How Manufacturing Companies Can Gain from Outsourcing - Example

OUTSOURCING Letter of transmittal Date: To the Instructor Dear sir/madam, In compliance with the fulfillment of the requirements, this research paper presents the study of how manufacturing companies can gain from outsourcing. The presented research fulfills the mandate which were given as per your instructions. The main purpose of the document is to propose how manufacturing company can take advantage of outsourcing to reduce their cost of operation and increase their time in research. This study shows that there are many advantages that manufacturing firms can reap from outsourcing but it is a hard decision which requires consideration of many factors. I hope you will approve the study. Truly yours ………………. Executive summary Purpose The main purpose of this report was to analyze how manufacturing sector is entering into outsourcing. The report looked on different factors that have to be considered before deciding to outsource and advantages and challenge of outsourcing. Method of analysis The main method of analysis used in this report was a review of literature on outsourcing. The report looked into credible sources about outsourcing and these facts were applied to the manufacturing sector. Major findings The study found out that the manufacturing sector can gain a lot from outsourcing. It can reduce the cost of production and concentrate on research and development. However, it will be faced by the challenge of jobs losses and loss of private information and intellectual property Recommendations This report recommends that outsourcing is the future of business. The manufacturing sector needs to realize the benefits it can get from outsourcing. Table of contents Title page ………………………………………………………... 1 Letter of transmittal ……………………………………………… 2 Executive summary …………………………………………....... 3 Table of content …………………………………………………. 4 Introduction ……………………………………………………… 5 Outsourcing ……………………………………………………… 5 What is outsourcing ……………………………………………… 6 Outsourcing – a hard decision …………………..……………….. 7 Advantages and disadvantages of outsourcing ………..…………. 9 Conclusion ………………………..…………………………….. 12 Recommendations………………………….………….……….... 12 Bibliography ………….…………………………….……….…... 13 Introduction Purpose The main purpose of this report was to analyze how manufacturing sector is entering into outsourcing. The report looked on different factors that have to be considered before deciding to outsource and advantages and challenge of outsourcing. Authorization This report was authorized the CEO. It was motivated the growing trend towards outsourcing and it was mainly meant to look at the advantages that the manufacturing sector could gain from outsourcing. Limitations One of the limitations of this report was time. It required a lot of time to find and analyze the necessary material on outsourcing which was not an easy task. Scope of report This reports looks into outsourcing. The report analyzes the concept behind outsourcing. It also looks into the ways in which the manufacturing sector has benefited from outsourcing and why most companies prefer to outsource production services. The report also looks into advantages and challenges of outscoring. Outsourcing Contracting out of business process to foreign providers is not new. It has emerged as the concept of offshoring that has taken the world by storm. Offshoring, which also encompass the process of outsourcing, has been practiced for decades now. Outsourcing has been practiced since the 1960s but the concept has gained prominence use in the recent past, beginning in the 1980s. It is evident that the process of outsourcing has developed along the line of growth in information and communication technologies. The change in structure of outsourcing has been underway, general influenced by the interplay of three factors including technological advances, economic and competitive pressures aimed at reducing cost and improving productivity, and institutional developments of favorable trade liberalization. What is driving outsourcing? The advance in technology has made outsourcing possible due to changes in communication and transportation. Advanced technology has reduced the cost of transportation which means businesses can now transport goods from one continent to the other cheaply (Summers and Smith, 2006). Advanced technology has also made it possible to disseminate and receive information with ease which has transformed the work process, organization structures and communication between organizations in different continent. Unlike in the past there internal process of making decision on whether to outsource or not, today, this decision can be made in a matter of hours since it will be possible to look for suitable firm to get the contract and comparative prices offered by the firms just be clicking the mouse (Simchi-Levi, Kaminsky and Simchi-Levi, 2008). Through use of modern information and communication technology, it will also be possible for firms to get an update of the work process which means they can track the whole process as if it was taking place in their own factories. Without growth in information and communication technology, it would have been quite difficult for outsource to take root. Essentially, the growth in outsourcing has occurred to push and pull factors. Theoretical development of outsourcing is based on the competitiveness of the firm in the domestic market. In order to compete effectively in the global environment, most firms have discovered that they need to come up with strategies to reduce their cost of operation. The main factors driving most firms to outsourcing include the related cost of production, distribution and productivity (Manning, 2007). Outsourcing is therefore seen as a strategy that can be used by the firm in order to gain competitive edge in the market. For example if the firm can outsource its infection production process to a foreign provider which is more cheaper and efficient, the firm will have time to concentrate on those areas that it can perform best. This mean that it will have opportunity to use its comparative advantage in order to expand its output or engage ni new business activities altogether. Outsourcing – a hard decision The decision whether a firm chooses in-house production or outsources from foreign producers is based on the theory of the firm. It also follows the principle of the transactions cost theory and the principle-agent framework. Agency theory stipulates that bounded rationality and self-serving behavior or opportunism of the firm’s employees can lead to productivity losses (Jiang, Belohlav and Young, 2007). Therefore, conflicting goals and interests between the firm and its employees may be a major problem for continued productivity of the firm. In order to reduce inefficiencies which stems from the strained relationship, a firm can outsource some or all of its activities to external providers where it does not have to deal directly with the employees. On the other hand, transaction cost theory concedes that outsourcing is only desirable so long as it cost or the related assets specific investment, contractual incompleteness and search efforts will be lower than the expected cost advantage. Making a decision on whether or not to outsource is usually a hard choice for most organizations considering the negative impact that it may on the workforces. Organization is a new trend that is being received well by managers and financial planners but not by organization employees who are at risk of losing their jobs. For most organizations, the decision to outsource is based on well calculated move that is aimed at saving the cost of operation and increasing the competitiveness of the organizations (Lewin and Couto, 2006). The growing integration of the world economy has placed the emerging market at an advantageous position since they have become the center of outsourcing. They provide cheap labor that is required by the established firms to keep their operating cost at the bare minimum. The reasons why manufacturing companies in the United States looks towards Mexico and India is just because they cannot bear the high cost of operation and will taken up any strategy that reduces their cost of operation. Before a manufacturing company like Toyota decides to outsource its parts, it has to make a comparative analysis of the benefits and challenges that will be incurred and from the analysis make an informed choice (Avish, 1997). Every organization is looking up at taking the most effective strategy that will maximize the value of the products or services in the market. For most consumers, the value is not only assessed in terms of the usability of the product but also on the cost of the product. This means that in today consumerism culture, the cost of the product is a major factor determining whether consumers are going to purchase the product or not. Most companies have found their products uncompetitive in the market compared to the products which are coming from outsourcing centers like China and India (Drezener, 2004). In essence, the basic instinct for most firms is to make a cost impression in the market so that consumers will be more attracted to the products. For example, the big Detroit three in America have found their high value cars like Jeep, Hummer, and others out of favor with consumers because the go at a higher price compared to cars which are being produced in India and Japan. This means that the cost of the production, which translates to the cost of the product in the market, is a major factor determining whether firms are going to outsource or not. The cost factor narrows down to comparison of the internal cost of production and the external or outsourced cost of production. This means that most companies will have the cost of labor in mind and the efficiencies of the production. For most organization opting to outsource, they find that internal production comes with many challenges compared to outsourcing (Ganesh, 2007). For internal production, the company will require workers and their managers. It will require power and equipments. It will require raw materials and others. In all these, the cost of labor and power are most likely to drive most firms to outsource. For example, an American company will find that it may take $50 in power and labor cost to produce1 unit. Comparatively, it may take $20 to produce the same unit in a country like China and additional $3 for transportation. There is not reason why such a firm will opt for domestic production. In addition to the cost of labor, the company may also be required by the federal laws to purchase insurance premiums for its workers, give them huge benefits, and others which push the cost of production even higher. This means that the comparative cost of production per unit will be the foremost factor likely to drive most companies to outsource. There are three main factors which are likely to be considered by a manufacturing firm before deciding to outsource. These include strategic, operational, and organizational factors. In strategic factors, it is important for a firm to consider whet it is going to have any preferential advantage by having its own production plants and having internal production (Lewin and Couto, 2006). The company will need to consider whether having its own manufacturing line will be a part of its business strategy or whether this can be achieved through outsourcing. In operational factors, the firm will have to consider the performance targets, manufacturing needs, and the supply chain. This means that the organization has to consider whether it will be able to meet it performance target and production needs using the internal production process or whether it can achieve it better through outsourcing. This is an important consideration for the firm because in either ways, it will be required to meet is performance target (Gareis, 2002). On organizational factors, the business has to consider how it achieves its results. The organization ahs to consider whether it will achieves its results with internal production or with external production. In case where the company has continuously missed to get its results with internal production, it is advisable to try extern outsourcing. Any manufacturing company has to consider all the three factors before arising at the decision to outsource or not. In addition, the firm must consider the advantages and disadvantages of outsourcing. Advantages and disadvantages of outsourcing For manufacturing firms, there are many benefits they are likely to get from outsourcing. The main advantage for manufacturing firms it that in line with theories supporting outsourcing, a firm has a chance to concentrate on areas that it is best suited in once it had decided to outsource is production. Production is a tedious process and its takes a lot of time and resources for the organization. Once the organization has decided to outsource, it will have time to concentrate on research and development which are important for continued competitiveness of the firm (Maike, Deflorin and Anand, 2008). One of the benefits that manufacturing organizations are likely to get is reduced time between production and market. The time take between production and marketing is important determinant of the performance of the organization. This means that reduced time-to-market is advantageous for the company. In terms of economics, manufacturing companies are more likely to lower the cost of production. The company will save on the cost of maintenance of equipments which are used in production. Outsourcing is also advantageous to the manufacturing company because it will not require keeping on changing its equipments with the changing technology. As new technologies become obsolete in days, it has become difficult for most companies to keep up with the cost of acquiring new technologically advance equipments (Currie, 2000). This means that it will be forced to turn to firms which have the capability to buy new manufacturing equipments. However there are many disadvantages of outsourcing. Once the company decide to outsource, it means that it is ready to give up is copyright to the manufacturing firm. If the environment is not well regulated, this information may leak to competitors thereby eroding the competitive edge of the company. Fear to lose intellectual property and privy information has been one of the factors that have driven most companies not to choose outsourcing. In addition companies have to lay off most of their laborers (Engardio, 2006). This is likely to lead to internal resistance since not many people are willing to lose their jobs. The continued loss of jobs in the U.S manufacturing sector has been attributed to outsourcings. Conclusion The concept of outsourcing entails having to contract a foreign firm to product goods or services for a firm. The main idea behind outsourcing is for a firm to get good products at their dictated terms for cheaper prices, and perhaps at reduced time compared to internal production. Outsourcing has been driven by the need for most firms to bring down the cost of production. For most firms in developed countries, they have found the cost of production as one of the major expenses eating into their profits. Although outsourcing has been considered an important factor in increasing the competitiveness of the firm, it is has many challenges as well. Outsourcing means that the firm is willing to give up its intellectual rights and privy information. Outsourcing will also lead to loss of jobs as the company cannot keep employees in the company who are not working. This is likely to cause resistance from the workers. However, outsourcing dictates the future of the manufacturing sector and firms have to be aware of the potential cost saving and competitiveness that comes with outsourcing. Recommendations With the above mentioned advantages of outsourcing, manufacturing firms should venture into outsourcing. However, they must make consideration of the all factors and weigh the benefits and cost before making that crucial decision. List of references Avish, S. 1997, T&E expense: To outsource or not? Management Accounting 67: 89-94 Currie W 2000, Expanding IS outsourcing services through application services providers, Executive Working Paper Series Drezener, D 2004, The outsourcing, Journal of Communication 11(1): 9-12 Engardio, P 2006, The future of outsourcing, Nature 26(3): 4-9 Ganesh, S 2007, Outsourcing: viability in manufacturing sector, Journal of Communication Management 11(4): 9-25 Gareis, R 2002, Analyzing the outsourcers, Journal of Communication Management, 12(4): 6-35 Jiang, B., Belohlav, J. & Young, S 2007, Outsourcing impact on manufacturing firms value: Evidence from Japan, Journal of Operations Management, 25(4): 885-900 Lewin, A. & Couto, V 2006, Next generation outsourcing, Survey Report, 2006 Maike, S, Deflorin, P., & Anand, G 2008, Outsourcing and its impact on manufacturing flexibility. Business Review, 56 Manning, E 2007, Dynamic perspective in outsourcing, Journal of Academy of Management Perspective 22(3): 35-54 Simchi-Levi, D, Kaminsky, P & Simchi-Levi, E 2008, Designing & managing the supply chain, 3rd edn, McGraw Hill, Singapore. Summers, J & Smith, B 2006, Communication skills handbook: how to succeed in written and oral communication, 2nd edn, John Wiley & Sons, Milton, Queensland Read More