CHAPTER ONE

INTRODUCTION

1.1. Background to the Study

Nowadays, there are many issues such as the augmentation of competitive pressures, business difficulties, limitation of sources, technologic complexities and specialization of tasks, acceleration of environmental changes, uncertainty about future, price increase, excessive enlargement of some organizations and legal considerations, which leads organizations to reconsider their managerial models to reach competitive advantages. One of these strategies is to focus on the core competencies and to entrust most of the activities to out-side suppliers or to outsource them. So in order to obtain the possibilities to do the tasks and simultaneously to give desirable services to the customers and to enable firms to react to various demands, outsourcing strategy is a necessary tool used by many progressive firms to ensure supply chain performance (Frayer et al., 2000; Masaaki et al., 2008).  Supply chain management has increasingly become an important topic of study by researchers as well as brewery companies involved in business. Focus has been on the creation of an effective supply chain which has been known to be a critical tool in product and service management and improving the competitive advantage for firms (Birech 2011). The concept of supply chain management plays critical role in aiding firms improve performance. This can be archived through outsourcing some of the activities of the organization.

One of the strategic decisions to be made by many organizations today, and a subject of many a boardroom discussion is the decision to outsource among other things, logistics. What do we outsource and why? Organizations have realized that in order to survive in today’s highly competitive environment they must decide which activities to undertake in house and which ones to entrust to other firms in order to get maximum benefits. When a company gains competitive advantage it means that it has the ability to differentiate itself, in the eyes of the customer, as well as lowering its operating costs and hence increase its profitability. Large organizations have used logistics outsourcing as a major strategy aimed at achieving significant cost and differentiation advantages (Jiang and Qureshi, 2006). Logistics outsourcing aims at meeting core objectives which are at the heart of an organization profitability and success. Chase et al. (2004) defines outsourcing as an act of moving some of a firm’s internal activities and decision responsibilities to outside providers. Activities such as order processing, inventory and planning management, warehousing, transportation and freight management, security, packaging and marketing form some of the key functions that both manufacturing organizations are outsourcing in today’s competitive environment (Edward Frazelle, 2004). Increased competitive pressures and stock price concerns are forcing firms to evaluate which activities should be performed in-house and which can be outsourced to increase productivity and return on shareholder value. Firms have opted to outsource activities such as payroll, accounting, customer service, and logistics. The contracting of logistics functions to an external supplier is referred to as third-party logistics (3PL).

The 3PL industry developed in the 1970’s when during a time of expanding globalization and an increased use of information technology. These trends resulted in increased demands on firms, and possibilities for companies to operate more competitively in the marketplace. The first generation 3PL’s (1970’s- 1980’s) offered services such as transportation, brokerage, and shipping. Second generations 3PL’s (1980-1990) were mostly asset or non-asset-based companies with increased service offerings. The third generations 3PL’s (2000 onwards) were mostly web-based 3PL’s with increased supply chain integration (Nemoto & Tezuka, 2007). 3PL typically concentrates in integrated warehousing and transportation services that can be scaled and customized to customer needs based on market conditions and the demand and delivery service requirements for their products and materials. 3PL is evolving from a predominately transactional role to one that is more strategic in nature. Some of the characteristics of 3PL’s are that they perform a variety of outsourced logistics matters, provide customized services, and handle multiple activities. These may involve transportation, distribution, warehousing, material handling, inventory control, packaging and inspection (Harrison, A. & Hoek, R.V, 2008)

Organizational and relationship measures are often used to assess the success of a 3PL provider and customer relationship. Organizational measures may include a firm’s investment in people, technology, equipment, and processes. Relationship measures may include the ability of both parties to meet their counterpart’s needs. Consequently, firms are interested in identifying the factors that influence the success of its 3PL outcomes. Identifying the critical factors that influence the performance and relationship measures will assist firms to improve their performance with 3PLs. Third Party Logistics (3PL) is defined as independent companies providing single or multiple logistics services to a purchase company. While 3PL providers do not hold ownership of the products or services they distribute, they are legally bound and responsible to perform the contract for logistics activities of the purchasing company as if they were the purchasing company itself (Hertz and Alfredsson, 2003). The relationship between the two parties is long and mutually beneficial to both companies. According to Lynch, (2000), 3PL is defined as the strategic use of third parties to handle activities that were traditionally handled internally. Logistics not only involves warehousing, transportation, inventory, material handling, packing, distribution and security, but it also includes the process of planning and managing the flow of information between the points of production to the point of use or customer end. This therefore means that logistics outsourcing impacts the activities of both manufacturing industries.

The concept of logistics outsourcing is largely about inbound logistics. Inbound logistics concentrates on purchasing materials, parts, finished inventory from suppliers as well as goods and services. The practices involved include transport, information, warehouse, material handling as well as inventory management. Knemeyer and Murphy (2004) also defined 3PLs as a relationship between supplier and a third party which when compared with basic services providers have more customized offerings, encompasses a broad number of service functions and is characterized by a long term and more beneficial relationship. On the other hand, Mortensen and Lemoine (2008) defined third party as simply the use of an outside company to perform all or part of the firm’s material management and product distribution. An annual study on the state of 3PL conducted by John and Capgemini (2016) indicated that organizations and their 3PL providers are moving towards meaningful partnerships as opposed to traditional transactional relationships. This research also concludes that there is a significant improvement in the strategic nature of relationships between organizations and logistic outsourcing companies. Hertz and Alfredson (2003) identified various advantages of 3PL services. Outsourcing saves money and time. It allows a firm to relieve its employees the burden of daily logistical tasks allowing them to spend more time focusing on growing the firm. It is also cost efficient, relieving the firm the hustle of establishing warehousing space, technology and transportation for its products. Additionally, outsourcing results to accountability since it involves putting an aspect of the firm’s operations into someone else’s hands who is responsible for getting the tasks done. It also results to the integration of experts who bring innovative technology that would otherwise be unavailable without outsourcing. It is also important to note that outsourcing logistical services allows 3PL providers to adjust to the needs of the firm accordingly. They are also capable of providing a vast network of resources as well as established relationships with providers that can offer the most cost-efficient service possible. This greatly enhances the supply chain performance of firms.

As competition in the 1990s intensified and markets became global, so did the challenges associated with getting a product and service to the right place at the right time at the lowest cost. Organizations began to realize that it is not enough to improve efficiencies within an organization, but their whole supply chain has to be made competitive (Li et al, 2006). The understanding and practicing of supply chain management (SCM) has become an essential prerequisite for staying competitive in the global race and for enhancing profitably traditional business functions and tactics across these businesses functions within a particular organization and across businesses within the supply chain for the purposes of improving the long-term performance of the individual organizations and the supply chain as a whole Brewery firms and other commercial sectors have begun to recognize that supply chain management is the key to building sustainable competitive edge for their products and/or services in an increasingly crowded marketplace. The concept of supply chain management (SCM) has been considered from different points of view in different bodies of literature, such as purchasing and supply management, logistics and transportation, operations management, marketing, organizational theory, and management information systems and it should be taken into consideration the impact of the points on the performance of a company.

Hausman. (2004) explains supply Chain Performance as the extended supply chain’s activities in meeting end-customer requirements. It includes variables such production reliability and defect rates, cycle time, on time delivery, cost of quality and scrap reduction, productivity, and inventory management. Srinivasan et al. (2011) explained the concept of supply chain performance as the extent of performance of the processes included within the firm’s supply chain department. Some of the measures specifically used to determine the supply chain performance of a firm include supplier performance, customer satisfaction, stock costs, and number of on-time deliveries, product availability performance and lead time.

Performance measurement is defined as the process of quantifying the efficiency and effectiveness of a given process or function. (Gunasekaran and Kobu, 2007). Effectiveness is the level that customer’s requirements are met and efficiency monitors usage of a firm’s resources when providing a pre-specified level of customer satisfaction (Sheperd and Gunter, 2006). Hence, performance measurement is an important factor that improves supply chains’ effectiveness and efficiency (Beamon, 1999). It is the responsibility of the decision-makers to develop metrics for evaluating performance.  Birech (2011) highlighted various performance metrics within operations area which include productivity measures, quality measures, inventory measures, lead-time measures, preventive maintenance measures, performance to schedule, and utilization; Specific measures which include cost of quality, variances, period expenses, safety measured on some common scale such as number of hours without an accident, profit contribution, measured in dollars or some common currency.

The global brewery industry is a multi- million-dollar market. Although a relatively market, there are always opportunities for ambitions in this sector. Supply chain management have contributed to the brewery firm’s by helping them boost customer satisfaction, transportation of products to the right location through effective supply chain, reduction in Operation, avoid delays and managing logistics of products development, marketing, customer service and business operation.

A report by Oxford Economics on the economic impact of beer industries around the world found that beer is an indispensable component of the economic growth. The first-ever worldwide report to assess the beer industry’s global economic impact, which was released by the World Breweries Alliance (WBA) on March 3, 2021, found that one in every 110 jobs in the world is linked through direct, indirect, or induced impact channels to the beer sector. It also revealed that despite the COVID-19 pandemic which disrupted socio-economic activities worldwide between 2019 and 2020, the beer industry contributed $555 billion to global GDP, generated 23.1 million jobs and contributed $262 billion governments’ revenue globally in 2019. The Craft Brewing Industry Contributed $62.1 Billion to the U.S. Economy in 2020, more than 400,000 Jobs. Even in a challenging year, small and independent American craft brewers contributed $62.1 billion to the U.S. economy in 2020 (Economic Impact data, 2021). The industry also provided more than 400,000 total jobs, with nearly 140,000 jobs directly at breweries and brewpubs, including serving staff at brewpubs. The EU28 is the second largest beer producer in the world, after China. There are around 10,300 active breweries, owned by more than 9,500 active brewing companies, which produced over 405 million hector-liters of beer in 2018. A significant number of new microbreweries (over 860 more than in 2017) have been established, adding to the innovation and diverse products offered by the beer sector, Total consumer spending on beer was over €117 billion in the EU28 in 2018. Enormous numbers of jobs depend on the continued success of beer in Europe. The total contribution of beer to employment is over 2.3 million jobs in the EU28 (around one per cent of total EU employment), in 2018 (EU Report – March 2020)

The Brewery industry has also been at the forefront of development of African economies.  The report by Oxford Economics on the economic impact of beer industries around the world also showed that the beer industry contributed $2.294 billion to Nigeria’s GDP, generated 309,200 jobs and contributed $526.2 million into Nigeria’s government revenue in 2019. It also ranked Nigeria 30th out of 70 top beer markets in the world that were covered by the report.  A breakdown of the economic impact of beer market on Nigerian economy, according to the report, further revealed the beer industry made $897.5 million indirect impact on the Nigeria’s GDP while it’s induced and direct impacts were estimated at $466.5 million and $875.4 million respectively. Furthermore, the report showed that of the 209,200 jobs generated by the beer industry in Nigerian economy in 2019 is made up of 148,423 indirect jobs, 87,508 induced jobs and 73,233 direct jobs. The South African Breweries (SAB). CEO Richard Rivett-Carnac said that the industry already contributes 1.3% to the national GDP. The beer industry continues to be a key contributor to the local economy, citing a recent Oxford Economics Research paper which showed that the beer industry contributed approximately R74 billion to the country’s GDP in 2019 – equivalent to 1.3% of national GDP. The sector sustained over 248,000 jobs in 2019, equivalent to 1.5% of national employment, while the tax impact was approximately R45 billion in 2019, this was the equivalent of 3.3% of government revenue (BUSINESSTECH, 2022).

To curb the spread of the coronavirus pandemic in the country, Cameroon issued a set of measures in March, including the requirement to close drinking establishments by 6 P.M every day. According to a report by Business in Cameroon (2021), the brewery industry rests on three companies namely, SABC (Castel group), Guinness Cameroon (Diageo group) and UCB (Kadji group). In 2018, their combined net sales were XAF457.2 billion. SABC paid XAF217.3 billion of taxes and duties to Cameroon’s public treasury. SABC says it invested CFA35 billion in the country in 2017. The various taxes it paid to the public treasury amount to CFA206.6 billion. With assets estimated at CFA700 billion, the company actually employs 6,000 people of which 3,000 are direct employees working at three entities: the breweries, Cameroon’s glass factory (Société Camerounaise de Verrerie-SOCAVER) and Cameroon’s mineral water company (Société des Eaux Minérales du Cameroun-SEMC). With seven plants throughout the country, the group controls 72% of the country’s beer market. The beer market in Cameroon was equal to 1.27 billion USD (calculated in retail prices) in 2015. Until 2025, the beer market in Cameroon is forecast to reach 2.15 billion USD (in retail prices), thus increasing at a CAGR of 4.91% per annum for the period 2020-2025. This is a decrease, compared to the growth of about 6.07% per year, registered in 2015-2019. The average consumption per capita in value terms reached 57.15 USD per capita (in retail prices) in 2015. In the next five years, it grew at a CAGR of 3.36% per annum. In the medium term (by 2025), the indicator is forecast to slow down its growth and increase at a CAGR of 2.34% per annum (strategy.com, 2022).

Despite the importance of the brewery sector to the economy of Cameroon, it has been facing challenges due to poor implementation of outsourcing operations by brewery firms thus affecting the supply chain performance this industry. This has scared away many investors in the sector.  Activities such as order processing, inventory and planning management, warehousing, transportation and freight management, security, packaging and marketing form some of the key functions that both manufacturing organizations are outsourcing in today’s competitive environment (Frazelle, 2004). This study is therefore out to evaluate the concepts of third party logistics or outsourcing operations and its effects on supply chain performance that could be a reference for any brewery firm in Cameroon.

1.2 Statement of the Problem

Effective supply chain management (SCM) has become a potentially valuable way of securing competitive advantage and improving organizational performance since competition is no longer between organizations, but among supply chains. Supply chain is one of the areas identified by researchers as having a great potential to boost efficiency and reduce costs of most manufacturing firms. Burgress Singh and Koroglu, (2006) highlighted the importance of supply chain management but noted there is little research done on supply chain practices. Any inefficiency incurred by any of the supply chain members can affect the performance of the whole chain. This is because inefficiencies add to the company costs in the long run. One of the ways of archiving this is through third party logistics or outsourcing some of the operations of the organization. Despite the fact that modern manufacturing firms can internally perform most production and service provision activities, most still choose to outsource these activities to 3PL service providers. Third Party Logistic providers have a vast network or resources available that provide advantages over in-house supply chains. Additionally, outsourcing logistics saves a wealth of time and money that would otherwise be spent sourcing internally. Choosing to use 3PL providers eliminates the need to invest in warehouse space, technology, transportation and staff to execute the logistics internally, keeps the organization up to date as far as the ongoing trends in the industry is concerned. A 3PL provider is knowledgeable of industry best practices, and stay up to date with the latest developments in technology, manufacturing, and logistics and they have the ability to scale space, labor, and transportation according to inventory needs i.e. scalability and flexibility. This has scared away many investors in the sector.  Frazelle, 2004 asserted that as firms grow, some key functions and activities such as order processing, inventory and planning management, warehousing, transportation and freight management, security, packaging and marketing functions should be outsourced by manufacturing firms in today’s competitive environment to ensure supply chain performance. However, most brewery firms in the Cameroonian context still insist on carrying out these operations by themselves thus resulting to inefficiency incurred by supply chain members which in turn affects the performance of the whole chain.

Frazelle, 2004 identified order processing operations as one of the logistics operations firms can outsource to ensure supply chain performance. According to him, in large organizations, order processing refers to handling voluminous products to make them reach the desired destination. Order processing comprise of verifying the order received and checking whether the facility has the required amount of goods. It is perpetual process which consist of picking (taking and collecting products in specified quantities prior to shipping the orders for customers), sorting (separating goods as per their destination), packaging formation (weight, label, and pack products) as well as consolidation (accumulating packed products to loading bays to be transported). However, in most cases, third party logistic providers of brewery firms do not fulfil all requirements in required quality or required time resulting to contract risk.  There is also a difference between the management methods and the culture of the company used by the provider and client resulting to management risk which affects the supply chain performance of brewery firms. Outsourcing order processing operations in some cases push brewery firms to incur financial risk as the real return on investment of order processing outsourcing is lower than the expectation. This pushes brewery firms to do the operations by themselves resulting to low supply chain performance.

Chen & Jiahong, (2015) also identified inventory optimization as one of the key the logistics operations firms can outsource to ensure supply chain performance. According to him, brewery companies must focus on maintaining healthy finished goods inventory stocks in order to be able to decrease inventory costs, meet customer requirements and to obtain competitive advantage. Yan (2010) mentioned that brewery firms should keep forward in development and focus on producing high quality, low cost, low material consumption goods to establish its foothold in the fierce industry competition. It is proved by previous studies that making use of appropriate Inventory Management (IM) practices is one of the effective approaches to retain the competitive edge of the enterprise (Onwubolu and Dube, 2006). Raza, (2020) Inventory Optimization is defined as a method of balancing the manufacturers’ capital investment constraints and goals along with the defined service-level goals over a large assortment of Stock-Keeping Units (SKUs) while considering all demand and supply volatility situations. It includes the practice of having the right levels of inventory to meet your target service levels while keeping a minimum amount of capital locked for inventory (Raza, 2020). However, the risk of poor quality information sharing by third parties result in serious problems and dramatic losses. Market fluctuations such as labor price, raw materials price, and the changes in customer demand also results in market risk. Financial risk also accrue, in some cases, the real return on investment of inventory control outsourcing is lower than the expectation resulting to financial risk. This affects the supply chain performance of brewery firms.

Frazelle, 2004, also outlined transportation operations as one of the logistics operations firms can outsource to ensure supply chain performance. According to him Transportation is a complex and costly part of logistics management. It can represent 50 percent of the logistics budget, putting pressure on companies to find the fastest and cost-effective way to get products and goods to the consumers and distributors. Transportation includes various platforms, such as road vehicles, cargo trains, freight shipping, and air transport. Perishables such as drinks do not travel far but are complexed in terms of handling. Transportation ensures the delivery of products from point of origin to the point of consumption. Timely availability of products is of prime importance as only then the reason to manufacture a product will be attained. However, in most cases, third party logistic providers of brewery firms do not deliver the products to customers at the right time causing brewery companies to incur financial risk as the real return on investment of transportation outsourcing is lower than the expectation.

As stated above, Cameroon’s brewery industry is perhaps one of the fastest growing sectors of the economy and there is fierce competition within the sector made up of giants such as Les Brasseries Du Cameroon, Guinness Cameroon, KADJI, SOFAVINC just to name a few. Competition is supposed to bring about efficiency in an economy (Boohene R. and Agyapong Q., 2011). Despite the high number of brewery firms in Cameroon, the industry has been facing challenges in terms of supply chain performance due to the poor implementation of outsourcing operations by third parties. However, previous literature on third party logistics operations and supply chain performance in the context of brewery product distribution   are still nascent and lacking in the Cameroon context. As such there is still a rather limited understanding of outsourcing driven-supply chain performance in the Cameroonian brewery manufacturing sector. This study therefore seeks to investigate the extent to which third party logistics operations enhance the Supply chain performance of brewery firms in Cameroon specifically, brewery manufacturing firms in Douala.

1.3 Research questions

1.3.1 Main Research Question

To what extent do third party logistics operations enhance the supply chain performance of brewery manufacturing firms in Cameroon?

1.3.2 Specific Research Questions

• To what extent does outsourcing order processing operations enhance supply chain performance of brewery manufacturing firms in Cameroon?
• How does outsourcing inventory control operations enhance the supply chain performance of brewery manufacturing firms in Cameroon?
• In what way does outsourcing transportation operations enhance the supply chain performance of brewery manufacturing firms in Cameroon?

1.4 Objectives of the Study

1.4.1 Main objective

To examine the extent to which third party logistics operations enhance the supply chain performance of brewery manufacturing firms in Cameroon.

1.4.2 Specific objectives

The specific objectives of the study are;

• To determine the extent to which outsourcing order processing operations enhances the supply chain performance of brewery manufacturing firms in Cameroon
• To examine the extent to which outsourcing inventory control operations enhances the supply chain performance of brewery manufacturing firms in Cameroon
• To analyze the extent to which outsourcing transportation operations enhances the supply chain performance of brewery manufacturing firms in Cameroon

1.5 Research Hypothesis

H1: Outsourcing order processing operations significantly enhances the supply chain performance of brewery manufacturing firms in Cameroon.

H2: Outsourcing inventory control operations significantly enhances the supply chain performance of brewery manufacturing firms in Cameroon.

H3: Outsourcing transportation operations significantly enhances the supply chain performance of brewery manufacturing firms in Cameroon.