Outsourcing/subcontracting
- get third party contractors to carry out non-core activities
- improves operational efficiency and reduces production cost advantages
- free to concentrate on core activities
- gets specialized services and experties from third parties
- greater efficiency and profitability disadvantages
- quality issues
- cost to monitor and maintain relationship with subcontractors
- conflict of interest with third party providers
Offshoring
- extension of outsourcing
- but you relocate part of a firm’s functions overseas examples:
- customer call centres
- finance and accounting services
- ICT (information communication technologies)
- manufacturing
- research and development
- Telesales
advantages
- cheap wages in other countries
- less stringent employment laws, easier and cheaper to operate
- focus on core competencies
- job creations in host countries
disadvantages
- unethical business practices
- cultural issues and language barriers
- quality controls and standards
- redundancies in domestic economy (staff cuts can be costly if you got to pay severance pay)
- got to do extensive market research so that their products sell well internationally
Insourcing
- use of a firms own resources to fulfil a job
- full control of operations
- insource when unhappy with quality of outsourcing advantages
- existing resources and employees, potentially cheaper if no significant capital investment is involved
- organization has better control over its operations
- develop institutional knowledge
- creates jobs locally
- suitable for start-ups or smaller organizations who don’t know how to use subcontractors disadvantages
- employees may not know how to do their job
- multinational companies cannot rely on insourcing
- reshoring can be expensive (outsourcing, but bringing back to home country)
Reshoring
- also known as onshoring
- bring back business to home country
- reasons to reshore
- cost advantage of offshoring has reduced
- domestic government has financial incentives to bring back production
- ethical/quality concerns
- political instability advantages
- higher quality product for customer
- greater control over production
- reduced risk → less complex supply chain, don’t have to worry about delays etc.
- operational efficiency
- avoid tariffs
- domestic employment disadvantages
- high costs. have to start from scratch
- resourcing - find local experts can be difficult
- international relations -
- time lags - tied into some contract so switching over may be difficult