CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
The
Insourcing and/or Outsourcing decision is referred to in purchasing as
sourcing policy decision and it is one of the most important decision
points for any organization because it has a multiple and web like
effect on the life of the organization. Managers of businesses most
especially manufacturing organizations faces a series of important and
determining questions which must be answered correctly if the
organization is to succeed in midst of competition. The Purchasing
Manager must first address the question of which product or service best
fits the needs of the organization and should the organization produce
(make or insource) what is consumed or buy from outside suppliers? The
questions arising from this is that, if they decide to buy from outside
suppliers, will the organization buy from a single supplier (single
source) or from several suppliers (multiple source); even when that is
answered, the questions will still be, should we buy directly from
manufacturers or use intermediaries or may be, the organization should
both insource and outsource simultaneously.
However, before an
organization can come to any decision as to whether to make what it
consume inhouse or to buy from outside suppliers (outsourced) several
factors such as financial consideration, cost consideration, core
competence consideration and a way they will have to be critically
analyzed to see how they will affect the organization productivity.
Outsourcing therefore, is a purchasing policy where outside suppliers
are engaged to supply an organization with its materials requirements.
Insourcing on this other hand signifies a situation where what the
organization needs, it produces and consumes. Several factors as already
indicated will need to be explained before an organization could come
to any of these sourcing policy decisions. These shall be the fulcrum of this study.
1.2 Statement of the Problem
In
an attempt to enhance their competitiveness, organizations are
increasingly turning to outsourcing. The argument is that outsourcing is
a way of achieving strategic goals, reduce cost, improve customers
satisfaction and to provide other efficiencies and effectiveness
(overall productivity). However, PZ has long been using outsourcing in
the realization of its needed materials, yet with the supposed
advantages of outsourcing. The organization has experience a tremendous
fall in productivity, cost of doing business has become almost
exorbitant, quality has been falling and market
shares and sales have also fallen. Another issue that calls for concern
is that, the organization has been using single sourcing policy which
sometimes causes delays in the supply of necessary materials used for
production. The question that emanates from these issues for this study
is that, should the organization continue with the outsourcing policy
and examine other factors or considers insourcing policy? Or should the
organization insource and outsource at the same time?
1.3 Objective of the Study
The
researched is aimed at setting the effect of insourcing or outsourcing
decision on the productivity of Northern Cable Processing and
Manufacturing Company (PZ) Kaduna. The main objective is built around a
number of specific objectives, among these are:
i) To determine the process the organization follows in outsourcing of contracts.
ii) To identify criteria for insourcing or outsourcing.
iii) To examine the benefits of insourcing or outsourcing.
iv) To identify the cost involved in Insourcing or outsourcing decision.
v) To determine the effect of insource and outsource on productivity.
1.4 Significance of the Study
The
research work is of immense significance. First, the researcher will
benefit from this study as it is a basic requirement in partial
fulfillment of the award of Higher National Diploma (HND) in Purchasing
and Supply Management in Kaduna Polytechnic; and without which the
researcher cannot graduate. Again, as a store of knowledge, the research
will serve as a guide for other researchers who may want to do a
further study on the same problem. It will also benefit the organization
understudied, to help it make a better choices as to whether to
insource an activity or outsource it. The general public will also
benefit from the explanation of this five principle, other manufacturers
and service providers will also find it handy and helpful in deciding
on the questions whether to insource or outsourced; and the implications
for each decision taken. Outsourcing Decision
1.5 Scope of the Study
The
exercise is centered on the effect of insourcing and outsourcing on the
Productivity of an organization using PZ in calabar as the case study.
The focus will be on purchasing, store and production departments of the
organization.
1.6 Research Questions
i) What are the processes the organization follows in outsourcing of contracts?
ii) What are the criteria used for outsourcing or insourcing?
iii) What are the benefits of outsourcing or insourcing?
iv) What are the cost involved in insourcing or outsourcing?
v) What are the effect of insource or outsource decision on productivity?
1.7 Definition of Terms
Sourcing:
This is a purchasing procedure through which buyers seek, survey and
evaluate suppliers and determine policies relating to those who will
most suitably meet the requirement of the buying organization.
Insourcing:
This is the process by which an organization takes responsibility for
providing services and conducting its operations in-house or in other
locations but by its own staff. Outsourcing: This is the process by
which an organization contract out services and operations that are
usually conducted in-house to other firms that can do them better,
cheaper and faster. Outsourcing Decision
Single Sourcing Policy: This describes a situation where the buyer places all orders with one single supplier.
Dual/Multiple
Sourcing: This also describes a situation where the buyer shares the
order among two or more suppliers. Policy: This is a management guide
that cause managers to take action in certain ways, by exposing the
organization’s official strategies and attitude to various forms of
behavior. Outsourcing Decision
Supplier: This describes a person or company that can agree to supply or release goods or services to a buyer.
Materials:
Anything that can be offered to the market for attention, acquisition,
use or consumption that might satisfy needs. Outsourcing Decision
Quality: This is the totality of features and characteristics of a product that bears on the ability of the product to satisfy stated or implied needs. Outsourcing Decision
Competitive
Advantage: This is the ability of an organization to add more value for
its customers than its rivals and thereby attain a position of relative
advantage. Outsourcing Decision
Distinctive Competence: These are
those capabilities that are unique to an organization and which gives it
competitive advantage over its rivals and also gives them, above normal
economic performance.
Core Competencies: Are the activities that are
central to the firms’ mission in which the organization excels,
compared to other firms. Outsourcing Decision
Production: This
directly refers to the rate of units produced in terms of machines,
labour, materials or any other effective basis. Outsourcing Decision
Productivity:
This is the attitude of the mine. It is a mentality of progress of the
constant improvement of that which exists. It is the process of
harnessing the capacity to increase production by ensuring proper and
efficient use of all types of resources. Outsourcing Decision
Efficiency: This implies using minimum amount of resources to reach the goals. That is, doing things right.
Effectiveness: This means pursuing and reading the appropriate goals. In other words, doing the right thing.
Cost: This is the amount of expenditure incurred on a given item.