The Effects of Outsourcing Decision on Organization Performance in The Manufacturing Industry (A Case Study of Cadbury Nigeria Plc., Ikeja, Lagos)
1.1 BACKGROUND TO THE STUDY
The recent years has seen an interesting debate on outsourcing. The outsourcing history has a direct link with the history of the growth of the contemporary business organizations. Outsourcing came as a result of over diversification that occurred majorly in the 1970s and 1980s. The result of this was increasing review of the core activities of the companies as they sought to focus on utilizing their core competencies and outsourcing the none core functions (Lysons & Farrington, 2000). Firms generally outsources those functions that are resource intensive, that is either high labor or capital costs, those that requires specialist competencies, those that are dependent on the rapidly changing technology as well as those that requires expensive investment.
The history of outsourcing is deeply rooted in the history of the growth of modern business enterprise. Outsourcing was developed as a reaction to the over diversification of the 1970s and early 1980s. This led many enterprises to review the core activities and concentrate on their core competences, i.e. what the organization believe they do best (Lysons & Farrington, 2000). The activities most easily outsourced are those that are: resource intensive (high labor or capital costs), those requiring specialist competences, those subject to rapidly changing technology and those requiring expensive investment
Outsourcing strategies originated way back in the 1960s and 1970 (Quinn and Hilmer, 1994). Outsourcing takes place when a firm entrusts some or all the entire non-core functional activities out of the core competences to external service providers in exchange with better conditions for the competitive advantage of Outsourcing (Sharpe, 1997).
The changing organization trends towards globalization have brought in new issues about outsourcing. Business environments are increasingly becoming global in many firms. Regional agreements such as North America Free Trade Agreement (NAFTA) between the United States (U.S), Canada, Mexico and the development of the European Market with a single currency facilitated the development of trade on global basis. As a result of this trend organizations have expanded the geographical depth of their business undertakings. This is with regard to the market served as well as production sources for products manufactured and service delivery. Emanating from these changes organization have acquired opportunities such as achieving greater economies of scale, selling in wide range markets, and accessing lower cost labor sources for product manufacture and service delivery. However, globalization has presented a number of challenges such as complex manufacturing Network, distribution, language difference, culture, legal requirement and currency movements.
Arguments of free trade are based on the law of comparative advantage, which traces its origin to an English economist known as David Ricardo (1772-1823). The law offers that countries have to specialize in the production and exportation of product and services which they produce at a lower comparable cost to competing countries. Nevertheless, trade liberalization has been blamed for shrinkage of jobs in first-world economies due to enterprises outsourcing manufacturing and service related activities to developing economies where labor costs are lower, a trend known as off- showing. Off- showing is the transfer of organizational activities which are carried out locally to service providers in other countries. Despite this fact, previous studies by Kakabadse, (2002) show that the cost saving argument for outsourcing is not as attracting as the potential improvements to be gained from quality of service or resource utilization flexibility.
Emerging results suggest that offshore outsourcing is driven more by cost considerations as suggested by (Hutchins, 2004). Globalization has brought about global sourcing which has become a distinct corporate strategy.
Global trends in globalization has contributed to numerous firms outsourcing some of their services to specialized firms in order to give much emphasis on their competitive advantage. Firms are sometimes forced to seek outsourcing services as a result of lacking human resources as they face challenges in getting right skills and knowledge which can make them gain world class capabilities similar to that expected from service provider (Kremic.et al., 2006).
The choice of offshore outsourcing or any other type of global sourcing destination will depend on a variety of factors. These factors include; labor costs, technological advancements, infrastructure, language, education system, competent manpower, host government support, data security, political and economic environment, cultural compatibility and legal maturity. Most firms in Europe and America are having offshore outsourcing in countries like China and India (Willcocks. L., 2003). These has been brought about by the fact that the two countries are densely populated leading to cheap labor costs and they also have the right technological infrastructure. Internationally they are known as having the hub for technology and business (Hirschheim. R. et al., 2007).
1.2 STATEMENT OF RESEARCH PROBLEM
The Manufacturing industry in Nigeria Such as Cadbury Nigeria Plc. Ikeja, Lagos, today is a beehive of activities and is gaining a lot of attention both within and outside the country. Industry trends such as rapid outlet expansion, strategic alliances (especially with companies in downstream sector of the oil and gas industry), and entrant of foreign players amongst others lends credence to these assertions. There exist in every economy, (whether developed, developing or less), various type of industries; manufacturing, service, food and beverage, textile, chemical etc. these industries compete among themselves for resources, infrastructure, market share and relevance, for successful competition, companies use creative and innovative weapons to compete favourably for profit maximization.
However the concept of outsourcing has not received a lot of attention as considered being important elements that account for the growth and remarkable performance of the Manufacturing industry in Nigeria. Also the effects of outsourcing on firms? performance are not completely clear. Previous outsourcing studies show contradictory results; while some claim a positive relationship between outsourcing and performance outcomes, others report no significant or even negative effects. (Rothaermel and Deeds (2001).
Outsourcing without proper management control could sometimes result in job losses, According to Ghodeswar and Vaidyanathan (2008) a large number of employees whose organizations outsource their business activities may have similar problems to those employees that have undergone downsizing, while organizations claim that the basis for outsourcing is to increase business efficiency.
1.3 OBJECTIVES OF THE STUDY
The general objective of the study is to determine the extent to which outsourcing have contributed to the performance of Manufacturing industry (Cadbury Nigeria Plc., Ikeja, Lagos) in Nigeria. The specific objectives of the Study are to:
(i) To examine whether business outsourcing assist Cadbury Nigeria Plc. entrepreneurs to reduce operation cost in their business.
(ii) To find out if knowledge process outsourcing supports Manufacturing Industry (Cadbury Nigeria Plc.) companies to build customers relationship.
(iii) To find out if outsourcing assist firms to increase sales turnover.
(iv) To determine whether outsourcing strategies adopted by a firm assist Nigeria Manufacturing Industry companies to increase profitability.
1.4 RESEARCH QUESTIONS
The research questions were
i. What is the effect of outsourcing decision on organization performance in Cadbury Nigeria Plc.?
ii. What is the effect of outsourcing decision on productivity at Cadbury Nigeria Plc.?
iii. What is the effect of outsourcing decision on profitability in Cadbury Nigeria Plc.?
1.5 SIGNIFICANCE OF THE STUDY
The Nigerian economy particularly the manufacturing sector faces a major challenge of performance in terms of efficient and effective utilization of the available resources to generate adequate output that can compete globally. Agusto (2004). The study would help Cadbury Nigeria Plc. investors to embrace the uniqueness of outsourcing strategy to venture into the business with lesser stress. It will also help them to see the opportunities that exist in embracing innovation technique as outsourcing that could help build customers relationship, increase productivity and efficiency of employee and assist in adoption of outsourcing strategies by Nigeria Manufacturing Indtry to increase turnover and profit.
Finally this becomes significant because it would provide a framework for Cadbury Nigeria Plc. Managers and staffs to be able to adopt outsourcing strategies in a unique manner to stay ahead of competition in their industry and also be able to compete globally with Manufacturing industry in developed countries thereby being in a model for the advanced world in any substantial form they desire which could be in form of developing unique menu that would be desired and demanded for globally by enterprise innovation .
1.6 SCOPE AND LIMITATIONS OF THE STUDY
The content scope comprised outsourcing, as the independent variable and outsourced services and organizational performance as the dependent variable.
Geographically, the study was carried out in Ikeja, Lagos where the Cadbury Nigeria Plc. was located.
The respondents for data gathering were plc. to managers and middle level staff in charge of production and business process in the study organizations. These managers are expected to be knowledgeable about outsourcing. The focus of the study was the Cadbury Nigeria Plc. industry of the Nigerian economy because of the importance of the sector to the overall economy of the country and its impact in helping the country to generate employment and increase revenue base.
1.7 DEFINITION OF TERMS
Outsourcing: Outsourcing is the process by which an organization contracts with another individual or company to get some of its work done. Outsourcing simply means to transfer work responsibilities and decision rights to someone outside the business.
Business Process Outsourcing (BPO): It is a situation in which a particular process task is outsourced. An example could be payroll. Business process outsourcing work could be either back office related or front office work.
Information Technology Outsourcing (ITO): This is usually overseen by the Head of information technology of an organization. However the head of IT is often called in to manage BPO and KPO operations where no significant IT skills are involved.
Outsourcing Decision: Outsourcing decision (make-or-buy decision) is made only after an analysis that compares internal production and opportunity costs with purchase cost and assesses the best uses of available facilities.
Organization Performance: Organizational performance involves the recurring activities to establish organizational goals, monitor progress toward the goals, and make adjustments to achieve those goals more effectively and efficiently. Those recurring activities are much of what leaders and managers inherently do in their organizations some of them do it far better than others. (It’s useful to think of organizational change in the context of organizational performance, rather than change for the sake of change, so the topic of Organizational Change will be useful to the reader, as well.
Manufacturing Industry: The branch of manufacture and trade based on the fabrication, processing, or preparation of products from raw materials and commodities. This includes all foods, chemicals, textiles, machines, and equipment.
1.8 HISTORICAL BACKGROUND OF CADBURY NIGERIA PLC.
Cadbury Nigeria is a member of the Cadbury Schweppes Group, a major player in the global confectionary and beverages markets with over 40, 000 employees and business operations in 200countries. Cadbury Nigeria has a portfolio of brands that are market leaders in the Confectionery, Food Drinks and Foods categories. Cadbury?s initial objectives in the 1950s to source cocoa and prospect for a market in Nigeria led to the establishment of a manufacturing facility in Ikeja, north of Lagos, in 1965. The company has since grown organically to become one of the leading manufacturers in Nigeria, with a rising profile in the Europe, Middle East Africa (EMEA). Listed on the Nigerian Stock Exchange since 1976, Cadbury is in the top 10 of the 258 quoted equities by market capitalisation at the end of 2002. Cadbury Schweppes currently owns 46.3% of the equity, with the balance stock held by about 40,000 individual and institutional shareholders. Cadbury Nigeria is one of the few signatories to date to the Convention on Business Integrity. Its lead brands include Tom Tom, Bournvita and Bubba bubble gum. Other brands include Cadbury Eclairs, Cadbury Chocki, Trebor Mints, Halls Take 5 (vitaminised candy), and Creme Rollers. Cadbury Nigeria also owns a cocoa processing business, the Stanmark Cocoa Processing Company.