Business Environment-5 (Out Sourcing)

7/29/2019 Business Environment-5 (Out Sourcing)

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Business Environment-5

OUTSOURCING

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Meaning of the term outsourcing

• Outsourcing refers to procurement(sourcing) than outside a firm of goodsand services which previously introduced

by the firm or could have been producedby the firm itself without significant newinvestment.

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Outsourcing of physical inputs

• Outsourcing of physical inputs refer tosituations when firms expanded their purchases of manufactured inputs like car

companies that purchased window cranksand seat fabrics from outside the firmrather than making them inside. This

involves vertical disintegration ininternational trade.

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Examples of vertical disintegration

• WTO Report details the production of an American car as follows: Thirty percent of car’s

value goes to Korea for assembly, 17.5% to

Japan for components and advance technology,7.5% to Germany for design, 4% to Taiwan andSingapore for minor parts, 2.5% to UK for advertising and marketing services and 1.5% to

Ireland and Barbados for data processing. Thismeans that only 37% of production value isgenerated in the USA.

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Examples of vertical disintegration

• A Barbie doll in the USA is made of plasticand hair procured in Taiwan and Japan ; ituses the mould in the USA and assembled

in Indonesia and Malaysia with Chinesedoll clothing and US paints. Inputs from sixcountries are involved.

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Long distance purchase of services

• Outsourcing of professional servicesthrough telephone. Fax and Internet is aprominent example of a new type of trade.

Examples include transaction by firms likephone call centers staffed in Bangalore toserve customers in New York and x-raytransmitted digitally from Boston to be

read in Mumbai or with direct consumptionof individuals like hiring an offshore firm toprovide plans for interior decoration.

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Special relationship

• Outsourcing means more than just the purchaseof raw materials and standardized intermediategoods. It means finding a partner with which a

firm can establish a bilateral relationship andhaving the partner undertake relationshipspecific investments so that it becomes able toproduce to goods and services to fit the firm’s

particular needs. Example, KFC and BRACPoultry agreement in Bangladesh.

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Types of outsourcing

• Outsourcing includes serving severalindustries like travel, insurance, financialservices, health care, professional

services, manufacturing, distribution andretail, and providing essential corporatefunctions such as financing and

accounting, payroll, research and analysis.

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Advantages of outsourcing

• 1.Cost saving. For every dollar of corporate spending that is outsourced, USCompanies save 58 cents, most of this

coming from labor saving. For example,the wage of software developers in theUSA is eight times higher than that of

similar workers in India.

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Social benefits

• 2. The benefits of outsourcing are not limited toreduction of cost to companies. They involvesocial gains. According to Daniel W. Brezner, for every dollar spent on outsourcing in India, the

USA reaps between $1.12 to $1.14. US firmssave money and become more profitable,benefiting shareholders and increasing returnson investment. Foreign facilities boost demandfor US products such as computers and

telecommunication equipment, necessary for their outsourced functions. Displaced labor isreallocated to more productive jobs

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Social benefits

• For example, although 70,000 computer programmers lost their jobs between 1999and 2003, in the USA more than 115000

computer software engineers found higher paying jobs during the same period.

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Benefits of outsourcing

• 3. Better deal for consumers. Theconsumers get a better product at acheaper price. Global outsourcing of

components has reduced the cost of IThardware by more than 30 percent since1995. Because of low price, additional

demand of $230 billion for computers wascreated in the US alone.

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• 4.Boosting of world economy. Outsourcingcreates new demand for cheap, efficientand new products. New jobs are also

created. This expands world GDP.

• 5. New markets. Outsourcing creates newmarkets for knowledge-based economies.

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6 Gains in the form of profit and new jobs. Most Indianoutsourcing firms are owned in whole or in part by UScompanies such as GE and EDS and repatriate their profits. On the other hand, as US loses jobs in call

centers and data processing, new opportunities arecreated for jobs in research and development. Contraryto the belief that US is importing massive amount of services from low wage countries, in 2002, it ran $64.8billion surplus in services.

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• 7. Outsourcing facilitates the production of new goods and services. Withoutoutsourcing, a producer will have to create

capacity for producing all components.This would delay the launching of a newproduct. The failure to launch a newproduct in time may give an advantage to

a competitor. For a new producer, there isno choice, for them it is a life and deathquestion.

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• 8. Outsourcing is advantageous for smallfirms. Outsourcing can help small firms actbig by giving them access to the same

economies of scale, efficiency andexpertise that large companies enjoy.

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Disadvantages of outsourcing

• 1. A large number of workers suffer fromoutsourcing. Outsourcing eliminates jobsin industrial countries. Even if new jobs are

created, they may not go to persons wholost jobs. New training is needed for new

jobs. Relocation may be necessary for

new jobs. Finally, the new jobs may beinferior to old jobs. Thus outsourcing isviewed as a threat by labor.

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Disadvantages of outsourcing

• 2. Continuous surveillance in qualitycontrol in outsourcing is needed.Otherwise the benefits of outsourcing

would be considerably eroded.

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Emerging Trends of outsourcing

• 1. The fear of job loss owing to outsourcing isexaggerated for three reasons.

• (a) All jobs in service sector cannot be outsourced. Closeto 90 percent of jobs in USA require geographicproximity. Such jobs include everything from retail andrestaurants to marketing and personal care.

• (b) jobs are lost in the manufacturing sector mainlybecause of technological change and not because of outsourcing. Developing countries are not getting moremanufacturing jobs because developed countries are

losing them. During 1995 to 2002, US lost 11%manufacturing jobs. China saw 15% decrease and Brazila 20%.

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Issue of job loss

• (c ) Protectionism is no answer to outsourcing.The US steel prices are higher. If steel workersare protected, the workers working in industriesusing steel would suffer, In the USA steel usersemploy roughly 40 times more people than dosteel producers. When US government imposedhigher tariff to protect Steel industry, 45000 to75000 jobs were eliminated in steel using

industries. When US tried to protect sugar industry, the industries which used sugar (suchas candy) were relocated.

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2,Change in size and industrialrelations

• 1. The small is not only beautiful, it isbecoming more efficient. The oldassembly line production is disappearing.

Management style must change andknowledge based production shall be thenew wave.

• 2. Old trade unionism based onconcentration of large number of workersin small places will disappear.

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3. Uneven benefits of out sourcing

• The benefits of outsourcing particularly inservices are not evenly distributed. Indiagets 60% preference amongst the global

companies and China 32% preference.India controls nearly half of the global off shoring market. The market is highly

competitive.

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Issues for discussion

• 1. What is outsourcing? Discuss the maintypes of Outsourcing.

• 2. Discuss the main advantages anddisadvantages of outsourcing.

• 3. Do you agree with the view thatoutsourcing is causing job losses in theUSA. Give reasons for your answer.

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Business Environment-5 (Out Sourcing)