THE IMPACT OF OUTSOURCING DECISION ON MATERIAL AVAILABILITY

1.1 Introduction

Outsourcing decision on material availability is the contracting out of an internal business process to measure the percentage of the total inventory of a system operationally capable of performing an assigned mission at a given time, based on materiel condition. According to Hung (2006), outsourcing strategy on Organization is the contraction of operations and responsibilities of a specific business function to a third party company or service provider to execute (Hung, 2006). Consequently, the management and development of innovations in outsourced activities become the responsibility of an agent external to the firm. Outsourcing decisions may affect company’s cost structures, long-term competitive situation and can also alter the nature of risks that the company must manage (Brannemo, 2006).

As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Research hypothesis and questions, Limitation of the study and Definition of terms.

1.2 Background of Study

Material availability and input reliability shape productivity, especially in developing countries. For some resources like water, storage devices can be used to manage unreliable services (Baisa et al. 2010). However, electricity requires that agents respond in other ways, as power is prohibitively expensive to store. A common response to sustained power supply issues is forms to invest directly in technology in order to generate electricity on site, or self generation. By crowding out other investment opportunities, blackouts reduce productivity (Reinikka and Svensson 2002).

In the early 2000s, industrial customers in nearly every province in China experienced blackouts associated with resource scarcity (IEA 2006). Despite exports to build new power plants at a rapid rate, double-digit economic growth has led to a tight market. Furthermore, retail electricity remains under price-cap regulation with limited price response to shortages. Finally, residential and commercial electricity consumers were given priority over industrial customers. While historic in the magnitude of blackouts, this remains a major concern for China. As recently as the summer of 2011, China faced substantial power shortages.

Although outsourcing is still at its developing stage in Nigeria, it has benefited many companies (Orji, 2002) as well as created jobs opportunities for many Nigerians as well. Firms outsourcing part of their production process and services are benefiting from increased efficiency and profits.

The decision to outsource comes with numerous responsibilities and considerations by the company willing to outsource. The need to improve and speedup the production process of a firm may lead to a firm deciding to contract or outsource some of its production process to another firm or vendor to handle. The issue of wastages in developing countries including Nigeria has been a major issue. The in-ability of companies to effectively manage their outsourcing process is alarming.

Farney et al. (2004) and Gay and Essinger (2000) describe the importance of formal procurement procedures in creating a global vision for outsourcing and selecting outsourcing providers. However, even when organisations set out to carefully evaluate an outsourcing opportunity, making accurate comparisons of internal processes relative to external providers can be extremely difficult (Hayward & McDonagh, 2000).

There is a huge variation in how organisations define processes such as Order-entry or Accounts Payable and little standardization in how organizations deliver and manage these processes. Davenport (2005) argues it is therefore very difficult to compare what happens internally to what is on offer externally. Davenport goes on to describe the benefit of establishing business process standards for use in outsourcing decisions and to facilitate improvement of internal capabilities.

Acknowledging that specific skill-sets are required to outsource, then developing the expertise and supply of outsourcing skills is likely to continue to gain momentum. Govpro (2005) discussed the changing role of the Tim Collins procurement professional and Hazra (2004) describes how it has become critical to take a longer term, balanced, strategic view of outsourcing opportunities.

Gay and Essinger (2000) suggest that a strategic approach to outsourcing is most effective when organizations are prepared to adopt a new perspective on management control with the focus on output rather than inputs, these views are supported by Quinn in a recent interview; Companies might have brilliant designers, lawyers etc., but might not have the capability needed for managing outsourcing. They need to have the ability to evaluate alternative cost structures and to understand the strategic risks of outsourcing to one partner versus another.

A good outsourcing manager must be able to motivate partners to do what is needed. They must be able to monitor the deal through software and personal contact without interfering; to get lead signals they need to maintain strategic control. They need a totally different set of management skills, and the real essence of these skills is a learning capability and willingness.

Therefore, in Nigeria where the research was carried out, the activities that was conducted is to know the Impact of Outsourcing Decision on Material Availability.

1.3 Statement of Problems

Investigation revealed that outsourcing is still at its developing phase in Nigeria and has brought numerous benefits to companies in Nigeria practicing it. Never the less, wastages of raw materials and human resource have been a major challenge with companies outsourcing. A study conducted by Farney et al (2004) revealed that most companies in developing countries fail due to wastages leading to scarcity of materials poorly structured outsourcing process and decision. Low labour cost countries like China and India have experienced huge growth providing outsourced products and services to more developed Western economies in recent years. However the internal infrastructures in developing countries are often not adequate to cope with such rapid growth, therefore resulting in the accumulation of waste products.

Companies might have brilliant designers, lawyers etc., but might not have the capability needed for managing outsourcing. They need to have the ability to evaluate alternative cost structures and to understand the strategic risks of outsourcing to one partner versus another. A good outsourcing manager must be able to motivate partners to do what is needed. They must be able to monitor the deal through software and personal contact without interfering; to get lead signals they need to maintain strategic control. They need a totally different set of management skills, and the real essence of these skills is a learning capability and willingness.

1.4 Aim and Objectives of Study

The aim of the study is to examine the Impact of Outsourcing Decision on Material Availability using Seven Up Bottling Companies as a case study. In achieving this aim, the following specific objectives were laid out as follows:

1. To examine the effect of outsourcing decision on material availability in seven up bottling Company, Lagos;
2. To evaluate the criteria used when making the outsourcing decision in seven up bottling Company, Lagos;
3. To identify outsourcing challenges of seven up bottling Company; and
4. To suggest better outsourcing strategies that can be adopted by seven up bottling Company.

1.5 Research Questions

The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:

• What outsourcing process does the management of seven up bottling company pass through before outsourcing?
• What outsourcing challenges do seven up bottling company face?
• What are the effects of outsourcing decisions on material availability?

1.6 Research Hypothesis

In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.

Hypothesis One

• H0: There is no significant relationship between outsourcing strategy and the performance of an organization.
• H1: There is a significant relation between outsourcing strategy and the performance of an organization.

Hypothesis Two

• H0: Outsourcing decisions do not directly affect material availability in the production process.
• H1: Outsourcing decisions directly affect material availability in the production process.

1.7 Significance of Study

The study will highlight various outsourcing strategies that will be beneficial to both management and staff of seven up bottling company.

The study will also show case outsourcing challenges to enable procurement managers and officers in organizations to have a deep understanding of these challenges and develop strategies to tackle them effectively.

1.8 Scope of Study

The study will cover the impact of outsourcing decision on material availability using seven-up bottling company, Lagos as a case study.

All findings and recommendations from the study may not reflect the true view of outsourcing management and strategy in Nigeria, as the researcher could not cover a wider area due to financial and time constraints.

1.9 Limitations of the Study

During the course of this study, there were some problems encountered which stood as limitations to the research work. Some of the limitations include:

1. Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
2. Establishment Policies: Establishment policies posed a serious limitation as most staffs are not ready to release information needed for this research work. There were lots of information needed from the staffs of this establishment to enhance the study which took them time to release or they did not release at all for security purposes, hence the scope was reduced.
3. Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
4. Initial Cooperation Delay from Respondents: A particular limitation of this work came as a result of the respondent refusal to offer their cooperation at the initial time they were contacted. This contributed in making the success of this research study difficult.

1.10 Definition of Terms

Outsourcing:

It refers to the delegation of one or more business process to an external provider, who then owns, manages and administers selected processes based on defined measurable performance matrices.