Outsourcing

Outsourcing has been a key factor in the growth of global logistics and globalisation.

Classical outsourcing is the buying in of non-core activities, services or materials. Porter (1980) and Handy (1993) indicate outsourcing as a method of increasing value and restructuring organisations to make them more competitive.

Outsourcing and offshoring have since become a staple strategic tool used by organisations to focus on their core competencies. This has proved a boon for many logistics providers since the 1980s as manufacturers and retailers decided that transport, warehousing and other elements of logistics were not core activities. Many businesses outsourced operations they felt a specialist could do better.

One of the largest effects this has had on globalisation is the outsourcing of labour to developing countries with low labour rates compared with the home country of the outsourcer. This has proved both an opportunity and a threat to both parties involved in outsourcing.

Initially, the outsourcing business focused on obtaining lower-priced raw materials which were cheaper because labour rates were lower. Outsourcing businesses soon realised they could also move some of their manufacturing to the developing country and save money on wages as well as materials and transport.

Another advantage of outsourcing is the control and management of the activity being outsourced. As developed nations rely on rules to be followed, parties of outsourcing must sign detailed contracts which are biased towards the business outsourcing.

Some senior managers prefer to outsource because they feel it is easier to manage the operation via a contract than having to manage employees directly. The downside to this is it is not a very flexible arrangement. Problems are at a great distance away and there might be cultural differences to overcome. For the organisation undertaking the outsourced work the extra business is good for them and the local economy.

The developed economy where the outsourcing originates loses employment and either needs to redeploy or train labour, but often workers lose their jobs. This saves the outsourcing business cost, but the social cost is high. Areas of manufacturing in the USA, Japan and Europe have experiences of this happening. This has caused considerable change in the developed world and many low-technology manufacturing businesses have moved factories overseas to benefit from low costs.

One of the key criticisms of globalisation and outsourcing is the apparent unfair distribution of the benefits of globalisation in the developed world. It is not always a net benefit to the outsourcing business in cost savings and apparently well-paying industrial jobs in the developing country. As developing countries attract more overseas investment in industry, wage rates and the standard of living increases.

China has been the main beneficiary of outsourcing since the 1990s, but wages are now rising fast and are becoming comparable with the developed world. This has caused some global brands to re-evaluate their outsourcing policy and find another country with lower labour rates. Now Chinese outsourcing businesses are having to compete with other south-east Asian countries such as Vietnam and Indonesia, for work.

Other Western brands have abandoned outsourcing to Asia and have instead looked for low wage countries nearer home. The US car industry has focused on Mexico and the European car industry has built new factories in the former communist states in Eastern Europe.

Outsourcing can be seen as a major factor in changing global distribution networks as global brands hunt for the best cost savings from developing countries. This foreign investment is good for these countries, but global branded businesses based in the developed world are not sharing the benefits of globalisation except with their shareholders.

Your task

Can outsourcing be a win-win for both developed and developing nations? Discuss in the comments area.


References

Handy C. (1993) Understanding Organisations. London: Penguin

Porter M (1980) Competitive Strategies. New York: The Free Press

Further reading

Troaca V. and Bodislav D. (2012) ‘Outsourcing: The Concept’. Theoretical and Applied Economics 6 (571) 51-58

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This article is from the free online course:

Principles of Global Logistics Management

Coventry University