A framework for analysing contracting strategies: studies on maximising paper production line life cycle profits

Abstract

Increasing market competition forces firms to improve profitability, and outsourcing and partnership contracts are some of the essential means of pursuing cost efficiency. Comparing the profitability of alternative contracting strategies, however, is a difficult managerial decision-making problem. The primary aim of the study is to develop a framework for analysing the total profitability of alternative contracting strategies. This framework attempts to capture the relationship between the costs and performance of alternative contracting strategies as well as to provide normative results to support managerial decision-making. The thesis is based on three main elements. First, an extensive literature study is made of measuring cost structures and performance in the paper industry, followed by a discussion of paper industry development trends and the resulting effects on contracting strategies. On the basis of this study, a framework to model costs and performance of alternative contracting strategies is constructed. Second, the accuracy and reliability of the developed framework is validated with empirical data of Finnish paper companies. Third, the usefulness of the model is tested by means of an imagined, real-like managerial decision-making process in which the profitability of three different contracting strategies to implement paper production is compared. The contribution of the thesis can be divided into two elements. First, the constructed modelling framework reveals the effects of the performance and costs of production inputs on total profitability in alternative contracting strategies. Second, the results of the thesis challenge practitioners and scholars to work towards unification of predominant theories regarding the measuring of total profitability instead of fine-tuning only parts of the measuring process. These two elements might also imply new business opportunities for able firms. On the basis of the discussion in this work, a few potential research questions can be formulated for future studies. First, developing the introduced model further and unifying central microeconomic theories with it remains as the main direction for future research. Second, the modelling framework should be further tested in real-world decision-making situations as the empirical validation results suggest that the model gives quite realistic results.