Factors Affecting Outsourcing Decisions In Pakistan

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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) are 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 economy:

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).

Common FMCG products:

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.

Market potentiality of FMCG industry

Some of the merits of FMCG industry, which made this industry as a potential one are low operational cost, strong distribution networks, presence of renowned FMCG companies. Population growth is another factor which is responsible behind the success of this industry.

Leading FMCG companies

Some of the well known FMCG companies are Sara Lee, Nestlé, Reckitt Benckiser, Unilever, Procter & Gamble, 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.


However, changing economies and production methods means delivering goods from one country to another or one region to another, and using companies in other countries to produce some goods and products. Multinational companies in the U.S., UK, and Europe send some part of production to other regions where the cost of labor is lowest, or where other advantages exist in cost of production (Graf and Mudambi, 2005).

Transitions in the world economy increasingly involve the flow of intermediate goods from one country to another as multiple countries complete successive steps in a globally integrated production process. More and more firms have located different stages of production processes in different countries. Many companies in the U.S. and Europe send some part of their production to other countries such as China, Thailand, Vietnam, and India in order to reduce costs. However, although outsourcing has become important, the process is still under the auspices of one company, which therefore must consider how to use its management tools.

Because of this industrial transformation, a new phenomenon is appearing on the industrial world map. China and India are major locations for industry, and many firms have sent goods and products to these countries for further production. This industrial map changing involves changing technology and convenient communications mean we can work from different countries but still work together as if in the same place and close to each other.(Gupta and Govindarajan, 2004).

Contract manufacturing is an emerging phenomenon with industry-wide implications. Contract manufacturing refers to the recurring buyer-seller relationship at the design manufacturing interface (Sturgeon, 1999). The relationship at the design manufacturing interface is inherently interaction intensive. Chan and Chung (2002) capture this assumption in the definition of contract manufacturing, when a provider of goods and services works collaboratively with other providers of goods and services as networked business partners to satisfy market niches by exchanging information through an inter-organizational information system.

Business process outsourcing has been an accepted business practice for more than two decades. It has shown a remarkable increase in recent years and has been a source of growth in several industrial sectors. In many countries, agreements have been made between a small number of multinational industry service suppliers and large client organizations, including central and local governments and large services and manufacturing firms. Outsourcing is the process of shifting tasks and services previously performed in-house to outside vendors (Jenster, Pedersen, Plackett, and Hussey, 2005). However, outsourcing is a common phenomenon, despite much attention being given to both globalization and regionalization, and occurs when organizations in one country contract work to another country either by creating operations in the foreign country or by contracting with an outsourcing provider (Niederman, 2005).

Outsourcing is a dynamic and recurring process that rests largely on the propositions of socio-technical theory, including open systems theory and contingency theory. Hence, it seems reasonable to assume that one static or unambiguous road map relating to outsourcing of manufacturing, which meets the requirements of every sectoral pattern, cannot be developed (Momme and Hvolby, 2001).

Thus outsourcing is a method in which management responsibility is transferred to an external organ or corporation in order to expand the core activities of the outsourcing company in fields complementary to its main activities. Outsourcing is and will remain an important method of satisfying the needs of business such as lower cost and competitiveness in the foreseeable future.

Outsourcing means the act of obtaining services from an external source, and business process outsourcing (BPO) occurs when an organization turns over the corporate environment of a particular business process or some part of production activities to a third party that specializes in that process (Brown and Wilson, 2005: 20). Business process outsourcing comprises activities in relation to management of an organization, including some part of production outside of the organization and/or third party by collaboration with a partner to produce that process for more efficiency of organization and competition (Magnezi, Dankner, Kedem, and Reuveni, 2006).

Companies such as Nike are well known in the 'outsourcing world' because they do not own manufacturing facilities or equipment in spite of selling a 'physical product' (Turner 2005). Nike chooses to outsource all its manufacturing operations, although it remains involved in the design and planning functions. Even though not all organizations are like Nike, outsourcing continues to gain popularity (de Kok 2000, Tukel and Wasti 2001, McCarthy and Anagnostou 2004). Some benefits of outsourcing are well known. They include allowing organizations to focus on their core competencies while taking advantage of the expertise and efficiency of the companies from which they outsource. Outsourcing also provides extra capacity without capital investments or hiring of personnel (Puich and Walker 2004), but outsourcing is not without its 'costs', including loss of control, possible higher product cost, possible reduction of flexibility, and the creation of dependency of suppliers (Humphreys et al. 2002).

Contract manufacturing is a supply chain arrangement. In this paper, we investigate a situation in which a manufacturing company outsources its assembly operations to two contract manufacturers, taking into account time (as a dynamic factor) and processing level (in terms of assembling) simultaneously. Each contract manufacturer is assumed to have a different level of improvement capability of inducing supply cost reduction that, in turn, benefit the manufacturing company. Two types of contract manufacturer are considered: (I) one which offers a cheaper current price for its supply, but having little improvement capability and thus little potential for future supply cost reduction; (ii) the other, although offering a higher price, possesses a higher improvement capability. The decision problem faced by the manufacturing company is twofold: over time, (a) how much should be outsourced to each contract manufacturer (i.e., less capable or more capable); and (b) how processed (in terms of assembling) should the semi- finished units be when returned from the contract manufacturers. An optimal control model helps us develop a set of mathematical results, which can solve the decision problem. Numerical examples are also employed to demonstrate how the analysis can be utilized in a real world setting.

Two important factors that affect outsourcing decisions are the production cost and the potential loss of customer goodwill due to late orders. This article deals with the problem of finding outsourcing strategies or solutions that consider trade-offs between outsourcing cost and average tardiness, an important measure of lost customer goodwill. Assumptions include that outsource costs are a function of machine use and that the planning organization owns no production equipment; instead, the production function is completely outsourced. Furthermore, the planning organization has flexibility in terms of the quantity of parallel production resources to outsource and it controls the assignment of jobs to these parallel production resources. The article presents lower bounds for the problem, which are used for comparisons. Several approaches to generate trade-off solutions are proposed and compared under a variety of experimental factors (RUIZ, PEZY, and WOJCIECHOWSKIX, 2006).

What is likely to make the outsourcing decisions a success?

Gilley and Rasheed (2000) argue 'the results [of their empirical study] indicate that firms pursuing more intense outsourcing strategies do not experience significant direct performance impacts. However, it is highly likely that outsourcing has an effect on the individual functional areas in which it occurs…Therefore, individual functional areas may experience performance improvements or declines as a result.'

This argument is usefully understood in two parts. First it is evident that for the outsourcing decision to be a success the provider would have to deliver service that was uncommon. In other words, if due to it's tradable nature outsourced provision does not provide market advantage, then only an outsourcing relationship that leads to market beating provision will bring measurable gains in 'success.' Second, it is clear that outsourcing will only be successful if it meets goals on a departmental level.

Whether it is the HRM department who manages the relationship or some other operational function, there will only be 'successes where the outsourcing service meets the needs of that department. This seems an area worthy of further investigation.

If outsourcing does not provide over all increases in firm performance, even given its well known cost and competitive focus advantages, then the decision to outsource must also consider whether the provider (in the case of HRM, a PEO) has market leading skills, and whether these skills are sufficiently understood by the contracting Organization in such a way that they form part of the outsourcing 'plan' in the first place.


The Objective of the study is to investigate & find out different factors that affect outsourcing decisions in FMCG industry of Pakistan.



H1: There is a significant relationship between Production Cost and Outsourcing decisions.

H2: There is a significant relationship between Quality Standards and Outsourcing decisions.


The methodology to be adopted for the subject study would be as follow:

The aim of this research is to study causal variables affecting FMCG industry outsourcing management in Pakistan. In this research we will collect and analyze data by both qualitative and quantitative methods. The qualitative method to be used would be in-depth interviews of 20-30 senior managers from these FMCG's sector in Pakistan. From the interviews, we will try to find out factors to be affecting FMCG industry outsourcing management. After that, all data from in-depth interviews will be reviewed and to be used to analyze related factors and variables. Factors and variables drawn from in-depth interviews would be compiled into a questionnaire that would then be provided to 30-50 managers from these industries in order to test its reliability. Reliability analysis resulted in Alpha Coefficient e =?

Factor analysis (SPSS) will be used to analyze the data. From analysis, factors and variables will be derived that have an effect on outsourcing to FMCG industries of Pakistan


The sample size will be five years (2005 - 2009), annual financial statements of five major banks which are as follows.

§ Murree Brewery

§ Peek Freans

§ Procter & Gamble

§ Reckitt Benckiser Pakistan

§ Shan Food Industries

§ Shezan International

§ Unilever Pakistan




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