Project Materials

EFFECT OF INSOURCING OR OUTSOURCING DECISION ON THE PRODUCTIVITY OF AN ORGANIZATION

Chapter one

INTRODUCTION

1.1 Background of the Study

In purchasing, the decision to outsource and/or insource is known as a sourcing policy decision, and it is one of the most critical decision points for any organisation because it has a wide-ranging and interconnected impact on the organization’s functioning.

Managers of firms, particularly manufacturing organisations, face a number of critical and decisive questions that must be accurately answered if the organisation is to succeed in the face of competition.

The Purchasing Manager must first determine which product or service best meets the organization’s needs, and whether the organisation should generate (make or insource) what it consumes or purchase from outside sources.

The questions that arise from this are whether the organisation will buy from a single supplier (single source) or from several suppliers (multiple source); even if that is answered, the questions will remain:

should we buy directly from manufacturers or use intermediaries, or should the organisation both insource and outsource at the same time?

However, before an organisation can make a decision on whether to manufacture what it consumes in-house or to buy from outside suppliers (outsourced), several factors such as financial consideration, cost consideration, core competence consideration, and a way must be critically analysed to determine how they will affect the organization’s productivity.

Outsourcing, thus, is a purchasing policy in which outside suppliers are hired to satisfy an organization’s material requirements. In contrast, insourcing refers to a situation in which an organisation produces and consumes what it requires.

As previously said, several elements must be discussed before an organisation can make any sourcing policy decisions. These will serve as the study’s focal points.

1.2 Statement of The Problem

Organisations are increasingly turning to outsourcing in order to increase their competitive advantage. The idea is that outsourcing is a method of attaining strategic goals, lowering costs, increasing customer satisfaction, and providing other efficiencies and effectiveness (total productivity).

However, PZ has long used outsourcing to meet its material needs, despite the purported benefits of outsourcing. The organisation has seen a significant drop in productivity, the cost of doing business has become virtually exorbitant, quality has been declining, and market shares and sales have also decreased.

Another issue that raises concerns is the organization’s adoption of a single sourcing policy, which occasionally results in delays in the procurement of critical materials for manufacturing.

The question that arises from these concerns for this study is whether the organisation should continue with the outsourcing policy while investigating other aspects or explore an insourcing policy. Should the organisation insource and outsource simultaneously?

1.3 Objectives of the Study

The research aims to determine the impact of insourcing or outsourcing decisions on the productivity of Northern Cable Processing and Manufacturing Company (PZ) Kaduna. The main objective is constructed upon a variety of specialised objectives, which include:

i) Determine the procedure by which the organisation outsources contracts.

ii) Determine criteria for insourcing or outsourcing.

iii) To compare the benefits of insourcing with outsourcing.

iv) Determine the costs associated with an insourcing or outsourcing decision.

v) To assess the impact of insourcing and outsourcing on productivity.