CHAPTER I: Introduction
1.1 Background of the Study
As production cost continues to rise in manufacturing industries, the concern of management has always been on cost effective technique. Invariably, manufacturers are faced with the problem on sourcing decision on materials acquisition to save cost and enhance foreseeable operation.
Economic principles is an ideal and commonly used basis in outsourcing decision making. Efficiency theory indicates that companies will allocate their resources within the value chain to those activities that give them comparative advantage. Meanwhile, other activities that do not offer such advantage will be outsourced. This is because some companies are highly integrated, others specialized and outsource their remaining transactions in market. Outsourcing occurs when a company purchases products or services from an outside supplier rather than performing the same work within its facilities, in order to cut costs.
The decision to outsource is a major strategic one for most companies, since it involves weighing potential cost savings against the consequence of a loss in control over the product or service. Some common examples of outsourcing include manufacturing of components, computer programming services, tax compliance and other accounting functions, transportation of products, payroll and other human resource functions etc.
The growth of outsourcing in recent years is partly the result of a general shift in business philosophy. Many companies sought to acquire other companies and diversify their business interest in order to reduce risk. As more companies discovered that there were limited advantages to running a large group of unrelated businesses, however, many began to divest subsidiaries and refocus their effort on one or few closely related areas of business. Companies try to identify or develop a “core competence” a unique combination of experience and expertise that would provide a source of competitive advantage in a given industry. All aspects of the company’s operations were aligned around the core competence, and any activities or functions that were not considered necessary to preserve it were then outsourced.
Some organizations adopt outsourcing decision e.g. Peugeot Automobile Nigeria Limited (PAN) which is the case study of this research. This entails having available experience and reliable sources because of production needs for certain parts cannot be readily made in-house. In adopting this decision, three core factors should be taken into consideration, time, cost and quality. The time (load time) which cover distribution via supply chain so as to meet up with production schedule must not be delayed. The cost (administration, production, overheads etc) must be properly and accurately to ascertain the viability of the business should be outsourcing decision. The quality which should not be comprised, determines the outcome of the final product.
Finally, purchasing manager should select capable supplier in order to develop a mutually beneficial partner relationship. It is important to develop tangible measures of job performance with the supplier you are doing business with as well as financial incentives to encourage the supplier to meet deadlines and control costs.
1.2 Statement of the Problem
With the continuing increase in competitive pressures in manufacturing the acceleration of cost and price increase and extensive need for improvement for productivity managers must have constantly the company’s survival in the market.
Some organizations are constrained in terms of cash to make their material input in-house as well as cost involve is very high. The money to be used to purchase facilities to make the material locally is beyond the plant capacity.
It was also observed that in many manufacturing companies, their operations were aligned around their core competence and any activity or function that were not considered necessary to preserve it were then outsource. Also organizations are only as good as their staff lack of staff with requisite skills and know how to make their material input in-house is also area of concern. Hence, companies may decide to outsource its material which mostly imported from advanced industrialized countries such as France, Italy, Germany, Russia etc. Apart from iron sheet “PAN” the company also import its tyres, paints, windscreens, seat belt, knot and bolts, electrical fittings and cable etc.
1.3 Objectives of the Study
It is important at this junction to clearly outline the purpose of this study. This includes the following:
i) To identify the factors involve in the strategic decision to outsource material in the organization.
ii) To identify and examine the problems associated on outsourcing material in the organization.
iii) To identify the criteria used for selecting suppliers for outsourcing material in an organization.
iv) To identify the impact of outsourcing on material, acquisition.
1.4 Significance of the Study
This research work is centered on decision to outsource materials in an Organization of Peugeot Automobile Nigeria (PAN) Limited, Kaduna. Therefore, the research study will be of benefit to the organization and other relevant organizations in Nigeria as a whole. The study will be of benefit to the executive and lastly the entire population.
The organization will benefit form the research study because the study will explain why outsourcing decision should be taken with extreme consideration and its advantages. The study will also be of benefit to the lecturers that across this study because it will serve as lecturing material to their students and also serve as reference material to them. Thus, adding value to their knowledge and what outsourcing is and it importance in cutting down cost and increasing efficiency in an organization. To the students the study will add value of their knowledge in understanding what outsourcing is all about. The study is also a requirement for partial fulfillment for the award of Higher National Diploma in Purchasing and Supply, Kaduna Polytechnic, Kaduna.
1.5 Research Questions
i) What are the factors to be considered before strategic decision to outsource materials in the organization?
ii) What are the problems associated with outsourcing material for the organization?
iii) What are the criteria used for selecting suppliers for outsourcing material in the organization?
iv) What are the impacts of sourcing in materials acquisition?
1.6 Scope of the Study
This study focused on purchasing activities of Peugeot Automobile Nigeria Limited that relate to outsourcing decision on material acquisition. The finding of the research is based on the collection of data from management and staff of the company that deals primarily with material acquisition, operation and quality control unit of the organization, drawn from purchasing department of the company. In addition to the primary data, the study drives its major input on the subject from numerous textbooks, journals and publication on purchasing and supply chain management.
1.7 Definition of Terms
Sourcing: This is a process and procedure by which the buyer seeks, survey and evaluates suppliers and determines policies relating to those who can most suitably meet the requirements of the organization.
Outsourcing: Is a process by which an organization contract out a business function that are usually conducted in-house to firms.
Insourcing: is a process by which an organization takes responsibility for providing services and conducting its operation in-house by its own staff.
Supply: Is the amount of some product that producers are willing and able to sell at a given price.
Supplier Selection: This is a process by which firms identify, evaluate and contract with suppliers.
Materials: This are any substances or components with certain physical properties that are used as inputs to production or manufacturing.
Lead Time: This is the time is between when an order is placed till when the order arrives buyers store.
In-house Manufacture: This is manufacturing that occurs in the plant of the buyer organization.
Cost: The expenditure of funds or use of property to acquire or produce a product or service.
Core Competence: Is the main strengths or strategic advantage of a business. Core competence is the combination of pooled knowledge and technical capacities that allow a company to be competitive in a marketplace.
Competitive Advantage: Is an advantage over competitors gained by offering consumers greater value, either by means of cover prices, or by providing greater benefits and service that justifies higher pries.
Quality: Is a measure of excellence or state of being free from defect, deficiencies and significant variations. It is brought about by strict and consistent commitment to certain standard that achieve uniformity of a product in order to satisfy specific customer or user requirement.
Supplier: Is a person or company that provides good or service to others companies as one of the contributors to the development process on the way to the ultimate customer.