Effect Of Outsourcing Decision On Organizational Performance In The Manufacturing Industry
[A CASE OF UNGA GROUP LIMITED]

Firms have always sought ways to gain a competitive advantage over their competitors; however, with the increased movement towards a single globalized economy, this desire is even more prevalent for businesses today. One avenue that firms have pursued to improve their competitive position in this new business environment has been to increase the role of outsourcing in their operations, which has been found to provide a competitive advantage and heightened performance to these firms (Monczka and Trent, 2008; Quinn and Hilmer, 2004).

In the early 80‟s the manufacturing industry was the leading business activity in Kenya, both in terms of size and employment. The industry was employing over 200,000 farming households and about 30% of the labour force in the national manufacturing sector. The sub- sector however started declining in the mid-1980s until the 1990s (Export Processing Zone, 2011). Efforts to spur growth in the manufacturing industry have been considered with outsourcing being one of the strategies.

Dwindling resources and market competitiveness have forced organizations to scrutinize their methods of producing goods and services and make changes in their processes in order to maximize economic returns. To survive and be profitable in current globalization era, organizations have pursued continuous improvement, leaned up production, reengineered business processes, and integrated supply chains (Brannemo, 2006). Over the past decades there is a growing realization of the important contribution of outsourcing strategy on organizational performance (Cousins et al., 2006).

While many firms have followed the pattern of outsourcing some part of their operations to improve their competitiveness, others have not, leading many to ask what factors influence the decision to use outsourcing and how such outsourcing improves organizational performance (Merino and Rodriguez, 2007; Nayak, 2007). Outsourcing is a management strategy by which an organization delegates major, non-core functions to specialized and efficient service providers.

According to preliminary interview with management at manufacturing firms in Nairobi region, these companies are increasingly opting for outsourcing of non-core activities relating

to human resource (HR), information technology (IT) and finance. The companies feel they will be able to focus on their core activity by outsourcing functions like promotions, payroll management, bonus, salary disbursement, provident fund, gratuity, recruitment, flexi-staffing, IT work, new product introduction, security and training to HR consultants. All these are in a bid to provide high service quality, improve on skills and experience and offer innovativeness that would consequently spur performance (Nayak et al., 2007).

In general, outsourcing is considered to be that part of an organization's process, which it sources from outside suppliers, regardless of the type of relation with these suppliers (Mol et al., 2005). As such, every firm engages in outsourcing to some degree, be it manufacturing, customer care, logistics, post sales technical support, finance, auditing, staffing, or design. The choice of what functions to outsource and which to keep in-house is based on the need to develop skills, invest in resources, and stay abreast of evolving technology in any areas kept in-house (Harris, 2008).

In studies examining the impact of outsourcing, there have been several key advantages of outsourcing identified, such as cost savings (Bardhan et al., 2006; Nayak, et al., 2007), reduced capital investment within the firm (Gilley and Rasheed, 2000), improved responsiveness to changes in the business environment and improvement on service delivery (Dess et al., 2005), an increased focus on core competencies (Kotabe and Murray, 2009; Saunders et al., 2007), increased competition among suppliers ensuring higher quality goods and services in the future (Kotabe and Murray, 2009), and a reduced risk of changing technology (Quinn, 2000).

Kenya is one of the top three Business Process outsourcing (BPO) destinations in Africa. In the BPO market, Kenya has a comparative advantage due to the low labour rates for quality services. Although Kenya already has a growing outsourcing sector with over 50 registered companies operational, a boom is expected (Kemibaro, 2011).

Unga Group Limited, founded in the early 1900s, is a flour milling company based in Kenya and is market leader in the manufacturing and provision of superior human nutrition, animal nutrition and animal health products and services within Eastern Africa. In the bid to enhance performance and maintain her competitive advantage the management staff makes some outsourcing decisions.

 The Company is headquartered in Nairobi with flour mills in Eldoret, Nakuru and Mombasa. The Company has two business segments, namely Consumer, and Animal Nutrition and Health. The Consumer segment produces products for human consumption. The Animal Nutrition and Health segment produces animal feed and mineral supplement products, and distributes products for animal health. The Company, through its subsidiaries, is engaged in the milling of wheat and maize, and the manufacture of packaging materials and animal nutrition products.

A growing trend in work organization is for firms to outsource many activities that had been previously performed in-house. Outsourcing these activities, it is argued, will free up human and capital resources as well as allow for increased flexibility in the way labour is employed. Although the extent of outsourcing and other approaches to flexibility have been well documented in developed countries, little attempt has been made to evaluate such practices in the Kenyan context and specifically in the manufacturing industry to which Unga Group Limited is a part. The purpose of this study was to review the existing research and to evaluate the effect of outsourcing decision on organizational performance of Unga Group Limited.