MASTER OF ARTS IN PROJECT PLANNING AND MANAGEMENT JANUARY 2018 INTAKE
LDP 603 : RESEARCH METHODS
ASSIGNMENT ONE: A CASE STUDY
FACTORS INFLUENCING OUTSOURCING DECISIONS IN LARGE MANUFACTURING ORGANIZATIONS IN KENYA: A CASE OF BRITISH AMERICAN TOBACCO KENYA LTD
Outsourcing has become an important aspect of the overall strategy of any organization. It can be considered as a panacea for every company which wants to leverage its competitive advantage. Outsourcing has been a relatively new concept especially in the Kenyan manufacturing industry. Consequently this area has not been studied fully, with only little literature on the topic predominantly focusing on the significance of outsourcing decisions and not the factors that influence the uptake of outsourcing strategies. This study sought to fill this gap. The study sought to investigate the factors that influence large manufacturing organizations’ outsourcing decisions using a case of BAT Kenya Ltd. The purpose of the study was to analyze the factors that influence outsourcing decisions with specific reference to British American Tobacco Kenya Ltd. The objective of the study was to determine the influence of operating cost on the outsourcing decisions of large manufacturing organizations, to examine the influence of availability of internal resources and the decision to outsource, and to establish the influence of improved service quality on the decision to outsource by large manufacturing organisations in Kenya. It is hoped that the study will contribute to the existing body of knowledge by providing clarity on the factors that influence outsourcing decisions. The study was based on the Transactions Cost Economics and Resource Based theories. The design of the research was descriptive research design.The target population of the study was 129 employees working in various departments in British American Tobacco Kenya Ltd. The sample size for the study was 97 respondents. The sample size was derived from the Krejcie and Morgan Table. The study used proportionate sampling to get the sample sizes for the different departments. Purposive sampling was adopted to select the respondents for the study. The study used questionnaires to collect data. Questionnaires were distributed to both office based and field based staff. The researcher performed pilot testing of the instrument by administering the questionnaires to 10% of the sample size. To establish the validity of the research instrument the researcher used content validity. So as to check reliability of the results, the researcher used Cronbach’s alpha methodology, which is based on internal consistency of the research instruments. A score of 0.713 was attained thereby qualifying the research instrument as acceptable and reliable. Qualitative data was analysed using conceptual content analysis. In addition, the researcher conducted a Karl Pearson’s Product moment correlation coefficient to ascertain whether a statistical significant relationship exists between the independent variables and the dependent variable. The study established that operating cost had the strongest influence on outsourcing decisions with a correlation coefficient of 0.933. Availability of internal resources and improved service quality also had significant influence on outsourcing decision with correlation coefficients of 0.897 and 0.883 respectively. Meaning this study accepted all the hypotheses as all the three variables had significant positive relationships with the dependent variable, outsourcing decisions.
1.1 Background of the Study
Outsourcing has been a global trend in business for several years. It has been growing both domestically and internationally during the recent years. The highly competitive environments in which today’s businesses operate acts as a strong stimulus for businesses to outsource their services. In addition, economic globalization facilitates the process of searching for opportunities on the open global market to outsource some of a firm’s activities instead of performing them on their own. The role of outsourcing practices in the process of economic globalization is clearly outlined by the leading international consulting companies (Jabbour, 2013). According to Chongvilaivan & Hur (2011), Senior Vice President at SunGard Availability Services, businesses in all industry segments found that limited internal resources would make outsourcing an attractive, cost-effective and prudent option that would allow them to focus on their core competencies.
Díaz-Mora (2008) sees outsourcing as a form of privatization that refers to a decision by an organization to contract with an external organization to provide a traditional function or service. The contractor then either takes over the employees of the firm in the outsourced section and pays the group according to its standards, or replaces the firm’s employees with its own staff. Chongvilaivan and Hur (2011) observed that the growing use of outsourcing reflects a general acceptance by organizations that it will reduce costs while continuing to provide essential company service. He adds that the need to remain competitive and to improve service delivery in the face of declining resources has forced institutions to turn to several popular management approaches, including outsourcing.
Outsourcing has existed in the USA for over 30 years particularly the business process outsourcing (BPO). The Bank of America, Best Buy, Delta Airlines, Goodyear, IBM, the Marriott, Motorola, PepsiCo, Procter & Gamble, and Sun Microsystems are all outsourcing HR functions. US federal and state governments also spend billions each year doing so also. HR functions are not just being outsourced, they are being sent offshore Weinstein (2005).
The US companies have off-shored their manufacturing and their R&D facilities in their semi-conductors, computing, chemicals and pharmaceuticals to the UK, Germany, France, Ireland and other developed countries. In Europe, many manufacturing organizations have chosen to outsource their non-core activities previously conducted in-house to a third party supplier. For example in UK, Dysons, whose core business is making of vacuum cleaners has outsourced some of its operations to Asian and North American countries where the labor charges are fairly low when compared to those of United Kingdom, (Heshmati, 2003).
In view of developing countries, outsourcing has taken place more recently in India and China. According to Heshmati, (2003), Malaysia, an emerging South East Asian nation, was the third most desirable location for offshore outsourcing in the world, after India and china. In Malaysia, the demand for outsourcing was not only from global multi-national companies but also from local companies. The demand for outsourcing was driven by the fact that companies could access a more reliable infrastructure that could ensure smooth core business operations at lower costs and with greater flexibility. Outsourcing also encouraged the pooling of resources for a more efficient use of resources to reap the benefits that could be derived from economies of scale.
In Africa, South Africa and Mauritius already have fast-growing BPO sectors. Countries like Kenya, Botswana, Ghana and Egypt have also ventured into outsourcing. These countries seem to be strong outsourcing destinations over the next few years. Mauritius has been doing outsourcing since the early 1990s. Accenture, Infosys, Ceridian, TNT and Orange are examples of companies with a strong presence there. The majority of the companies serve the European countries, mainly the U.K. and France. In Kenya, Kencall which is East Africa’s largest international contact centre provides call centre services for various companies worldwide.
1.1.1 Outsourcing in Kenya
Kenya’s highest foreign exchange earner in the services industry is Business Process Outsourcing (B.P.O). This is according to a survey commissioned by the International Monetary Fund and carried out in conjunction with Kenya National Bureau of Statistics (K.N.B.S). The phenomenon of outsourcing in Kenya can be described as being in its infancy. Whereas instances of Business Process Outsourcing, for instance in the banking sector can be said to have taken root, manufacturing firms are still experimenting with the idea of outsourcing (Perunović, Christoffersen & Mefford, 2012). Most manufacturing firms have not yet embraced the idea though it is slowly evolving as one of the key strategies in cost optimization and eventual delivery of quality products and services to the customer. Several Kenyan organizations have outsourced non-core operations. East African Breweries Ltd, Unilever Kenya Ltd and Coca Cola have outsourced their Logistics & distribution functions to third party logistics firms (3PL), for example, to DHL, Kuehne and Nagel and Bollore. This is the case with many more other organizations and it extends beyond logistics & distribution into Information Technology systems, Human resource in Kenyan banking sector amongst others (Jabbour, 2013).
The purpose of this study was to assess the decision factors of the outsourcing phenomena for the Kenyan manufacturing organizations. It is undoubtedly clear that outsourcing is a business growth catalyst and its evolution trend is moving from standard and simple activities such as management of information systems or client profiling (Business Process Outsourcing) to more complex activities such as product profitability analyses and company merger studies (Knowledge Process Outsourcing) e.g. in the NSE, Barclays Africa and South African bank mergers (Chongvilaivan & Hur 2011).
1.1.2 Large Manufacturing Organizations in Kenya
Kenya has a large manufacturing sector serving both the local market and exports to the East African region. The sector, which is dominated by subsidiaries of multi-national corporations, contributed approximately 13% of the Gross Domestic Product (GDP) in 2004. According to Ondiek and Odera, (2012), improved power supply, increased supply of agricultural products for agro processing, favourable tax reforms and tax incentives, more vigorous export promotion and liberal trade incentives to take advantage of the expanded market outlets through AGOA, COMESA and East African Community (EAC) arrangements, have all resulted in a modest expansion in the sector of 1.4 % per cent in 2004 as compared to 1.2% in 2003 (Janssens & Mohaghegh, 2005). This growth continues unabated according to the Kenya Association of Manufacturers.
In the Kenyan manufacturing industry, while formal sector employment (private and public) has been on the decline, informal sector employment has grown rapidly at an average of 39% during 1990-1995 and 13 % during 1996-2000. Growth in total wage employment declined from an average of 3.8 % for period 1964-89 to a mere 1.2 % for the period 1990-2002. With an average employment growth rate of 3.1 percent per annum (from 1964 to 2000), the formal sector has not grown fast enough to improve the welfare of the majority of Kenyans. The decline in employment was partly attributed to the collapse of private firms and retrenchment due to stiff competition from imports (Ondiek & Odera, 2012).
The rising levels of poverty coupled with the general slowdown of the economy has continued to inhibit growth in the demand of locally manufactured goods, as effective demand continues to shift more in favor of relatively cheaper imported manufactured items. In addition, the high cost of inputs as a result of poor infrastructure has led to high prices of locally manufactured products thereby limiting their competitiveness in the regional markets and hampering the sector's capacity utilization. However, the recent introduction of the EAC Customs Union provides Kenya’s manufacturing sector, the most developed within the region, a greater opportunity for growth by taking advantage of the enlarged market size, economies of scale, and increased intraregional trade (Ching, Choi & Huang, 2011).
1.1.3 British American Tobacco Kenya Ltd
British American Tobacco (BAT) Kenya is one of the largest manufacturing firms in East and Central Africa. The company has four hundred and seventy five employees based in different locations in Kenya. British American Tobacco Kenya is the fourth largest taxpayer in Kenya behind Safaricom, East Africa Breweries Ltd and Teachers Service Commission. It contributed Kes 14.5 billion in Excise, VAT and corporate tax in the year ended 31st December 2013 (Annual Report, 2013). The organization’s core activity is the production and sale of cigarettes both for the domestic market and for export. The organization grows tobacco through contracted farmers in Nyanza (Oyani), Western (Malakisi), and Eastern (Embu and Meru) areas of Kenya. The harvested tobacco is processed at the Green Leaf Threshing (GLT) plant based in Thika (Annual, Report 2013). As part of its continued drive to the commercial viability of the group’s manufacturing sites, the GLT plant in Thika was selected as the processing centre for all tobacco grown for BAT in East Africa (Annual Report, 2013).
To fully deliver its core business strategy of customer satisfaction and increase in shareholder wealth, BAT Kenya Ltd has outsourced a number of its activities to third party contractors (Kini, 2007). BAT Kenya Ltd was among the first few companies in the country to have successfully outsourced its non-core logistics activities to a professional logistics company (Lahiri & Kedia, 2009). The company embraced outsourcing in 2000 by outsourcing its logistics and warehousing to DHL and later added Kuehne & Nagel and Bollore within the same services as its business expanded. The company has since outsourced other services: factory services to Capacity Outsourcing Limited and MMA Engineering, as well as cleaning and ground maintenance, information technology services, payroll and invoice registry. There are still other services such as financial services and Human Resources that the company can outsource. This research aimed at providing an in depth study of what triggered this outsourcing at BAT Kenya Ltd.
1.2 Statement of the Problem
Outsourcing has become an important aspect of the overall strategy of any organization. It can be considered as a solution for every company which wants to leverage its competitive advantage. Globally many manufacturing organizations have outsourced non-core activities like ground maintenance, transport and logistics, warehousing, factory services, catering, security, IT, freight, cleaning services, and human resource. This allows them to concentrate on the core and value adding activities. After exhausting the traditional modes of cost cutting such as staff rationalization and overheads reduction, outsourcing has become the most favored avenue for cost cutting with the idea being to outsource non-core business functions leaving the company to concentrate on its core objectives (Minondo & Rubert, 2006). Outsourcing has been a relatively new concept especially in Kenyan manufacturing industry. Consequently, this area has not been studied fully with only little literature on the topic predominantly focusing on the significance of outsourcing decisions and not the factors that influence the uptake of outsourcing strategies. This study sought to fill this gap. The study therefore sought to investigate the factors that influence manufacturing organizations’ outsourcing decision in Kenya, using a case of BAT Kenya Ltd
BAT Kenya Ltd has embraced outsourcing in its efforts to implement its strategic plan of being a world class organization, producing and selling quality cigarettes that meet the customers’ needs. The organization has outsourced a number of its non core activities. It started with outsourcing logistics and warehousing which saw it reduce its middle management as well as non management staff. This was followed by outsourcing of its cleaning, payroll and factory services. All these have had an impact on the performance of the organization.
1.3 The Purpose of the Study
The purpose of the study was to examine the factors influencing outsourcing decisions in large manufacturing organizations with specific reference to BAT Kenya Ltd.
1.4 Objectives of the Study
This study was guided by the following objectives:
To determine the influence of operating cost on the decisions to outsource by large manufacturing organizations in Kenya.
To examine the influence of availability of internal resources and the decisions to outsource by large manufacturing organizations in Kenya.
To establish the influence of improved service quality on the decisions to outsource by large manufacturing organizations in Kenya
What is the influence of operating cost on outsourcing decisions by large manufacturing organizations in Kenya
Does availability of internal resources influence outsourcing decisions by large manufacturing organizations in Kenya.
What is the influence of improved service quality on outsourcing decisions by large manufacturing organizations in Kenya
1.6 Hypothesis of the Study
H1: Operating cost significantly influences outsourcing decisions by large manufacturing organizations in Kenya
H2: Availability of internal resources has a significant influence on outsourcing decisions by large manufacturing organizations in Kenya
H3: Improved service quality significantly influences outsourcing decisions by large manufacturing organizations in Kenya?
Using the background and the statement of the problem given in the case study above answer the following question. Ensure that your answer is totally linked to the information provided . You are also required to provide relevant and appropriate good examples .
Group 1: Discuss the strength and weaknesses of the literature review conducted for this study
Group 2: Discuss the sampling design appropriate to this research study proposal
This individual assignment should be done by all members of the group. Marks will be awarded according to an individual’s contribution to the group work.
Each group will be given 15minutes to present their paper in class
(3) The final paper should be ready for marking on or before 30th May
Essay writing guidelines
NB: Any essay has three parts, introduction, body and conclusion. The examiner is interested in finding out if you have answered the question correctly. To give a good answer, ask yourself these questions from the checklist below.
Have the main points been covered in sufficient detail?
Are the answers relevant to the question asked?
Have I focused on the topic in the appropriate way i.e. if asked to discuss, explain or analyse, do I do that or do I produce large chunks of incoherent work?
Is the essay balanced i.e. have I given a balanced argument by taking all points of view into account?
Have I attempted to answer all possible objections to the argument?
Have I arranged my argument in clear steps showing, where necessary the links between them?
Is my argument related to the question asked?
Have I signposted the main stages of my argument so that the reader can follow its overall direction?
Have I used headings and subheadings in the body of my essay?
Have I supported my arguments with the relevant literature?
Is my language clear and precise?
Have I acknowledged all literature sources and provided the refrences at the end of the essay?
Is my essay neat and presentable? (At least 1.5 spacing, font size 12 in Times New Roman is preferable. Avoid fancy fonts, colours,/designs and underlining)
Identify key issues/terms and define them correctly
Include material relevant to the topic only
Show evidence of wide reading and research (cite/quote other studies to support your arguments) e.g Armstrong, (2001) or (Storey, 1998, pg 12) etc. Show all references and write them correctly and in full e.g Armstrong, M. (2001) Strategic Human Resource Management: A Guide to Action, Routledge, London
Show clear understanding of any theories
Provide a clear well supported conclusion
The introduction should set out clearly the plan of the essay
Signpost your essay by using language that enables your reader to navigate through your essay (eg ….In the next section four roles of the manager will be discussed. Or… In the last section the roles of the manager were discussed. This will now be followed by an examination of the challenges faced by managers..….)
Watch your grammar and syntax! Reread your essay at least twice to correct all editorial and typing errors (it is bad manners to present any written work with your own editorial and typing errors!)