk for History of successful outsourcing is 0.2.

Calculation of Total weighted risk:

The total weighted risk is calculated be summing all the weighted risk values.

$\begin{array}{c}\text{Total weighted risk = 0}\text{.4 + 3}\text{.6 + 0}\text{.4 + 0}\text{.2}\\ \text{= 4}\text{.6}\end{array}$

The total weighted risk for England is 4.6.

Calculation of weighted risk for Canada:

The weighted risk is calculated my multiplying the weights with risk rating of each criteria.

The weighted risk is calculated as follows:

Price of service from outsourcer:

$\begin{array}{c}\text{Price of service from outsourcer = 0}\text{.2 }\times \text{ 3}\\ =\text{0}\text{.6}\end{array}$

The weighted risk for price of service from outsourcer is 0.6.

Nearness of facilities to client:

$\begin{array}{c}\text{Nearness of facilities to client = 1}\text{.2 }\times \text{ 1}\\ \text{= 1}\text{.2}\end{array}$

The weighted risk for nearness of facilities to client is 1.2.

Level of Technology:

$\begin{array}{c}\text{Level of Technology = 0}\text{.4 }\times \text{ 3}\\ =1.2\end{array}$

The weighted risk for Level of Technology is 1.2.

History of successful outsourcing:

$\begin{array}{c}\text{History of successful outsourcing = 0}\text{.2 }\times \text{ 2}\\ =\text{0}\text{.4}\end{array}$

The weighted risk for History of successful outsourcing is 0.4.

Calculation of Total weighted risk:

The total weighted risk is calculated be summing all the weighted risk values.

$\begin{array}{c}\text{Total weighted risk = 0}\text{.6 + 1}\text{.2 + 1}\text{.2 + 0}\text{.4}\\ \text{= 3}\text{.4}\end{array}$

The total weighted risk for Canada is 3.4.

The weighted risk value for England is 4.6. The weighted risk value for Canada is 3.4. Since, the risk value for Canada is less for England (3.4 < 4.6), Canada is selected.

The doubling of weights of the risk avoidance criteria does not alter the result arrived at in part (a). The weighted risk value is doubled for England and Canada. But, the risk value of Canada is still lower than England. The result will not change irrespective of doubling the weights because the risk avoidance criterion value is unaltered.

Hence, the Doubling of weights will have No Change.