FMCG industry, on the other hand called as CPG Consumer packaged goods industry primarily deals with the production, distribution and marketing of consumer packaged goods. The Fast Moving Consumer Goods (FMCG) is those consumables which are normally consumed by the consumers at a regular interval. Some of the prime activities of FMCG industry are selling, marketing, financing, purchasing, etc. The industry also betrothed in operations, supply chain, production and general management.

FMCG industry provides a wide range of consumables and accordingly the amount of money circulated against FMCG products is also very high. The competition among FMCG manufacturers is also growing and as a result of this, investment in FMCG industry is also increasing, specifically in India, where FMCG industry is regarded as the fourth largest sector with total market size of US$13.1 billion. FMCG Sector in India is estimated to grow 60% by 2010. FMCG industry is regarded as the largest sector in New Zealand which accounts for 5% of Gross Domestic Product (GDP).

Some common FMCG product categories include food and dairy products, glassware, paper products, pharmaceuticals, consumer electronics, packaged food products, plastic goods, printing and stationery, household products, photography, drinks etc. and some of the examples of FMCG products are coffee, tea, dry cells, greeting cards, gifts, detergents, tobacco and cigarettes, watches, soaps etc.

Some of the well known FMCG companies are Sara Lee, Nestlé, Reckitt Benckiser, Unilever, Procter & Gamble, L’Oreal, Coca-Cola, Carlsberg, Kleenex, General Mills, Pepsi and Mars etc. The purpose of this topic is to investigate the relationship between the factors that affect the outsourcing decisions in FMCG industry of Pakistan. There are higher trends seen in the market for outsourcing in many FMCG companies but still it is reflecting as there are a number of factors which inhibit the FMCG companies to make outsourcing decisions.

Outsourcing occurs as a result of intimate acquaintance between subcontractors and managing departments. Outsourcers want to decrease the cost of production and the cost of management by distributing work to avoid other costs such as wages and compensation. However, outsourcing helps society by decreasing unemployment, making the economy grow and decreasing social problems.

Outsourcing is also a way to boost the economy and it helps producing industries to survive in the market. However, it is not a guarantee that the producing industries will survive. It is just one of the devices that FMCG’s should use in management, but it depends on managerial efficiency in the industries. If FMCG’s want to survive in the age of globalization, they have to adopt management techniques suitable for each situation in order to survive in the current industrial climate.

Nowadays, macroeconomics and microeconomics have been changing very rapidly, in every region. This situation is forcing all countries in the world to adapt to competition resulting from globalization, including modifying government policies, international relations, free trade area agreements, etc. Changes are also occurring in industrial management, especially organizational management, production management and technology, delivery, and marketing management, in response to both local and international competition.

In the competitive environment of manufacturing concerns and evolving technological era, to enhance efficiency and productivity, cost remains a challenge to overall manufacturing industry to compete with rivals in providing the best total lower cost to end customers and to secure the market share in order to add value to the shareholders. To invest heavily in capital investment such as machineries, buildings and land to expand space in supporting the production operation is a burden to most companies if the return of investment is not valuably.

Organizations that outsource are seeking to realize benefits or address the following issues:

Cost savings – The lowering of the overall cost of the service to the business. This will involve reducing the scope, defining quality levels, re-pricing, re-negotiation, and cost re-structuring. Access to lower cost economies through off shoring called “labor arbitrage” generated by the wage gap between industrialized and developing nations.

Focus on Core Business – Resources (for example investment, people, and infrastructure) are focused on developing the core business. For example often organizations outsource their IT support to specialized IT services companies.

Cost restructuring – Operating leverage is a measure that compares fixed costs to variable costs. Outsourcing changes the balance of this ratio by offering a move from fixed to variable cost and also by making variable costs more predictable.

Improve quality – Achieve a steep change in quality through contracting out the service with a new service level agreement.

Knowledge – Access to intellectual property and wider experience and knowledge.

Contract – Services will be provided to a legally binding contract with financial penalties and legal redress. This is not the case with internal services.

Operational expertise – Access to operational best practice that would be too difficult or time consuming to develop in-house.

Access to talent – Access to a larger talent pool and a sustainable source of skills, in particular in science and engineering.

Capacity management – An improved method of capacity management of services and technology where the risk in providing the excess capacity is borne by the supplier.

Catalyst for change – An organization can use an outsourcing agreement as a catalyst for major step change that cannot be achieved alone. The outsourcer becomes a Change agent in the process.

Enhance capacity for innovation – Companies increasingly use external knowledge service providers to supplement limited in-house capacity for product innovation.

Reduce time to market – The acceleration of the development or production of a product through the additional capability brought by the supplier.

Co modification – The trend of standardizing business processes, IT Services, and application services which enable to buy at the right price, allows businesses access to services which were only available to large corporations.

Risk management – An approach to risk management for some types of risks is to partner with an outsourcer who is better able to provide the mitigation.

Venture Capital – Some countries match government funds venture capital with private venture capital for start-ups that start businesses in their country.

Tax Benefit – Countries offer tax incentives to move manufacturing operations to counter high corporate taxes within another country.

Scalability – The outsourced company will usually be prepared to manage a temporary or permanent increase or decrease in production.

Creating leisure time – Individuals may wish to outsource their work in order to optimize their work-leisure balance.

FMCG Industry and Outsourcing

Companies that were struggling to increase the capacity to support the ramp up demand at times were upset when there was a drastic downturn of demand cut. As a result, the sudden downturn would affect the resources and investment that were put into supporting the end customer’s demand. Team of human resources and machineries that consumed production space and being idled would increase the overhead and fixed cost, thus affecting the companies badly in their financial statements. In addition, training and development to up skill internal resource skills set in terms of running the operation effectively, bringing up technical content expert, specialist ability to perform research and development to add value, effective management and maintaining the operation would require significant investment in human resources.

Thus, most of the companies started to explore opportunities to reduce cost and to improve profit margin in order to maintain competitive edge in the market. One of the identified opportunities was to outsource non-core business functions to external service providers at a lower operating cost.

Outsourcing decisions are those strategic decisions that change the operating strategy of an organization both in manufacturing and services. The most important step in any outsourcing decision is to clearly define the scope of the activities that are being considered for outsourcing versus previously in sourced.

Outsourcing becomes a basic strategy of the FMCG industry and is essential for FMCG firms to stay competitive in the global environment. From firms’ perspective, outsourcing offers several advantages, such as reducing or stabilizing overhead costs, gaining cost advantage over the competition, concentrating on core activities and organizational specializations, providing flexibility in response to changing market conditions, and reducing investment in high technology based manufacturing organizations.

Through 2004 onward business growth strategy changes and business growth was restored as the first priority for most worldwide businesses, making cost reduction the second or third priority. Ensuring business growth as well as business process speed, agility and cost reduction requires a unique mix of internal and external capabilities, skills, services and processes. Only a business-driven sourcing strategy – supported by “good-enough” sourcing execution capabilities — will guarantee successful business outcomes as well as improved performance and competitiveness.

Lack of an outsourcing strategy or relevant skills and processes to manage outsourcing relationships is the most important reason for the failure of service and manufacturing industry. Global competition, increasing regulation and inspection, the development of specific standards and the industrialization of services will raise the competitive bar for the FMCG’s services and business processes, making it compulsory for the FMCG’s to work on their core business in source & let the others do their job for you. By competing on core competencies and outsourcing non-core areas, FMCG companies achieve consistently higher performance over the globe in all fields especially manufacturing and supply chains through consistent focusing and tracking their Key performance indicators.

For any of the company to make decision for in source or outsource, it’s the company strategic decision which will make the basis for the whole in source or outsource process. For making any decision, decision maker will consider the following perspective in their mind or they must have good answers for these questions.

Determine what your company needs to or should do best – strategy driven long-term positioning

Determine how best to do things – profit driven short to intermediate term competitiveness

INSOURCING/ OUTSOURCING STRATEGIC DECISION KEY STEPS IN SERVICE BASE INDUSTRY

An executive level cross-functional decision-making process identifies core competencies and areas for internal investment.

The level of internal control required by the companies and prospective direction for operational insource/ outsource decisions are identified and analyzed based on strategic value and relative competitiveness of the company in the market.

Document complete strategic decision making process and the implementation process for the strategic decision being made as it provides closed-loop assessment for continuous improvement of the decision in the long run.

Align the implementation strategies, processes and Key performance indicators with criteria and assumptions used in strategy formulation or development and in sourcing /outsourcing decision process.

STANDARDIZED OUTSOURCING PROCESS FLOW IN FMCG INDUSTRY

Stage

Key Activities

Rough Timeline

BU Role

COE Role

Opportunity Consideration

Align on business need & gain mgmt commitment to evaluate options

Identify options to consider (e.g., internal cost savings, consolidation, off-shoring, outsourcing)

Perform Options Analysis / Size of Prize (not detailed financial analysis)

If potential for outsourcing, contact outsourcing COE for support

NA

PR

PR

PR

PR

C

C

Evaluation Team Kick-Off

Establish small team to perform preliminary evaluation of outsourcing (Project Mgr/Business Mgr, Deal Mgr, Purchases Mgr, F&A Mgr, HR Mgr, External Rel.)

1-2 wks

PR

C

Initiate Evaluation Project

Agree on top-line preferred deal parameters with OS COE (e.g., general scope boundaries, sell all vs. partial assets)

Develop Keep Price Analysis using the CBA model (COE website)

Develop preliminary project success criteria

Develop preliminary project process, timing and critical path

Consider advisory needs (e.g. external consultants, legal support)

Consider need for employee communication pre-market evaluation activity

Confirm business management alignment & support to evaluate the option

1-4 wks

SR

SR

SR

SR

C

SR

PR

SR

SR

SR

SR

PR

SR

C

Market Evaluation/Discovery

Analyze market and identify potential suppliers (e.g., market position, capabilities, potential for savings & monetization)

Develop supplier materials (cold call message & operation review presentation)

Meet with suppliers (generally worth meeting w/up to 10 or so if available)

Evaluate findings of visits and determine potential for outsourcing

RFI may go out as part of typical assessment activity

4-8 wks

PR

PR

C

SR

C

C

PR

SR

Decision to Pursue Outsourcing

Refine project objectives, scope, etc. (w/knowledge of market evaluation)

Prepare recommendation to pursue outsourcing

Gain management approval per Decision Authority PRIOR to RFP

Determine the small group of suppliers to be engaged in an RFP (3-4 ideally)

Execute CDA’s with these suppliers

Expand project team (RFP leader, Legal, Administrative support, etc)

Develop communication plan & communicate to employees if not yet been done

Base Case Financials

2-3 wks

PR

PR

PR

SR

PR

PR

C

C

C

SR

PR

C

C

RFP Development

Draft and gain approval to RFP

Develop RFP timeline (release date, supplier engagements, site visits, submittal date)

Release RFP and instructions to suppliers

4-6 wks

PR

C

PR

TPO

PR

TPO

RFP Process Execution

Perform step-by-step RFP completion process w/suppliers (e.g., RFP review session, electronic Q&A cycle, preliminary solution review)

Receive & review bids, and execute formal solution walk-thru process

Get revised bids and perform evaluation (operational, HR, financial)

4-8 wks

SR

SR

SR

SR

SR

SR

Downs elect Process

Develop recommendation to down select to 1 or 2 suppliers (keep 2 suppliers ideally to maintain competitive environment)

Get management agreement

1-2 wks

PR

PR

C

C

Due Diligence

Conduct due diligence as required (us on suppliers; suppliers on us)

1-2 wks

PR

TPO

Final Bids

Provides suppliers with draft contract

Request Best & Final Offers (if appropriate)

1-2 wks

C

C

PR

PR

Negotiations and Contract Signing

Negotiate detailed price and contract terms (w/2 suppliers as long as possible)

Align on final down select

Get management approval

Finalize internal and external communication plans (with External Relations)

Sign contract and execute related communications

4-6 wks

C

PR

PR

PR

PR

PR

C

TPO

C

C

Transition and Closing

Put full transition team in place

Execute required transition steps (including road shows, job offers, etc)

Develop and execute companion agreements in other countries

Execute closing

Prepare deal files

4-12 wks

PR

PR

SR

PR

SR

PR

PR Primarily Responsible Total Time Required*

SR Shared Responsibility 5 – 10 months (ex Transition)

C Contributor 6 – 12 months (w/Transition)

TPO Technical & Process Oversight

* will vary based on project scope

Problem Statement

The rapidly changing global industrial environment, cost of working capital, research and innovation, releasing key internal resources, concentrating on Core business functions, obtaining better organizational form has significant impact on outsourcing decision making in FMCG industry of Pakistan.

Hypothesis

H1: Outsourcing activities are increasing day by day in FMCG Industry of Pakistan.

H2: FMCG industries are Outsourcing in all areas of their business & not only manufacturing operation.

H3: FMCG industries are Outsourcing to reduce Operating cost.

H4: FMCG Industries are outsourcing to increase concentration on their core business.

H5: FMCG Industries are outsourcing to Improve Quality of Services.

H6: FMCG Industries are outsourcing to Acquire Specialized expertise and knowledge

H7: FMCG industries are focusing on Selective Outsourcing.

H8: FMCG industries have midterm Outsourcing contracts.

H9: FMCG industries make Outsourcing contracts with good & reputable companies.

H10: FMCG industries make Outsourcing contracts with companies that produce at lower cost.

H11: FMCG industries make Outsourcing contracts with companies that have advance technology and management experience.

H12: Losing control of the certain business is the major concern in FMCG industries to make Outsourcing contracts.

H13: Increasing dependence with outsourcers is the major concern in FMCG industries to make Outsourcing contracts.

H14: Difficult to bring in source after conflicts is the major concern in FMCG industries to make Outsourcing contracts.

H15: Disclosure of commercial secrets is the major concern in FMCG industries to make Outsourcing contracts.

H16: Conflict of Interest with outsourcing partner is the major concern in FMCG industries to make Outsourcing contracts.

Outline of the Study

The research structure based on five chapters as follows:

Introduction about the Outsourcing and FMCG industry.

The literature review had provided theoretical background of the research and cites author had previously researched on the topic of factors affecting outsourcing decision

The research methods chapter included method of data collection, statistical technique and hypothesis development.

The results chapter had included findings and interpretation of the results.

The conclusion, discussions, implications and recommendation section provided the final logical analysis.

Definitions

Outsourcing

Outsourcing is an agreement in which any task; operation, job or process that could be performed by employees within an organization, but is instead contracted to a third party for a significant period of time-one Company provides services for another company that could also be or usually have been provided in-house.

FMCG’s

 It is an acronym for Fast Moving Consumer Goods.

It is defined as “fast selling, low unit value consumer products normally in universal demand”. It includes categories like foods, soft drinks, toiletries, cosmetics and other non-durables.

CHAPTER 2: LITERATURE REVIEW

Most of the companies that were struggling to increase the capacity to support the ramp up demand at times were upset when there was a drastic downturn of demand cut. As a result, the sudden downturn would affect the resources and investment that were put into supporting the end customer’s demand. Team of human resources and machineries that consumed production space and being idled would increase the overhead and fixed cost, thus affecting the companies badly in their financial statements. In addition, training and development to up skill internal resource skills set in terms of running the operation effectively, bringing up technical content expert, specialist ability to perform research and development to add value, effective management and maintaining the operation would require significant investment in human resources (David Mackey and Kaye Thorne, 2003).

Thus, most of the companies started to explore opportunities to reduce cost and to improve profit margin in order to maintain competitive edge in the market. One of the identified opportunities was to outsource non-core business functions to external service providers at a lower operating cost. Outsourcing decisions are those strategic decisions that change the operations strategy of an organization both in manufacturing and services. The most important step in any outsourcing decision is to clearly define the scope of the operations that are being considered for outsourcing (Cook, Mary, F. and Gildner, Scoot B. 2008).

Human resource professionals throughout the world are being asked to do more or less, to enhance productivity while controlling costs and to find out new ways to increase profitability. (Uddin, Gazi, M. 2005).

Outsourcing is not a new notion. For decades, jobs have been migrated from other part of the countries namely American and European countries as well as other overseas countries to global service providers primarily India, China, Singapore and Malaysia due to lower operating cost. According to Cynthia A. Kroll (2004), a regional economist from University of California Berkeley, the recent wave of outsourcing affected a different mix of jobs, at different wage levels. It was not confined only to a small set of industries but cut across all industrial sectors in new geographic area rapidly (Cynthia A. Kroll, 2004). William P. DiMartini (2005), Senior Vice President at SunGard Availability Services said 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 (AccountingWEB.com, 2005).

Demand for outsourcing is a result of demand for organizational products by the target audience. On the basis of organizational estimate of total turnover, practicing managers can attempt to establish the nature and type of outsourcing required to that esteemed goal (Uddin, Gazi M. 2005).

Outsourcing advantages to name a few include lower operating cost, improve competitiveness, low in capital investment, shift resources to focus on core functions, generate demand for new growth and market segment, access to world class capability, sharing risks and make capital funds available for core business investment. Bangladesh is a least developed country, basically an agrarian economy, having around 24 million acres of cultivated land, employing about 14.5 million cultivators. Manufacturing industries have grown around Dhaka and Chittagong based on agriculture input of jute, cotton, chemical and gas based industries.

Industrial production growth has averaged more than 6% over the last 5 years. The export sector has been the engine of industrial growth, with ready-made garments leading the way, having grown at an average of 30% over the last 5 years. Primary products constitute less than 10 percent of the country’s exports; the bulk of exports are manufactured/processed products, ready-made garments and knit wears in particular. (www.euroitx.com)

There are many manufacturing concerns in Bangladesh that are looking into outsourcing opportunity to reduce cost and to overcome the internal limitations and achieve lower cost of operation. The country is now moving towards industry based economy from the agro-based one. Hence, this study was an attempt to access determinants influencing the outsourcing decision and to research the manufacturing concern in Bangladesh on how well the factors would influence the manufacturing industry in Bangladesh to outsource certain function of their business areas to external service providers. The study also aimed at finding out the influencing factors that influenced the companies in outsourcing decision and helped the companies to overcome the internal limitation barriers.

In the early 1980s, ‘outsourcing’ typically referred to the situation while organizations expanded their purchases of manufactured physical inputs, like car companies that purchased window cranks and seat fabrics from outside the firm rather than making them inside. Nowadays, outsourcing took on a different meaning. Presently it refers to a specific segment of the growing international trade. This segment consists of arm’s-length, or what Bhagvati (1984) called ‘long-distance’ purchase of services abroad, principally, but not necessarily, via electronic mediums such as the telephone, fax and the Internet. Outsourcing can happen both though transactions by firms, like phone call centers staffed in Bangalore to sen7e customers in New York and X-rays transmitted digitally from Boston to be read in Bombay, or with direct consumption purchases by individuals, like when someone hires an offshore firm to provide plans for redesigning or redecorating a living room (Bhagwati, J. et al. 2004)

In an era of rapid technological change and short product life cycles, companies were trying to reduce cost and maintain quality at the same time which implied that companies would need to specialize in what they did best and de-emphasize management attention from business processes that did not directly impact the business. Outsourcing was a means to partner with service providers so they could handle specific business processes – better, faster and at a lower operating cost (V. Krishna Polineni, 2001). It was defined as the transferring one or more internal functions of an organization to an external service providers. According to the analyst Dean Davison, the outsourcing was growing about 20 percent to 25 percent per annum (Dean Davison, 2006). Outsourcing has become an alternative, which all major corporations must consider in order to remain competitive. It helped to increase efficiency, improve service quality, accountability, values, decreased headcounts and cash infusion and gain access to world class capability and sharing risk (The Outsourcing Institute, 2006).

One of the primary advantages of outsourcing arises quickly from the reduction of overheads. This might give rise to an immediate, and possibly one-off, advantage in terms of the avoidance of future or recurrent capital outlay, and the savings in office space and equipment provisions if these could be released during the outsourcing decision. There was clearly a staff cost reduction possible here, and this could be the predominant element in directly-attributable, ongoing cost savings. The spin-off from this might benefit the business support services department where the outsourcing was partial, and could be especially useful where the capital cost was high and recurrent, particularly if there was uncertainty about the future costs of maintaining effective and competitive business support. It was an investment risk transfer, in other words. Where outsourcing is total, the benefit was accrued directly by the core business – it translated to a capital injection to the customer’s business. This was one of the major driving reasons of the outsourcing of IT provision in the early 1990s – generally agreed as having been led in 1989 by Kodak, which outsourced all of its IT operations to IBM (Jonathan Reuvid and John Hinks, 2001). This could also confer a great deal of flexibility on the company. For a centralized organization which was providing a range of its support services from its own personnel and offices, the move to outsourcing could allow a downsizing of the property commitments. Consider the impact on the organizational infrastructure requirements of a change to outsourcing IT provision, payroll and credit processing, pensions, catering, recruitment, training, Human Resource Management (HRM), cleaning, security, lettings, software development, estates and building management. It could also confer direct scope for downsizing or increased options for organizational re-structuring through property and HRM flexibility.

The transfer of a non-core service provision to a variable cost would allow economies of scale to be passed on from the supplier, and also would mean that incremental changes in the process capacity of the customer (upwards or downwards) could be covered at proportional rather than quantum cost changes. Where scope to vary the scale of the contracted supply was agreed, this has allowed the business organization to make maximum use of its marginal capital for core process change rather than non-core process support change. This could allow decreased time to market for new products or processes, and also increased scope for changes. Outsourcing solutions can provide an excellent chance to get the company service provision out of a rut and, if properly managed, to stimulate new solutions to problems from the mixing of different approaches.

A noticeable feature of the global economy is the enhancing international products. Robert Feenstra (1998) describes the remarkable international specialization in the manufacturing products. For example, the raw materials of manufacturing products like Barbie dolls (plastic and hair) are obtained from Taiwan and Japan. Assembly used to be done in those countries as well as to lower cost locations like Philippines, Indonesia, Malaysia, and China. The growth in international specialization can also be observed in aggregate statistics. William Zeile and Gorden Hanson et al (2003) document the importance of trade within multinational firms. David Hummels et al. (2003) show that trade in intermediate inputs has grown faster than trade in finished products. While the globalization of production may yield important productivity benefits, there is a widespread view that it has also adversely affected low skilled workers. There are frequent media reports on how low-skilled labors in the first world countries are hurt when manufacturing jobs are relocated in the US and in many other countries have picked up on this theme to push for greater restrictions on trade with developing countries. Yet, despite its prominence in the public debate, there is little systematic evidence of the extent to which low-skilled workers are harmed by outsourcing to poor countries (Hsieh, Chang T. and Woo, Keong T., 2005).

Outsourcing has existed in the USA for over 30 years particularly the business pr