IMPACT OF OUTSOURCING DECISION ON MATERIAL AVAILABILITY (A CASE STUDY OF SEVEN UP BOTTLING COMPANY, LAGOS)

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Material availability and input reliability shape productivity, especially in developing coun-tries. 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 for .rms to invest directly in technology in order to generate electricity on site, or .self generation..1 By crowding out other investment opportunities, blackouts reduce pro- ductivity (Reinikka and Svensson 2002).2 In contrast to the literature, this paper examines how the onset of blackouts a¤ect productivity in an immense and rapidly-growing economy, namely China. Using enterprise-level panel data, we study how .rms respond to blackouts and estimate the resulting lost productivity and environmental e¤ects.

In the early 2000s, industrial customers in nearly every province in China experienced blackouts associated with resource scarcity (IEA 2006).3 Despite e¤orts 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.

Having identified non-core activities, Domberger (1998) emphasises the importance of developing a “framework of analysis which provides a structured, systematic approach to contracting decisions and outsourcing strategies” (p.9).

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 standardisation 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 organisations 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.

1.2 STATEMENT OF THE PROBLEM

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.

1.3 OBJECTIVES OF THE STUDY

The main aim of the study is to examine the impact of outsourcing decision on material availability. Specific objectives of the study are:

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

1.4 RESEARCH QUESTIONS

In-order to achieve the stated aim and objectives above, the researcher developed the following research questions:

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

1.5 RESEARCH HYPOTHESIS

To validate findings from the study, the researcher formulated the following hypothesis:

1. Ho: There is no significant relationship between outsourcing strategy and the performance of an organization.

Hi: There is a significant relation between outsourcing strategy and the performance of an organization.

1. Ho: Outsourcing decisions do not directly affect material availability in the production process.

Hi: Outsourcing decisions directly affect material availability in the production process.

1.6 SIGNIFICANCE OF THE 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.

1.7 SCOPE OF THE 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.

1.8 LIMITATIONS OF THE STUDY

However, there were some constraints that impinged on the research, these are;

1. Financial constraint:         The cost of sourcing information and collecting samples of bread was quite on the high side, which included visiting various small businesses in the various towns that made up the local government.
2. Time Constraint: The limited time frame given to achieve the research was also a constraint to the study.