Outsourcing,_Poultry

Executive Summary Outsourcing business functions help poultry companies to remain competitive in the fierce competitive environment of today. Not only can outsourcing reduce cost for poultry conglomerates, it also greatly benefits specialty poultry companies. This paper discusses the various types of outsourcing poultry companies employ with emphasis on the different outsourcing motives for conglomerates and specialty companies. In the discussion, business functions are separated into core functions and support functions. The benefits of outsourcing for each core functions listed below are contrasted with the drawbacks: - Day-old Chicks - Feed - Farming - Processing - Marketing Explanation on why outsourcing is important for each aforementioned core function is compared with different levels of vertical integration of poultry companies. Weighing the potential benefits of economy of scale and the problems of outsourcing, this paper concludes and recommends that specialty poultry companies have to carefully outsource both support and core functions after weighing the risks and benefits diligently to remain competitive in the marketplace.  Outsourcing In the highly competitive environment in the food industry of today, there are essentially two types of poultry companies in the marketplace: conglomerates and specialties. Conglomerates like Tyson Foods, Inc. of Arkansas and Foster Farms of California, are extremely vertical in their business structure, often owning or controlling most parts of the value-added process. However, this level of vertical integration “requires maximum investment to equipment.” (Saruliene & Vilkas, 2010, p. 745). On the other hand, specialty poultry company like the one I work for is comparatively small in size and revenue with a horizontal business structure. Specialty companies often rely heavily on outsourcing and strategic alliances to strengthen its competitiveness, decreased capital expenditure and reduce risks. This paper will discuss the benefits and drawbacks of outsourcing each core functions and concludes that specialty poultry companies should carefully utilize outsourcing to increase its competitiveness. To help readers adequately differentiate between “core processes” (Boguslauskas & Kvedaraviciene, 2009) and support functions in the poultry industry, Figure 1 depicts the typical core business processes of a poultry company a modern poultry industry. Figure 1 Core Business Processes of Modern Poultry Industry Each of the aforementioned business process has core components as well as support functions associated with it; any or all of them can be outsourced or be performed in-house. For example, a company can either purchase feed from an established feed company or own and operate a feed mill along with all the delivery trucks; or only operate the feed mill and outsource the delivery to a logistic company. Brown (2008) has stated that some business functions historically have long been outsourced in the United States as “companies continually identify strategies to cut cost, become more efficient, expand, and gain access to new markets” (p. 51). For example, human resource functions, payroll functions, and information technology functions are the most common types of outsourcing. The main reasons to outsource these support functions within any poultry company are lower costs and to gain expertise. Furthermore, these support functions do not necessarily create value for the business (Tadelis, 2007). Therefore, poultry companies should outsource these support functions after determining there are no important relationship between them and the company core competencies (Raiborn, Butler & Massoud, 2009, p. 354). Day-Old Chicks The decision to buy or produce day-old chicks can be broken down into two reasons: cost and control. To produce quality product, quality inputs are required; therefore, the quality of day-old chicks are paramount for any poultry company. The day-old chicks market is very competitive and many small poultry company and individual farmers purchase day-old chicks. However, by procuring day-old chicks from third-party suppliers instead of producing them, company gave up control over the quality and consistency of the chicks. For this reason, conglomerates own and operate the breeder farms, egg producing facilities, and the associated hatcheries to ensure control of the chicks if economy of scale can be achieved and the costs of the day-old chicks can be kept to a minimum. On the other hand, purchasing day-old chicks from different suppliers minimizes the risk when one particular supplier is offline thus unable to provide chicks for various reasons. Moreover, outsource day-old chicks production to suppliers across different geographic locations can minimize the risk if one location is quarantined, like the H5N1 avian influenza of 2005 where the border between British Columbia, Canada and United States was closed to live poultry. If a company’s only source of day-old chicks come from British Columbia, Canada, the supplies would be severely disrupted. Instead of performing the day-old chicks function in-house, specialty poultry company can use strategic alliances to achieve some control of quality (Saruliene & Vilkas, 2010). For example, specialty company can operate breeder farms to maintain control of the genetics then forge long-term alliances with hatcheries to produce the day-old chicks at a negotiated price to remain competitive in the marketplace. Feed Feed can often be up to 50 percent of the production cost; therefore, successfully controlling feed costs are paramount for the profitability of poultry companies. However, operation of feed mills can involve a vast amount of capital investments. Unless there are some benefits in accumulating these assets (Boguslasuskas & Kvedaraviciene, 2009) and the quantity of feed utilized can achieve significant economy of scale, there is no advantage to operate a feed mill. Few poultry companies will justify the capital expenditures; instead, conglomerates could utilize “virtual integration” (Saruliene & Vilkas, 2010, p. 741) by establishing joint ventures or partially owning feed mills that are in close proximately to production facilities. This type of partial outsourcing can reduce the capital required as well as the personnel necessary to manage them, but still allow the company to maintain adequate quality control and keep feed costs down. Specialty poultry companies are at a disadvantage when it comes to feed because of the smaller quantities used. There are only a limited suppliers exist in the marketplace not counting feed mills that may be joint ventures or partially owned by the competitors. Strategic alliance is still the method of choice to assert some level of control and assure feed quality. However, since specialty companies lack bargaining power, costs of their feed will always be incrementally higher. Farming Farms and associated real estates also require extensive capital investments. Therefore, the actual production of poultry is almost always outsourced to individual farmers. This decentralized production approach to farming functions can keep production to several regions thus minimize logistic costs. Moreover, by producing locally, it can improve the company’s marketing image by encourage local economic growth. Furthermore, poultry production facilities are highly regulated by the United States Department of Agriculture (USDA); therefore managing and operating all of the production facilities in-house require a tremendous amount of administrate support. On the other hand, company-owned and operated farms can provide companies with ultimate control over how the products are produced. It gives the fullest range of control over all the input variables and final quality assurance of the products. It is sometimes necessary to exert this level of control, despite the disadvantages, especially in situation where new products and technologies are being tested. Therefore, both conglomerates as well as specialty companies operate company-owned farms to test and experiment with new products, technologies, new feed formulas, and new farming best practices. Processing To create the leanest poultry companies, processing functions can be outsourced. Outsourcing core processing functions to third-party processing plants can significantly reduce capital investments and in-house personnel for plant operations. Moreover, it can eliminate operational uncertainty and cost variances in processing. While processing functions can be outsourced, few companies do it. Processing is arguably the most important core function for poultry companies. It is at the processing plants marketable products are produced and packaged. Depend on the geographical locations of production facilities and customers, companies might operate more than one processing plants. Companies will often outsource processing only when it first expands in new geographic locations. For specialty poultry companies, if certain geographic markets do not have the sales volume to justify a company-owned processing plant, the only solution is to outsource this core function, even to competitors’ plants, to remain competitive. Marketing There are a myriad of marketing agencies, advertising firms, and public relation companies vying for poultry companies to outsource marketing functions to them. It is because marketing function, although important, is not a “core competency” as defined by Boguslauskas and Kvedaraviciene (p. 77). Advertising agencies have specialized expertise in marketing food products can perform this core function better with less resources. Since marketing campaigns are expensive to conceive and to implement, smaller specialty poultry companies might not be able to afford to outsource the marketing function through strategic alliances and must settle with short-term contracts. The decision for specialty poultry company to outsource a particular function is best summed up by Boguslauskas and Kvedaraviciene, where they have suggested that “organization should operate as few non-revenue producing units as possible” (p. 77). This means that specialty company should readily outsource support functions. However, deciding which core functions to outsource is more difficult. Specialty poultry companies have to be diligence in choosing which functions to outsource and to what level of integrations should be present in each core functions. Tadelis (2007) correctly points out that outsourcing inherently presented a conflict of interest between the companies because vendors will always seek to maximize profits while the company will seek lower costs and better services. Therefore, outsourced functions might not yield the lowest cost all the time. Specialty poultry companies have to carefully weigh the risks and benefits before committing to outsource core functions like day-old chicks production, processing, and marketing. In practice, specialty poultry companies must outsource support functions and even core functions to remain competitive in the marketplace. However, with growth and expansions, specialty companies will mature to a point where “bringing an outsourced service or good back in-house” or “backsourcing” (Tadelis, 2007, p. 265) is an option if it can again gain a competitive advantage by achieving economy of scale.   References Boguslauskas, V., & Kvedaraviciene, G. (2009). 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