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Global Outsourcing and Its Impacts on Organizations Research Paper


Introduction

Organizations in all industries are interested in maintaining their levels of competitiveness for continued delivery of value to their owners (shareholders). In fact, “any organization in today’s fast moving environment that is looking for the pace of change to slow is likely to be sorely disappointed” (Bertscherk and Kaiser 395). One of the major changes that organizations consider in the effort to gain competitive advantage is the adoption of cost-cutting strategies such as outsourcing. This paper addresses the question whether organizations based in the US should focus on creating and protecting jobs at home or facilitating international business even if it means moving some productions abroad.

US-based Organizations’ plan of Outsourcing Production from Asia

Organizations reduce their production costs in the effort to deliver optimal returns on investments to their owners. Outsourcing is among the many available options for accomplishing this mission. The US Bureau of Labor Statistics uses the term outsourcing to describe the “movement of work that was formerly conducted in-house, by employees paid directly by a company, to a different company” (Mucha 28).

The term offshoring refers to the other organization that is referred in this definition in situations where it is located outside the US. Whether outsourcing is done to an organization operating within or outside the US, both situations attract controversies. Mucha confirms that many critics for business outsourcing contend that various jobs that were initially held by the Americans go forever whether (or not) organizations employing them venture in manufacturing outsourcing deals offshore or inshore. Although any loss of jobs will imply more government expenditure in welfare and/or reduced tax revenue, outsourcing has its advantages and disadvantages to the US economy.

With the emerging differences in technological advancements and differences in living standards, the US needs to outsource in a bid to lower its cost of production. The concept of outsourcing can be evaluated in terms of its implication on the US economy from different perspectives. For instance, Kathawala, Zhang, and Shao assert that there is nothing wrong with over depending on outsourcing production for given nation (185).

The authors maintain that organizations should consider cost-cutting strategies such as outsourcing noncore activities in the effort to gain competitive advantage. In the automobile industry, many organizations have had long strategic partnerships with manufacturers of rubber, metal, and even electrical products among other products. For instance, as Kathawala, Zhang, and Shao (190) confirm, “by the end of 1930s, two thirds of Ford’s production came from outside sources”. Through this outsourcing, the organization gained both high productivity levels and cost saving advantages.

The benefits acquired by Ford Company through its engagement in outsourcing implies that the single most important reason for the US to continue depending on outsourced production in Asia is anchored on the economic cost saving principles. Indeed, many US-based corporations that outsource from Asia such as Nike are able to cut on labor costs tremendously since the emerging economies have lower living standards, and hence low wages compared to the US.

Through outsourcing production, US-based organizations also gain from the “delivery of new products to markets more quickly, in cost-effective ways while also staying up to date with technology and latest procedures” (Kathawala, Zhang, and Shao 192). These merits form important assertions in favor of the US to continue depending on outsourcing its production rather than basing its production at home. Indeed, production involves collaboration between different parties, which produce products’ parts either partially or to completion for subsequent assemblage so that all products are produced in a globalized outsourcing manufacturing environment. The US cannot afford failing to benefit from this globalized outsourcing environment.

While developing the capacity to compete with other organizations, operational efficiency is important for any organization. Thus, it is only natural that the US-based corporations “should do their best to obtain useful sources of materials and services from different channels and to build their sustainable comparative advantages using different approaches” (McCormack 213). Outsourcing is one of the ways of enhancing the productivity of an organization. It surfaces as an important comparative advantage for organizations that are established in geographical areas with high living standards, which prompt them to pay their workers higher wages and salaries so that their products become more expensive in the global market place. By outsourcing in Asia, it follows that the US can mitigate this challenge by having access to unique materials that are produced elsewhere across the globe to gain more market opportunities.

While claims on the importance of depending on production outsourcing in Asia for competitive advantage are important, challenges such as a reduction of employment opportunities for the Americans cannot be overlooked. For instance, “the United States has lost approximately 42,400 factories since 2001” (McCormack 214). Many of these factories deal with production, which has since then been shifted to Asia. While the number of Americans working in the production organizations continues to reduce, the number of Asians working in such organizations continues to grow. The dominance of Asian nations in the manufacturing of printed circuit boards (84-percent of the global printed circuit boards) may perhaps well exemplify this scenario (McCormack 217). This observation implies that more jobs are been created in Asia than within the US. The ramification of low employment opportunities is higher with reference to welfare and the reduction in government revenues through taxations.

Following high investments in automation in Japan in 1970s, many of the production operations for American-based organizations were transferred to Japan. Later, cheaper labor was discovered in Mexico, thus prompting the organization to consider outsourcing from there. In 1990s, China became the most preferred nation to outsource production from while India, Vietnam, and other Asian nations were also rapidly picking up as preferred outsourcing destinations. These trends imply that many of the US-based corporations base their production outsourcing decision on labor costs rather than the total costs.

When US-based production organizations evaluate the cost of production that is associated with outsourcing, it may soon become evident that overlying on outsourcing production in Asia subjects the US into economic challenges. A possible counterargument is that production operations that are mainly outsourced in Asia require low-skilled labor besides being tiresome so that Americans are left with more attractive and lucrative jobs. However, it is important to note there are Americans living below poverty levels, as set by different states, thus prompting them to depend on welfare benefits from the government. The low paying jobs, which require low or medium skilled workers, may be attractive to this group of people. Why should they be shifted to Asia while still some Americans need them? In this sense, relying on outsourcing production in Asia is unhealthy for America. It denies some of its residents the opportunities for employment with the repercussions of higher government expenditure on welfare.

Pros and Cons of Production Outsourcing

Advantages

From the perspective of the national economy, all nations do production outsourcing. For instance, “The UK’s economy is already 26.6% outsourced, defined as the ratio of imports to the gross domestic product” (Mucha 29). Although reduced labor costs are important in forming decisions to outsource production, organizations also acquire the advantage of benefiting from specialized expertise in production. Organizations outsource their production to other organizations when they are sure that the vendor has the required specialty in technical expertise together with the appropriate equipment for production of a product to the required quality levels. As such, it becomes easy for an organization to achieve better productivity combined with a consistent supply of its products in the global market.

Middle-line managers in an organization engage in various tasks, including ensuring timely production and that the production processes are running efficiently. This case suggests that noncore activities compete for the core activities performed by such managers. The core activities are important for consistent growth of an organization. Since outsourcing is mainly done for noncore activities, it implies that line managers are freed some duties so that they can concentrate only on the processes that enhance organizational growth. In the process of outsourcing, an organization also transfers part of its risks to another party. As revealed before, vendors to whom production is outsourced are specialists in noncore productions tasks. Therefore, they are able to enhance mitigation of some risks better than an organization seeking production-outsourcing services.

Organizations’ HRM ensures productivity of employees through the reduction of labor turnover. The HRM is also tasked with recruitment, training, and development of employees in the event of low motivation, organizations experience low productivity levels due to costs such as absenteeism and non-optimal job performance. In terms of outsourcing, these tasks are transferred to another party (the vendor). Indeed, “Outsourcing eludes the need to hire individuals in-house…hence recruitment and operational costs can be minimized to a great extent” (Mucha 28). Dealing with fewer employees implies less problematic efforts to enhance their performance to increase the overall productivity of an organization.

Disadvantages

Outsourcing involves trading managerial control with cheaply produced products. Signing a contract for the production of a complete product or some parts of a product implies shifting the power to control the processes of production to other parties that are not residing in-house within a company. Consequently, misalignments of missions may occur. Outsourcing vendors often focus on profit maximization by delivering products in the condition and manner specified in the contract.

Production processes require handling and storage of an immense amount of data. Since this data is required in production, the vendor must have access to it. Unfortunately, the organization seeking production-outsourcing services is exposed to the risk of the likelihood of such data being held without confidentiality. In some instances, outsourcing may create quality problems. The only way that outsourced vendors increase their profits is through a reduction of expenses.

Provided the products produced through outsourcing meet the standards specified in the contract, an organization cannot question or place demand for better quality levels in response to changes made by competitors to its products without making an additional payment. Nevertheless, even where an organization is willing to follow this route, it is limited by the capability and flexibility of the vendors’ production systems. With reference to hidden costs and negative publicity where a vendor produces goods with child labor or exploitation, outsourcing may present significant disadvantages

The Problem with increasing Dependency on Asia for Production

Working conditions in Asia have come under sharp criticism from human rights activists claiming that some products are produced under conditions that are best described as sweatshops. Avoiding sweatshops has positive ramifications to an organization. Employees who are treated poorly produce goods that fail to pass the quality test (Gellar 8). “Desirable employees want to work for companies, which they can share their values, just as consumers want to buy from companies that put values into practice” (Crook, Todd, Combs, Woehr, and Ketchen 446).

Unfortunately, such conditions are less observed by firm owners who focus on meeting the production contractual agreements through reduced costs of production such as expenditure on labor. For example, in China and other developing nations, garment factories are commonplace where workers execute their daily routines in an environment with fiber dust-enriched air (Powell and Zwolinski 461). To make the conditions of the workers even worse, employees in the low-cost mass production factories are under paid.

The term ‘underpaid’ means that employees in an organization are paid salaries and wages that make it impossible for them to afford their basic needs. “Sweatshop workers often do not earn enough money to buy the products that they make, even though such items are often commonplace goods such as t-shirts, shoes, and toys” (Powell and Zwolinski 460). This finding is perhaps well evidenced by the case of Honduran garment manufacturing factory.

In 2003, employees at the factory were paid only 0.24 US dollars for every sweatshirt made and 0.15 US dollars for a long sleeved t-shirt. Sweatshirts went for 50 US dollars in the retail market. This implies that even if a worker would make 100 sweatshirts in a day, he or she would still not afford a single sweatshirt that he or she made, with other daily needs notwithstanding. This case highlights another challenge with outsourcing from Asian vendors whose operations take after these sweatshops based on the prevailing issue of employee exploitation.

In the debates of outsourcing from Asia, employee exploitation is a phenomenal issue. For instance, over several years, Nike has been accused that it employs children in its Cambodia-based plants. While the stalemate of the company’s accusation for employment of children remains unresolved according to Boggan, there are immense concerns that the company makes use of a very minimal portion of the cost of production of its pair of shoes (70 pounds) in the payment of labor (Boggan Para.5).

Amid the high calls for Nike to ensure that workers within its Asian production plants are remunerated accordingly, the company “treated sweatshop allegations as an issue of public relations rather than an issue of human rights ” (Boggan Para. 21). Measures to provide good working conditions at the Nike plants in Asian countries face challenges that emanate from managers and employees. This case evidences that outsourcing in Asia in a bid to cut production costs is also accompanied by hidden costs such as bad reputation.

Conclusion

In conclusion, labor costs amount to a significant portion of the total cost of a product. In a bid to reduce the cost of products that are offered for sale in the global markets, organizations seek strategies of ensuring that the prices of their products are low enough. In this quest, apart from outsourcing manufacturing services, western organizations are even outsourcing services such as customer care by transferring call centers to nations where living standards are lower.

Works Cited

Bertscherk, Irene, and Ulrich Kaiser. “Productivity Effects of Organizational Change: Microeconometric Evidence.” Management Science 5.2(2004): 91-99. Print.

Boggan, Steve. . 2001. Web.

Crook, Russell, Samuel Todd, James Combs, David Woehr, and David Ketchen. “Does human capital matter? A meta-analysis of the relationship between human capital and firm performance.” Journal of Applied Psychology 96.3 (2011): 443-456. Print.

Gellar, Scott. “Scared safe: How to use fear to motivate safety involvement”. Occupational Health and Safety 6.1(2003): 6-10. Print.

Kathawala, Yunus, Ren Zhang, and Jing Shao. “Global Outsourcing and Its Impacts on Organizations: Problems and Issues.” International Journal of Outsourcing Operations Management 1.2(2005): 185-196. Print.

McCormack, Richard. “Accenture: Offshore Outsourcing Has Not Worked.” Manufacturing & Technology News, 18.7(2011): 212-231. Print.

Mucha, Susan. “Calculating the Total Costs of Offshore Outsourcing.” The Economist 11.3(2003): 28-30. Print.

Powell, Benjamin, and Matt Zwolinski. “The Ethics and Economic Case Against Sweatshop Labor.” Journal of Busness Ethics 107.4(2012): 449-472. Print.

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IvyPanda. 2020. "Global Outsourcing and Its Impacts on Organizations." June 2, 2020. https://ivypanda.com/essays/global-outsourcing-and-its-impacts-on-organizations/.

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IvyPanda. (2020) 'Global Outsourcing and Its Impacts on Organizations'. 2 June.

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