The purpose of this paper is to understand how outsourcing is an activity that promotes productivity for an organization. What will be covered in the discussion is how outsourcing is associated with trade-offs between inputs and comparing the benefits and challenges of outsourcing locally with those realized when global sources are considered. Trading labor for capital or material resources will be the focus of the study in developing the discussion. The paper ends with a conclusion that sums up the study.
Productivity is realized when costs of production are minimized and this is achived by substituting different inputs. Outsourcing on the other hand, it is where inputs are sourced externally regardless of whether the source is local or international. Outsourcing is one way of improving productivity where a firm chooses to purchase products or services rather than manufacturing them. Such decisions are found to be applied on those activities that a firm does not a competitive advantage over their competitors. Laborers from low labor-cost countries may be outsourced to maintain production quality rather than choosing to hire those that are less skilled and are paid low wages. In this regard, productivity is increased (Paul & Yasar, 2006). McCann (2006) supports this argument by noting that it is theoretical that when ‘non-core’ production activities are outsourced productivity increases. The outcome is said to be in two ways- the inputs provided will be cheaper and will be of a higher quality than those that the firm would have manufactured. The other way is that the resources saved from outsourcing are allocated to those production activities that have a higher value (Vonderembse & White, 2013). International outsourcing is found to create better benefits for the firm where the firm would be exposed to new knowledge and practices.
Businesses have been weighing the advantages and disadvantages they have on the various processes they have employed to increase profitability, reduce business risks, increase productivity, among other objectives. Outsourcing is a new process that is embraced by all businesses where those activities that add no value and can be handled better by a specialized third party who provides similar services to different clients. Thus, when firms choose to outsource, they aim at reducing production costs and increasing quality of the processes. Firms should not limit their outsourcing to the local providers, but as they globalize, they can choose to source for suppliers internationally. International suppliers enable firm to acquire new knowledge and get exposed to technological advancements but the desire can easily make the firm lose focus on the need to reduce production costs and increase productivity. Outsourcing becomes successful when vendors understand properly the capabilities of the firm and its vision. Global outsourcing is found to be weak in this case because of the far distance the suppliers are. Outsourced activities are done through contract negotiations and cultural differences and language barriers may interfere with the agreements. Security issues, which may be political, terrorism, corruption, and others, may affect global outsourcing. In this regard, local outsourcing seems to be better for a firm than global outsourcing however, it is not easy to compare the costs and quality of the local vendors, quality offered would not be as high as the one offered by international vendors (Haartman & Bengtsson, 2015; Strain, 2017).
Cheap labor is the main product or service sourced from low-labor-cost countries. In the manufacturing industries, labor form the largest part of the production costs. A low-labor-cost country is not only selected just because it offers cheap labor but there are other factors that are considered that explains why countries like South Sudan, Afghanistan, and Yemen are not chosen for labor needs like China and Vietnam are. Globally, China seems to be the one that is mostly considered for labor related issues and this is because, it has proven to be capable of manufacturing products that require a lot of labor. In addition, China has the required infrastructure that even smaller firms use. Due to China’s popularity in manufacturing and its on-going developments, competition for laborers is quite high as well as the experience the laborers have. Thus, laborers are paid well and production is of high quality (Segran, 2017).
The activities that are of no value addition in the company and they take time to be processed are those that can be outsourced. China is a favorable country for labor intensive activities as products can be processed at lower labor costs and still be of a higher quality. Thus, a manufacturing firm in America can choose to outsource a part of its processes such as assembling to China and import back the assembled products back to America for further processing. Assembling would not affect the firm’s competitive advantage and the costs saved from outsourcing would be used to improve the production of those products to be assembled, which is the firm’s core activity. Thus, the trade off that the company will have made is trading labor for material or capital. Outsourcing the cheap labor in another country, will have helped the firm in gaining more knowledge about the production process from the laborer’s experiences and production practices that reduce costs further while increasing quality.
From this discussion, it has been understood that outsourcing helps to improve productivity by reducing costs incurred when processing non-core business activities. What is saved from the costs is directed towards improving production of core business activities. Outsourcing can be done locally or globally but the selection depends on the activity that can be outsourced and the capability of the vendor to handle the production needs.
Haartman, R. & Bengtsson, L. (2015). The impact of global purchasing and supplier integration on product innovation. International Journal of Operations & Production Management, 35(9), 1295-1311.
McCann, F. (2006). Outsourcing and firm productivity. Retrieved< http://www.fiw.ac.at/fileadmin/Documents/FOKO_II/McCann.pdf>.
Paul, C. J. & Yasar, M. (2006). Outsourcing, productivity and input composition at the plant level. Retrieved< http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.598.9621&rep=rep1&type=pdf>.
Segran, E. (2017). When “made in China” means sustainable, ethical, and expert. Retrieved< https://www.fastcompany.com/40419020/when-made-in-china-means-artful-ethical-and-expert>.
Strain, M. (2017). Advantages and disadvantages of outsourcing production. Retrieved< com/advantages-disadvantages-outsourcing-production-18244.html”>http://smallbusiness.chron.com/advantages-disadvantages-outsourcing-production-18244.html>.
Vonderembse, M.A. & White, G.P. (2013). Operations management . San Diego, CA: Bridgepoint Education, Inc.
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