Outsourcing in Retail

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Outsourcing in the Retail Industry: From Europe to India and China

September 2007 1

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Outsourcing in the Retail Industry:

From Europe to India and China

By

Sunil Agarwal

2007

A dissertation presented in part consideration of the

degree of MA Management


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Acknowledgements

My sincere thanks to my dissertation supervisor, Swee Hoon Chuah for her help and

guidance through out my dissertation and without her help and inputs this piece of work

wouldnt have been possible. Secondly I would like to thank my parents who has always

supported my decisions and been a strong pillar for me. I would also like to thank God

for all what I have today. My thanks to all the professors of Nottingham University

Business School, who have taught me a lot during the entire course. Also I thank all my

friends and other family members.

I would like to thank the firms, their respective employees, China-Britain Business

Council and Council for Leather Exports for giving their precious time for the interviews

and answering my queries, which was of great help to my dissertation.


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Abstract

Outsourcing is passing over the responsibility and accountability for performing certain

business functions or activities to an outside specialized vendor that are required by a

company to carry out its operation. Due to advantages of outsourcing there has been

constant increase in the outsourcing activity in the European retail industry, in particular

to India and China. It is becoming an important and key tool for the European retailers

leaving them to concentrate more on retailing rather than other business areas. Cost

reduction is always the main focus of every retailers behind outsourcing and it has been

seen that number of companies have successfully implemented outsourcing and have

gained their desired results.

India and China both possess some qualities like man-power, cheap labor, proficiency in

English, as well as highly developed skills which make them the most preferable

outsourcing destinations in the world. The outcome from the findings bring forward that

in todays competitive business atmosphere reduction in the cost is important for the

firms to remain competitive. A company outsources the non-core functions of its business

and the core functions are generally kept and nurtured in house to sustain and be

competitive in the market. Outsourcing has gained attraction from more and more firms

than in the past and it is believed that in future the outsourcing industry will grow more

with offshore outsourcing being the most common of all.


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Table of Contents

Acknowledgements

Abstract

Table of Contents

List of Figures and TablesChapter 1.0: IntroductionChapter 2.0: Literature Review

2.1: Outsourcing

2.1.1: Different Categories of Outsourcing

2.2: Outsourcing to India and China

2.2.1: Strengths of India and China

2.3: Reasons for the growth of OutsourcingChapter 3.0: Research Questions and Methods

3.1: Research Questions

3.2: Research MethodsChapter 4.0: Results

4.1: Firm Costs

4.2: The Make or Buy Decision

4.3: The Advantages and Disadvantages of Outsourcing

4.4: The Future of OutsourcingChapter 5.0: Conclusion

ReferencesAppendix

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List of Figures and Tables

Table 1: Categorization of sourcing alternatives based on Percentage ofIS Budget as a Differentiator between Total and Selective SourcingDecisions.

Table 2: Categorization of sourcing alternatives based on How theClient Manages or Utilizes the Suppliers.

Table 3: Categorization of outsourcing based on How the ClientManages or Utilizes the Suppliers.

Table 4: Salary Gap-U.S.A. compared to India Hourly Wage.

Table 5: India and Chinas share of the world exports.

Table 6: National minimum wage (adult rate), 2004, in national currency(gross).

Table 7: Minimum wages per month in China.

Table 8: Minimum wages per month in India.

Table 9: Advantages of Outsourcing.

Table 10: Asian countries leather exports.

Table 11: Ratio of imported to domestic intermediate inputs for textiles,apparels and footwear.

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1.0: Introduction: -

Business activities and functions have changed a lot from the past. It is getting much

more difficult and complex today than in the past. In todays global market there is a

cutthroat competition among the sellers. On the other side buyers have become more

demanding and the seller has to make what the buyer wants.

Outsourcing has contributed significantly in the drastic change of the current business

environment. Outsourcing can be defined as handing or passing over to an external party,

responsibility for performing certain business functions or activities that are required for

a company to carry out its operation. In the present business environment Outsourcing

seems to be a normal business activity. If we see the past and present, there has been an

explosive growth in outsourcing to India and China by the European firms.

The nature of the outsourcing activity is very diverse. Most of the European retail firms

are all engaged in extensive outsourcing. As the importance of outsourcing continues to

grow, its nature and focus is developing. In the past outsourcing was only implemented in

the manufacturing industry but now with the widespread of its advantages it is now

spreading in the other industries also like service industry. Also if we see that today

outsourcing is increasingly becoming cross-national and global. There are many firms,

which not only outsource their non-core activity but also at the same time started

outsourcing of their core activities so extensively that they no longer indulge themselves

in any form of production.


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Outsourcing is a process of the non-core activities of the business into an agreement

relationship between the client and the supplier. The reason behind the outsourcing of the

business functions and activities are lowering firm costs and to make more efficient use

of in house or the available resources. A key driver for outsourcing business activity is

the facility to arbitrage in the cost reduction and also skilled labour in countries such as

India and China (Grant 2005, Davies 2004 as cited by Kevan and Graham, 2006).

According to the research conducted by Accenture, retail companies believe that

outsourcing delivers operational efficiencies and provides them with the ability to detect

and quickly respond to customer needs. Struggling for the lower margins and

commoditization, high-performance retailers are influencing outsourcing as a medium for

the increase in the operational effectiveness and gain productivity and lower costs.

(www.accenture.com)

All the companies involved in the activity of outsourcing have common aim of cost

reduction. Price remains the most important variable for many products. In some product

areas the differentiation in price due to the different production costs are considerable,

resulting in substantial non-UK sourcing by the European retailers. Let us take an

example of the production of Toys which has moved from low-production cost in Hong-

Kong, Taiwan to even lower production cost area like China. Also goods for the retailers

for resale and to there specifications are often produced in the low-labour-cost countries.


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A recent survey conducted by Accenture compromising of more than 800 health,

manufacturing, retail and the travel executives in the European countries represents that

around 86% said that the activity of outsourcing helps to offer them more and better

control over there business results in many critical areas like planning. Although cost-

cutting factor is among these key areas, the managements also accounted equivalent

levels of control in other areas like reliability, cost variability improvements and effective

implementation of the ideas. Also the survey represents that 55% of the sample said

outsourcing helps organizations to put into practice strategies and modify at a faster and

more controlled pace. And around 57% of the organization surveyed reported that they

experienced control gains in the first few months only of an outsourcing contract.

(www.accenture.com)

According to the BBC News 2006, China and India are one of the world-manufactories

and emerging markets. Many European organizations have successfully implemented

outsourcing with Indian and Chinese suppliers and more and more organizations are

interested in doing so. These two countries have become world renowned as a destination

for outsourcing activity. This is due to number of contextual specifics that have delivered

these two countries with a comparative advantage over other most likely outsourcing

destinations. Both countries offer cheap labour rates and there areas of expertise are

different.

On one hand we can see the activity of outsourcing as a powerful strategy to cost

reduction, improvement in the performance, and also for focus on the core activities of


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the business, it is sometimes seen that outsourcing fall short of management's

expectations. Implementation of the process of outsourcing activity successfully is not an

easy task. If we see the result, companies have obtained from outsourcing, there are a

number of companies, which have gained benefits, and other companies, which failed to

achieve success. To determine whether to make or buy is of great importance for any

company. It is very important to decide first which activity can be best performed by the

in-house department and which activity can be best performed by an external vendor.

This helps the company to understand from where its competitive advantage comes from.

In this dissertation, I will explain in details the activity of outsourcing, its implementation

and its effect on the business functions. To be more precise, I will look at the impact of

outsourcing in the European retail industry to India and China. I am focusing on the

outsourcing of the European retail industry as I have worked for three years in an Indian

organization who used to manufacture and export goods to retail stores in Europe.

Therefore this research will allow me to apply and also to enhance my knowledge in

these areas.

Today maximum numbers of products we see in European retail stores have labels, either

Made in India or Made in China. What is the reason behind products or services

being made or bought from India and China? The main aim of this dissertation is to make

a clear picture of the reasons behind retail companies in Europe outsourcing, particularly

to India and China and the advantages and disadvantages of this. Organizations face

dilemmas in deciding whether the required part or services are best developed within the


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organization or purchased from the market. Therefore it was also one of the primary

concerns to understand which of the two make vs. buy is more essential and important

for a companys success.

There is a boom in the current phase of outsourcing. Numerous companies are now

outsourcing maximum percentage of there functions. But it cannot be said that todays

boom will prevail in the future also. Therefore another reason behind this research was to

analyze and find out whether the present trend in outsourcing will continue to increase or

there will be a downfall.


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2.0: LITERATURE REVIEW:-

2.1: Outsourcing

Business needs are continuously changing. The past and the present business scenario are

totally different and have changed drastically. In the past very few companies used to

outsource there jobs to different companies but in the present scenario where the

customers are more and more demanding and the market being dominated by the buyer,

companies are focusing more on the quality of the products and there core competencies.

For large as well as small companies it becomes very difficult to manage all the activities

on its own and produce each and every single input required for the final output of the

company. Therefore the companies are focusing more on the internal strength i.e., the

activity at which the company is best at doing and outsource the other inputs from the

outside suppliers from the same country or from a foreign country.

Outsourcing means selectively turning over to a vendor some or all of the functions,

ranging from simple data entry to software development and maintenance, data centre

operations and full system integration (Apte, Sobol, Hanaoka, Shimada, Saarinen,

Salmela & Vepsalainen, 1997). Outsourcing is the contracting of various information

systems, sub-functions by user firms to outside information systems vendors.

(Chaudhury, Nam & Rao, 1995)

Companies come into contracts with external parties in the same country or foreign

countries for their various functions and activities. In detail we can say that it is an

activity, which is given to external vendor to provide the parts, products, services etc. The


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parts of activity given on contract to the external companies are generally the non-core

activities of the company.

Outsourcing is the use of an external vendor to provide parts, products, processes or

services and is a management strategy that has been growing dramatically within many

industries in recent years. The rapid and continuous growth of supply market enables

firms to outsource more organizational activities and functions as diverse as Information

Technology (IT), manufacturing, logistics, customer services and many back office

operations are now outsourced (Barthelemy & Adsit, 2003). Outsourcing is a

management strategy that is spreading within all forms of industry. It helps the

management to concentrate and focus on the companys core activity and outsource the

non-core activities

Outsourcing can be defined as a contractual agreement that entails the procurement of

goods and/ or services from an external provider. Drawing from our earlier discussion,

four additional basic features can be outlined:

Prior to being sourced from a local (domestic outsourcing) or foreign (off shoring)

enterprise, the activity was being carried out in-house;

Once outsourced, control over the activity resides with the external provider;

The outsourcing relationship is bound to be characterized by asymmetry of size

and power;

The activity outsourced to a more efficient provider must be non-core.

(Harbhajan, 2006)


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It is quite evident from the above mentioned four points that companies now outsource

the activities, previously carried out within the company but along with the job or

services this form of management strategy also passes the control over that particular

activity to the external supplier. It is not necessary that the external vendor has to be of

the same form of business or size; it can be smaller in size or a specialized provider.

Generally the companies only outsource their non-core activity, keeping the core activity

to be carried out in-house only.

Outsourcing is a form of privatization where one unit contracts with an external

organization (second unit) for providing service. Outsourcing seems to be a very common

activity in todays business. While many companies have benefited from outsourcing but

at the same time many other companies seem to have failed to implement it.

2.1.1: Different Categories of Outsourcing:

There are various forms of outsourcing like total outsourcing, selective sourcing, total

insourcing, multi-supplier outsourcing, joint-venture, general outsourcing, value added

outsourcing, business process outsourcing based on different characteristics like IS

budget, how the client manages or utilizes the suppliers. The three following charts

explain the different types of outsourcing and their definitions are.


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Table: 1 Categorization of sourcing alternatives based on Percentages of IS Budget

as a Differentiator between Total and Selective Sourcing Decisions.

Terminology Definition as quoted in literature (Lacity and Hirschheim, 1995)

Total Outsourcing ..to refer to those organizations that decided to outsource at least

80% of their IS budgets to third party providers.

Total Insourcing ..Refers to those organizations that formally evaluated

outsourcing but selected their internal IS departments? Bid over

external vendor bids, thus keeping over 80% of the IS budget

provided by the internal IS department.

Selective Sourcing ..Refers to organizations that opted to use third party vendors for

certain IS functions which represents between 20 and 60% of the

IS budget (typically around 40%) while still retaining a

substantial internal IS department.

Source: (Lacity & Hirschheim, 1995)


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Table: 2 Categorization of sourcing alternatives based on How the Client Manages

or Utilizes the Suppliers

Terminology Definition as quoted in literature

Total Outsourcing Total outsourcing is when an organization chooses to outsource

as much as 70 to 80% of its IT facility, usually to a large single

supplier. These contracts are usually for between 5 and 10 years.

Multi-Supplier

Sourcing

entered into IT sourcing arrangements with a variety of

suppliers

Joint-Venture/

Strategic Alliance

Sourcing

An organization enters into a joint venture with a supplier on a

shared risk/ reward basis. This may involve selecting an existing

IT supplier or helping to create a new company to which work

can be outsourced. Sometimes an organization may take share

ownership in an existing IT supplier or vice-versa.

Insourcing An organization opts to retain a large centralized IT department

and in source management and technical capabilities according to

the peaks and troughs of IT work. Contractors may be given

employment contracts lasting between 3 months and a year,

although there are many examples of them staying with an

organization for several years.

Source: (Currie & Willcocks, 1998)


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Table: 3 Categorization of outsourcing based on How the Client Manages or Utilizes

the Suppliers

Terminology Definition as quoted in literature

General Outsourcing ..encompasses three alternatives: (a) selective outsourcing (b)

value-added outsourcing or (c) cooperative outsourcing

(General Outsourcing)

Selective Outsourcing

..where one particular area of IS activity is chosen to be turned

over to a third party, such as data center operations


Value-added

Outsourcing

..where some area of IS activity is turned over to a third party

who is thought to be able to provide a level of support or service

which adds value to the activity that could not be cost

effectively provided by the internal IS group


Co-operative

Outsourcing

..where some targeted IS activity(ies) is (are) jointly performed

by a third party provider and the internal IS department

Transitional

Outsourcing

..involves the migration from one technological platform to

another

Business Process

Outsourcing

..Contractual agreement that defines the vendors contribution

to the client in terms of specific benefits to the business and

defines the contracting payment the customer will make based

upon the vendors ability to deliver those benefits. The goal is

to match actual costs with actual benefits and to share the


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risks.

Business benefit

contracting

..Contractual agreement that defines the vendors contribution

to the client in terms of specific benefits to the business and

defines the contracting payment the customer will make based

upon the vendors ability to deliver those benefits. The goal is

to match actual costs with actual and to share the risks.

Source: (Millar, 1994, as cited in Lacity & Hirschheim, 1995, pp. 45)

For carrying out outsourcing it is necessary for the companies to know which category of

outsourcing they relatively fall in. This will help the companies to get into the right

contract with the external vendor who are responsible for the activity outsourced.

Business process outsourcing refers to an outsourcing relationship where a vendor is

responsible for performing an entire business function for the client (Millar, 1994, as

cited in Lacity & Hirschheim, 1995, pp. 45). The management literature offers several

examples of how ages-old business methods and processes were abruptly displaced by

new ideas and techniques that did not exist just a few years ago (Leifer et al., 2000;

Christensen, 1997).

In the year 1980s and 1990s outsourcing mainly affected employees jobs or was

restricted only to the blue-collar jobs. This process of outsourcing made the companies


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and industries dominant in the cutthroat competitive global market and at the same time

employment stayed firm or started declining and the output of the companies started to

increase where the process of outsourcing used to take place. This necessarily didnt

affect the economy of the countrys net profit. For example the computer industry shows

sharp rise in the sales during the late 1980s and also in the 1990s, with the increased

activity of outsourcing of many inputs, which were previously manufactured in-house.

This effect was not only seen in the computer industry but went beyond it. The

accessibility of economical IT technology flared-up the demand for computer software

along with services jobs. Over a decade and half it was found that this resulted in

decrease of a million technologically advanced related manufacturing jobs, but at the

same time another 1.5 million services jobs were added. This affected more the routine

and lower paying jobs but at the same time growth was noticed in higher paying services

jobs. (Cynthia A. Kroll, 2004).

Outsourcing if we see is not a new business activity. Since long time jobs are transferred

from one company to another in the same country as well as foreign countries, although

the scenario of outsourcing today has changed to quite an extent. Today outsourcing is

not confined or restricted to a particular set of industries. It is spreading very fast even

through new geographic areas.

Outsourcing is driven by various factors such as wages, technical training, English

language etc. The requirement of the capital investment is also very low as compared to

the cost of investment for own or in-house manufacturing. The reasons behind the


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activity of outsourcing are many. Outsourcing helps to lower the manufacturing costs for

local firms and at the same time help to compete with other firms. It also helps the firm

with free resources for new investments and at the same time may generate demand for

other activities such as industries, job etc. Outsourcing is not done keeping only the cost

issue in the mind but firms outsource due to many other reasons also such as: -

Gaining access to the new and better technologies and ideas.

Focus more on the strength of the firm/ core competencies.

Reducing cost.

Lower capital investment.

Transfer of knowledge.

Provides access to the specialists.

Access to technology with further cost.

We exist in the era of outsourcing. Today organization are outsourcing more and more

business activities, varying from product assemblage to designing, from marketing to

research and development, even after sales service. The rising assimilation of world

markets brought a disintegration of the production process; in which manufacture or

services activities, done abroad are combined with those performed in the home country.

(Wang, 2006). Outsourcing can be defined as turning over all or part of an

organizational activity to an outside vendor (Baitheiemy, 2003). Today every

management comprises of some or more types of Outsourcing.


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The Economist Intelligence Unit report presents that in the year 1997 around 34 per cent

of the companies outsourced some or all of their information technology (IT). Also

according to the report these figures were estimated to reach 58 per cent by the end of the

year 2010. It is also estimated that there will similar increase in the percentage of

outsourcing in other activities like telecommunications, accounting, human resources and

other Business Process activities. Empirical evidence suggests that planned and carefully

done outsourcing strategies increases the performance of the company on the whole

(Baitheiemy, 2003). As the CEO of a medium-sized firm that had outsourced activities

as diverse as IT, logistics, financial services, and facilities management pointed out:

Outsourcing enabled us to double our operating income before tax while our revenues

remained stable." (Baitheiemy, 2003).

The concept of outsourcing was first made popular by Ross Perot when we founded

Electronic Data Systems (EDS) in 1962. EDS would say to a potential client, "You are

good at designing and manufacturing widgets, but we are skilled with managing

information technology. We will sell you the IT services that you require, and you can

pay us periodically with a minimum commitment of two years. Today, EDS is a multi-

billion dollar company with over 70,000 employees and is only one of many global BPO

firms. - The Outsourcing Times (www.blogsource.org). 16thJuly, 2006.

There are contradictory accounts about the beginning of outsourcing, but its first accepted

practice appears to be in the year 1954 in the area of information systems (IS) when

General Electric Corp. contracted with Arthur Andersen and Univac (Klepper & Jones,

1998). The process of outsourcing consists of various activities and sub activities and is a


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very vivid and complex process. It is very difficult for the managers of the company to

decide which part of the business activity to Outsource and which part of the business

activity should be manufactured within the firm. Therefore make vs. buy is a question

carrying many managerial dilemmas.

2.2 Outsourcing to India and China

Today outsourcing has pick up the pace. It becomes cheaper for the U.K., European or

U.S.A. companies to produce the same goods in India and China than in there own home

country. (See diagram for comparison between India and U.S.) The wages and labor cost

are cheap in India and China than compared to U.K. and U.S.A. (see diagram comparison

between India and U.S.)

Table: 4: SALARY GAP- US COMPARED TO INDIA HOURLY WAGE

OCCUPATION U.S. CA SIL.VAL. INDIA

TELEPHONE OPERATOR $ 13.85 $ 14.50 $ 16.80 < $ 1.00

HEALTH RECORD TECHS $ 11.50 $ 13.20 $ 15.00 $1.50-$2.00

PAYROLL CLERK $ 13.95 $ 15.90 $ 20.40 $1.50-$2.00

LEGAL ASSISTANT $ 18.25 $ 23.85 $ 27.10 $6.00-$8.00

ACCOUNTANT $ 22.60 $ 25.30 $ 28.30 $6.00-$15.00

FINANCIAL ANALYST $ 27.50 $ 30.85 $ 34.60 $6.00-$15.00

PROGRAMMER $ 30.00 $ 33.45 $ 36.90 $2.65-$6.00

Source: FCREUE from US BLS, interviews and reviews of want ads as cited in (Cynthia

A. Kroll, 2004 Background on Business Services Outsourcing and the California

Economy University of California Berkeley).


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India and China undoubtedly are two countries certainly a vigor to think when it comes to

the factor of Outsourcing. India and China are, and will stay in demand for the activity of

offshore outsourcing. Outsourcing to these countries is turning out to be a good thing for

the organizations. The reasons why companies are drawing their attention towards these

two countries are there edge over the quality and cost benefits. The level of superiority

and distinction that these two countries have achieved in the field of outsourcing has not

come overnight. Various factors such as different government policies, infrastructure,

people speaking fluent English, who can adapt to western accents, have all played a

crucial role and participated in making these two countries destination of Outsourcing.

India and China are overall ultimate destination for the companies outsourcing. Some of

the reasons why the two countries have advantages are mentioned below.

2.2.1: Strengths of India and China

The manpower

India and China has great manpower in terms of both attributes - quality as well as

quantities, which outnumber others in the world. Their man powers are known in the

world for their characteristics like dedication, determination, adjustability and immense

talent. Companies outsourcing to these two countries can get specialized talent in specific

areas.

Indias prevailing education system and Chinas upcoming education system.

There was an age-old belief that the education system that prevailed in India was faulty

and imperfection, killing individuals creativity. This belief has been proved wrong.

Indeed this education system has produced students with multi talents. Grip over


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quantitative models, along with a confident command over the communication skills, has

cemented the way for students to the peak. Also today we can see that more and more

Chinese people are learning English and becoming aware of proper education.

Government Policies

Indian and the Chinese government have taken numerous liberalization proposals to

support the development and growth of outsourcing sector and also trying to draw lot of

FDI (foreign direct investment) into the country.

http://www.indiasoftwaredevelopment.com/outsourcing-to-india.asp. The decision of

outsourcing is a very composite procedure, addressing concerns in a variety of domains,

such as political (e. g., union pressures), economical (e. g., financial feasibility) and

technological (e. g., performance metrics). (Harbhajan, 2006)

Due to the various significant advantages of outsourcing, we can see that companies these

days implement the activity of outsourcing. The activity of outsourcing is basically

considered to be a mighty tool for cutting a companys cost through less internal

investment and use of suppliers, which are more located, overseas like India and China.

(Barthelemy & Adsit, 2003) For example we can see that there are figures indicating that

Asian suppliers can provide key components or finished products for many different

industries at up to 60% less than in-house production (Bettis et al, 1992).

For example: Feenstra (1998) have described the production process of Nike Company.

About 75000 people are employed in Asia in the production of shoes and clothing for


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Nike, though only a few hundred of these are actually employees of the company. The

rest are employed in factories that have some contractual arrangement with Nike,

possibly run by the third parties (Feenstra, 1998). We can also see that large

pharmaceutical companies like GlaxoSmithKline, Pfizer and Bayer, now commonly

outsource part of their R& D to small, specialist biotech companies (Mc Namara, 2000).

India and China both the countries have become world renowned as a destination for

Outsourcing in every field. This is due to a number of contextual specifics that have

provided both the countries with a comparative advantage over the other potential

outsourcing destinations. Every firm producing goods need some components for its final

output. Therefore the firm has two choices either the firm can select in-house vertical

integration or secondly it can outsource the components required either from the home

country or from a foreign country. Outsourcing is not a new phenomenon and also cannot

be restricted only to the IT industry (Dibbern et al, 2004). There are other forms of jobs

and services which can be outsourced apart from IT outsourcing (ITO), like business

process outsourcing (BPO) of various back office functions, which can include human

resources, finance and accounting, processing of insurance and credit transactions,

procurement, and IT services (Kevan Penter & Graham Pervan, 2006,)

In the developed economies, there has been a drastic change in the retailing environment.

Companies into retail business have grown at an exceptional scale and are progressively

becoming international companies. Today we can see that consumers are more mobile


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and well-heeled, demanding for specialized goods and services. New retailing business

environment has to adapt to these changes in order to sustain the market. Responding to

the culture of the customers is very essential for the success of the retailers.

While retail industry lags behind other industries such as car manufacturing, banking and

financial services, when it comes to the amount of business activities which has been

moved to outsourcing, its augmentation is a reflection on the shift from manufacturer-

based economies to service-based economies. Traditionally the safeguard of the product

manufacturing such as private label, there has increasingly been a move to the

outsourcing of services including IT and logistics. Outsourcing used as a planned tool to

gain and sustain competitive advantage, outsourcing is now hard at work in the retail

business. Whether there are disputes in favor of or against the outsourcing, it is certainly

going to play an increasing role in international retailing as globalization takes hold.

(http://www.foodinternational.net/articles/ecr/10/outsourcing-tool-of-the-future-for-

retailers.html cited on 16/07/2007)

The decision whether to outsource or not remains a potential minefield for the retailers.

On the other hand, with the retail market becoming more and more competitive the

opportunity to restructure costs is one that many businesses cannot afford to miss, says

John Broy (Straight to the source, 2006, Retail Systems October -November). Buying is

one of the main activities performed in the retail environment. What to purchase from the

market and what should be manufactured internally? How to buy? Where to buy? These

are some questions, which are kept in the mind before the actual buying activity take


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place. It is very essential for the success of the retail business to make the

purchase/buying effectively.

A survey conducted by Shaw et al. (1992) indicates that out of the goods outsourced 39

% of products were purchased from non-domestic suppliers i.e. from the overseas market.

It is also necessary for the company to decide whether to buy locally i.e., from the

domestic market or from a foreign supplier. The key things, which should be, consider

for evaluating the decision are price differential between the two, variety, quality and

availability.

In some industry the company becomes specific and gives each and every single detail of

the goods to its supplier. For example, in the textile industry the firms often provide its

suppliers design of the garment, specifying the fibre, fabric, colours, quantities etc. and in

the leather industry the firm provide it suppliers with the type of leather, colours, design

of the model, and other descriptions. Therefore we can say a leather goods retailer in

Europe will give its supplier in India or China each and every detail, exp. the type of

leather, colour of the leather, model of the wallets and purses, fabric colour and style,

buttons, zipper sizes etc.

It is often time consuming to locate and identify the suppliers in other countries for the

retailers and for the same the retailers even establish buying-offices in those countries.

For exp. Retailers like Elcorte Ingles of Spain has their buying-offices in the suburbs of

Delhi, India. Otto Versand, a German based retailer has 10 buying offices in Asia. The


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main responsibilities of the buying offices are searching the market for the suppliers and

also representing the retailers in dealing with the suppliers. The buyer from the retail

companies also visits different trade exhibitions held in different countries for the

procurement of the goods.

Conventionally the safeguard of product manufacturing such as private label, there has

been more and more move to the outsourcing of services along with IT and logistics.

Outsourcing also appears in other forms such as advertising, public relations, marketing

and sales promotion. And now the growth of services is being highlighted by the

dramatic economic growth of India, China and other Asian countries.

China and India as exporters of manufacturers since the middle of the 1990s has

contributed together to the changing pattern and volume of the global trade. From the

chart below we can see that by 2004 Chinas share of worlds manufacturing exports

accounted to 8.3 percent and Indias accounted to 0.9 percent. In commercial services we

can see that Chinas share of exports reported 2.9 percent and Indias share 1.9 percent.


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Table: 5: INDIA AND CHINAS SHARE OF THE WORLD EXPORTS

Chinas and Indias share of the World exports

1980 1990 2004

World exports China India China India China India

A. Manufacturing 0.8 0.5 1.9 0.5 8.3 0.9

1. Iron & Steel 0.3 0.1 1.2 0.2 5.2 1.6

2. Chemicals 0.8 0.3 1.3 0.4 2.7 0.7

2.1 Pharmaceuticals -- -- 1.6 1.2 1.3 1.0

3. Office machines &

telecommunications

equipments.

0.1 1.0 0.8 15.2 0.6

4. Auto parts 0.0 0.0 0.1 0.1 0.7 0.1

5. Textiles 4.6 2.4 6.9 2.1 17.2 4.0

6. Clothing 4.0 1.7 8.9 2.3 24.0 2.9

B. Commercial services -- -- -- -- 2.9 1.9

1. Transports -- -- -- -- -- --

2. Travel -- -- -- -- 4.1 --

3. Others -- -- -- -- 2.4 3.1

Source: Srinivasan 2006 as cited in Winters Alan (2007)


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The activity of outsourcing IT and business processes yields more than $10 billion a year

for India giving employment to more or less half a million of Indian workers (Harbhajan,

2006). The emerging Indian and Chinese organizations that now rule the global sector got

in full swing only after multinational companies initiated the approach, proved the world

that India and China were viable outsourcing destination with trained critical mass of

local employees. Foreign organizations sharpen up the effectiveness and productivity of

the local industries by inducing in new capital, technology, new business models, and

management skills. Global outsourcing offers a compelling podium to study the matters

of upgrading competitive advantage in developed countries and contract out non-core

competencies to emerging markets.

According to the report textiles and clothing exports account for 7 % of total world

exports where China leads the market followed by India. Indias textile industry trails

well behind that of China. Due to the incorporation with the global production network

having direct connections with the retailers in the organizations for economic co-

operation and developed countries an also through foreign investments, China has a sharp

advantage over the others. For example in the year 2004 Wal-Mart, U.S. based retail

company purchased around $18 billion worth of goods from China itself. Indian

organizations have very less direct contacts with the retailers. India and China, though

both competing with each other in some forms of exports are mounting and both the

countries are emerging to dominate the global market to an even greater level than it used

to in the past. (Winters Alan, 2007)


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Outsourcing can make retailers more competitive, but it is about more than just saving

money. It requires serious effort and retailers must be clear from the outset about their

aims and objectives. These were the words of Kevin Hawkins, Director General of the

British Retail Consortium, commenting on the first ever Pinsent Masons survey

conducted with the British Retail Consortium over the summer. (David Philpot, 2007)

The prevalent location choices for this offshore outsourcing trend are India and China,

primarily due to the potential of exploiting labour cost arbitrage to achieve an overall

reduction in operation costs.

2.3: Reasons for the Growth of Outsourcing:

There are many reasons to consider outsourcing: for example, to reduce cost, to reduce

capital investment, and to have access to technology. According to Outsourcing Journal,

April 2002, interests in outsourcing were for the following reasons:

Improving core business results.. 39%

Cost savings 36%

Upgrade current service levels.. 9%

Inability to staff appropriately... 7%

Implementation of large scale initiatives... 5%

Avoiding needed investment. 4%

Every industry or organization has its own unique challenges. But in the retail industry,

retail stores and the constantly increasing segment of E-business catalogues sales has an

entire shopping cart filled with challenges.


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Outsourcing is used as a tactical tool for achieving success and sustaining competitive

advantage in cutthroat competitive market. This activity is now firm at work in the retail

business. As globalization takes place in the world market, outsourcing is certainly going

to play an ever-increasing role in the international retailing sector irrespective of the

arguments in favour or against the outsourcing. In an idyllic business atmosphere,

retailers would have very few or no need to outsource services or production. In the late

19th century and as well as into the 20th century, when information technology was not

even a blip on the horizon, retailers owned their own farms, manufacturing sites and there

was very few or no need to outsource. For exp; Boots, the UK-based retailer, used to

have their own fire service and even employed its own gardeners who grew Boots own

label bedding-out plants and bred Boots own ladybirds.

Amit Bajaj, head of retail and consumer industries at TATA Consulting Services (TCS),

says outsourcing has traditionally focused on two activities in the retail sector: products

and services. (http://www.foodinternational.net/articles/ecr/10/outsourcing-tool-of-the-

future-for-retailers.html as cited on 16/07/2007). The ultimate goal of many people is to

make their own decisions and build up their business so that they can ascertain the

success of the firm. But for many companies or organizations, which have reached a

certain level and size this idea, seems to be vague and no longer possible. Due to the

lesser and tighter margins and increasing legislation it is important that the retailers have

knowledge in every corner of their business activities. Keeping this information and

knowledge in mind outsourcing non-core business functions to professional specialists


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who can provide an efficient and dedicated work let retailers to concentrate on what they

know best retailing.

According to Davies P. (2004), more than half of the UK FTSE 100 companies now

contract some portion or the whole of their business processes to outside organizations in

the same country or foreign country, a position that is also replicated to an even greater

degree with the Fortune 1000 companies in the USA (Friedman 2006). The activity of

Outsourcing today has become significantly important for many local and global

companies but many companies have not been able to achieve the craving and likely

benefits from outsourcing due to the problems like no formal outsourcing process, limited

cost analysis, and core business definition.

(http://www.asiawebmedia.com/Definition_of_outsourcing.htm as cited on 17/07/2007)

The nature of outsourcing is very diverse. We see that some organizations now days

outsource there core production activities so broadly that they no longer indulge

themselves into production as they used to do before. (Knemeyer et al., 2003; Zsidisin,

2003). The term Core competencies was mentioned in 1990 in Harvard Business

Review Article as the Core Competence of the Corporation. (Prahalad and Hamel,

1990; cited by Corbett, 2004). Core competencies are deemed to underpin the ability of

the organization to outperform the competition (McIvor, 2000) and thus convention

suggests that they should be protected and nurtured i.e., kept in-house. According to

Bettis, Bradley and Hamel, 1992, the reason why the core competencies were not usually


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outsourced was because contracting out such activity of organization to an outside

supplier was threat to the firms competitive advantages.

While we also see that there are other firms outsourcing extensively secondary value-

chain activities for exp. accounting systems, distribution, human resource management,

information technology, logistics etc. (Johnson and Schneider, 1995; Lacity and

Wilcocks, 1998; Odagiri, 2003; Ono, 2003).

Along with critically analyzing the different facets of the business, it is the responsibility

of the managers also to intermingle with the different layers of the organizations in order

to be aware of different associated implications. Like any other business move, there is a

level of risk involved with outsourcing (Aubert, Patry & Rivard, 1998; Earl, 1996 as cited

in Harbhajan, 2006). In its 2004 report, the research group Gartner states that as many as

80% of outsourcing deals are unsuccessful and that European businesses wasted $7

billion on poorly managed contracts. (Harbhajan, 2006). Global competition and

shareholder expectations have led European companies to focus on reducing their

operating costs and on core competencies. To achieve this in the global economy,

companies are turning to business process outsourcing (BPO), outsourcing.

While global executives began outsourcing substantial portions of their operations, more

than a decade ago, to offload activities regarded to be non-core to cut costs and refine

their strategies, modern outsourcing companies are looking around globally for more

fundamental reasons to facilitate rapid organizational change, to launch new strategies,


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and to reshape business models. In essence, they are engaging in transformational

outsourcing, which is partnering with globally scattered companies to achieve rapid,

substantial, and sustainable improvements in performance.


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3.0 Research Questions and Methods

3.1 Research Questions:

There are four research questions and surrounding these questions the interviews were

conducted and the secondary data were collected. The four research questions have been

selected keeping in mind the global growth of outsourcing.

The research questions are as follows:-

1. How do companies reduce cost and what are the difficulties faced in doing so?

Reducing the production and operating cost of any company is very essential for any

company to gain and sustain competitive advantage. Therefore how companies reduces

cost and how far are they successful in doing so is one of the main research questions.

2. What is better make or buy?

It is very important for companies to decide whether they should make i.e., produce the

goods in-house or should buy i.e., purchase the goods from the external sources.

3. What are the advantages and disadvantages of outsourcing?

If a company is outsourcing its goods then it is necessary for the company to know the

advantages and disadvantages of the activity also.

4. What is the future of outsourcing?

My last research question will decide whether the present boom in the activity of

outsourcing will increase or decrease due to its advantages or disadvantages.


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3.2 Research Methods:

Whatever are the advantages or ideas supporting the decision of outsourcing, evidence

can be seen that the main decision is mainly cost-based decision. It is always seen that if

the products or functions can be purchased/available from the market cheaper than

manufacturing in the company, then it should be outsourced rather than going for the in-

house production. But this has to be kept in mind that if a company only outsources to

reduce its costs i.e., mainly cost based decision then the main strengths may be lost to the

market and the firms success is sometimes put at risk. Now, when we study the

European retail industry we see that off late more and more European firms have started

becoming even more dependent on developing countries for procurement of raw

materials as well as finished goods in particularly manufacturing industry. When we go to

a retail store in U.K. most of the products displayed or available in the store has a tag on

its back written Made in India or Made in China etc. Why is it so? Why firms are not

manufacturing but outsourcing from the market? It is because they can buy the same

goods at a cheaper rate and sustain competitive advantage. The government removing

quotas from import and exports in some of the Asian countries like India and China has

also led people in Europe to import goods from these countries. The main basis of the

primary research is to identify the issues that effects and influence a companys decision

of outsourcing and the future of outsourcing.

The next step is the data collection systems as well as the edge of the research. Thought

and concern should also be given to the exclusive features of the research subject, the

range of the research and the resources needed to complete the method (Yin, 1994). The


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required objective should be attainable within the limitations of time and the individual

researchers abilities (Yin, 1994), and the nature of the study will represent whether the

study should be qualitative or quantitative.

Quantitative study method focuses on facts and numbers that signify opinions or concepts.

Cost is a centre and main concern in the discussion of outsourcing and quantitative

examination of variables such as production and transaction costs would give helpful

insight into the cost-effective explanations for outsourcing. But Qualitative research

study edges on words and inspections to convey truth and efforts to describe people and

the matters in normal situations (Easterby-Smith et al, 1991). Qualitative research method

was deemed as appropriate. While a range of theoretical concepts has been applied to the

debate, few academic studies explicitly examine the hands-on experience of

outsourcing firms, especially within a single industry. By using a qualitative research

design it was hoped that a richer, more realistic and a meaningful view of this

management trend would be provided. The theoretical and questions suggested appeared

from the literature review in actual fact forms the walls of the primary study. The above

mentioned two aspects express the choice of parts of study, the reason that will be used to

link data to the suggestions and the criteria for data explanation (Yin, 1994).

The criteria such as Core competency, competitive advantage, cost benefit etc within the

context of the literature review above seeks to ascertain appropriate for decision making

so as to which function of the business can and should be outsourced and which function

of the business should not be outsourced. The study of the topic is thus planned to test


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decision-making theory within the companies (Carroll & Johnson, 1992) by applying

these ideas to European retail firms and the intensity of outsourcing that they put into

practice.

After critically evaluating the topic it was decided to investigate and study a number of

European retail companies, agents who buys good on behalf of the retailers, one Indian

manufacturer cum Export Company supplying goods to European companies so as to

represent outsourcing variety and range of scale, from lesser integration companies

through to those into high-level outsourcing. Critically analyzing how these firms decided

particular strategies and aligning the outcomes with literature, it was expected to offer

companies wishing to outsource more wide-ranging direction for making the most

suitable conclusion for their business. The main purpose of this study is to get an insight

into companies know-how of the functions of outsourcing and the application of

different criteria when making decisions. The questionnaire was made of total 9 questions

to get an overview of companies involved into the activity of outsourcing. Detail

literature study was done to get idea of outsourcing, its advantages and disadvantages and

the effect of outsourcing on the business and employment. Also the future of outsourcing

was to be studied and this particular question was included in the questionnaire. Also

press articles have been analyzed to get an insight of the present scenario of the

outsourcing. All answers to the research questions will be supported from the literature

part i.e., the secondary data also. All the four research questions will be answered both

from the primary data and the secondary data i.e., findings from the interviews as well as

literature.


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Four interviews from the European retailers and one interview from the agent working on

behalf of his clients were taken by the e-mail. The interview of the Indian manufacturer

was taped and transcribed for the data analysis. The interviews were compared and

summarized and then it was extracted. The secondary data collected from various sources

such as journals, books, press releases etc. were together collected and summarized and

used where appropriate to enhance the analysis and provide better and broader matter so

as to give a clear picture. The results of the interviews were then discussed in relation to

the theories supported from the secondary data. Comparison of the findings of the study

with ideas relevant to the decision-making procedure proposed a number of suggestions

for the managers and giving directives for putting into practice an effective outsourcing

strategy, together with promising areas for future study.

Mainly the European based companies working primarily with the Indian and Chinese

suppliers were selected for the interview and the data collection. Also the Indian

manufacturer cum exporter supplying goods to the European companies was taken into

consideration for the data and interview. The reason why the companies were chosen

was their current outsourcing strategy and their relation with the European retail industry.

The size of the company chosen varied from each other and each of them had different

nature of business. Only the C.E.O., primarily owners or the senior managers who were

directly involved in the business having control over the activity of outsourcing were

interviewed. The interviews were conducted only once due to limitations of time

although regular contact with them were kept by e-mail whenever needed. The primary


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data was collected keeping in mind the recent changes and therefore maximum selection

of journals, books and articles was not too old.


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4.0: Findings:

Four European based retailers based in different countries of Europe, one agent

outsourcing for his clients based in Switzerland and one Indian manufacture cum exporter

supplying goods to the European companies were interviewed and the response suggested

that in todays global environment, outsourcing is a topic which every people would like

to discuss. As the market is becoming more and more competitive and going on a global

scale more and more people are opting for outsourcing.

Firstly the following table will represent an overview of firms selected for interview in

terms of its size, years in the following business, turnover.

Firm No No. Of Employees Years in the business Turnover

1 4 4 years 650.000 Euros

2 30 20 years 10,00,000 Euros

3 3 26 years CHF 2, 5 Million

4 17 11 years 8.5 million Euros

5 11 22 years 6 million Euros

6 10 years 5 million Euros

Although the nature of the firms varied from each other but all of them had one thing in

common i.e., outsourcing. Firms used to outsource some or the other parts of the business

functions to the external supplier for various reasons.


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4.1 Firm Costs:

How do companies reduce cost? Difficulties faced in doing so?

All firms have realized that the cost has become significantly important and many of the

firms has put into practice methods to lower it. The reduction in cost is due to the

consumer demand for lower price goods and increasing in the attitude of use and throw.

If a customer can buy a pair of Jeans from a store for 5 to 10 Euros he or she only needs

to wear that jeans couple of times, not always and then throw away. Consumers are more

prices oriented and the retailers sell what the consumer wants. (Firm 4)

According to the firm 4 Cost reduction is not an easy task. It is a complicated network

and a challenging task. Reduction of costs is not necessarily reduction of specific

expenses only but wherever possible. It is sometimes very difficult to reduce costs in an

increase item but then one can try to get more output from this expense and thus increase

profits.

Also when selling at lower price, the volume of the turnover will be high and because of

this, the firms to allow customers price demand and to sustain themselves in the market

many have outsourced there manufacturing to external suppliers. Also it states that the

lower wage rates prevailing in some country enable the European firms to make

substantial savings. In this way the firms shift their production to these countries where

the rates are lower. For example: The minimum wage pays in U.K. for adults (which


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mean people aged 22 and over) receive the full rate of 5.35 an hour (From 1 October

2007 this will increase to 5.52)

(http://www.direct.gov.uk/en/Employment/Employees/Pay/DG_10027201) whereas the

minimum wage pays in China and India are very less compared to the above. The

following chart presents the minimum wages prevailing in different European countries

and Indian and China.


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Table 6. National minimum wage (adult rate), 2004, in national currency (gross)*

Belgium Monthly EUR 1,210

Hourly BGN 0.71 (EUR 0.36)

Bulgaria Monthly BGN 120 (EUR 61.43)

Hourly CZK 39.60 (EUR 1.24)Czech Republic

Monthly CZK 6,700 (EUR 210.09)

Hourly EEK 14.60 (EUR 0.93)Estonia

Monthly EEK 2,480 (EUR 158.50)

Hourly EUR 7.61**France

Monthly EUR 1,286.09**

Daily EUR 25.01Greece

Monthly EUR 559.98

Hourly HUF 305.00 (EUR 1.21)

Daily HUF 2,440 (EUR 9.70)Weekly HUF 12,000 (EUR 47.68)

Hungary

Monthly HUF 53,000 (EUR 210.60)

Ireland Hourly EUR 7.00

Hourly LVL 0.474 (EUR 0.71)Latvia

Monthly LVL 80 (EUR 120.26)

Hourly LTL 2.95 (EUR 0.85)Lithuania

Monthly LTL 500 (EUR 144.81)

Malta Weekly MTL 53.88 (EUR 125.89)

Netherlands Monthly EUR 1,264.80

Poland Monthly PLN 860 (EUR 189.98)Hourly ROL 16,342.44 (EUR 0.40)Romania

Monthly ROL 2,800,000 (EUR 69.12)

Hourly SKK 37.40 (EUR 0.93)Slovakia

Monthly SKK 6,500 (EUR 162.41)

Slovenia Monthly SIT 117,500 (EUR 491.45)

Daily EUR 16.36Spain

Monthly EUR 490.80

UK Hourly GBP 4.85 (EUR 7.14)

* Conversions into EUR, where necessary ** Rate applies only to workers on 39-hourweek.

Source: http://www.eurofound.europa.eu/eiro/2005/07/study/tn0507101s.html


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Table: 7: Minimum Wages per month in China

City in China Minimum wage (per

month) in Local currency

Minimum Wage (per

month) in and Euro**

Guangzhou RMB 780 52 and Euro 76.60

Beijing RMB 730 49 and Euro 72.18

Shanghai RMB 760 51 and Euro 75.15

Local minimum wage (per month) **Euros to 1GBP= 1.47299 Source:

CBBC office. www.cbbc.org

Table: 8 Minimum Wages per month in India

City in India Minimum wage (Per

month) in Local currency

Minimum wage (per

month) in Euro*

Delhi Rs. 3325 Euro 60.45

Mumbai Rs. 2450 Euro 44.55

Kolkata Rs. 2125- 2375 Euro 38.64 43.20

*1 Euro= 55.00 INR

Source: www.paycheck.in

If we see the above three tables we can clearly see the difference among the minimum

legal wages prevailing in Europe, China and India. The wages paid to the labour in India


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and China compared to Europe is very less and this is one of the basic reasons why

European companies prefer to get their work or activities done in these two countries.

Secondly when the work is outsourced there is reduction in cost of capital investment.

When you plan to intake all the activities to be performed in house, then there is huge

capital investment as compared to when the work is being outsourced.

When asked the purchase manager of the firm 5, he replied that reducing cost is very

essential to gain competitive advantage.On one hand the firm looks for growth and on

the other hand there is always a demand to reduce cost. Both have to be done

simultaneously. We generally contract out activities like human resource, billing, pay-roll,

goods for resale to third party. This helps the firm to reduce the cost and gain

professional skills at the same time. The strategy of reducing cost and at the same time,

which does not compromise on the firms growth, is a very tricky situation. As it is said

that Your job is to trim the fat not cut into the bone which means to (trim) lower the

(fat) cost and not just remove the cost.

Many firms considered more and more foreign competition has focused for the demand

of lesser manufacturing cost and as a result of lower cost many retailers now source

directly or indirectly from the external suppliers within the country or overseas. In 2005

Firm 1 had an order for 1 million leather bags from its client. That year the company

outsourced all the goods from its supplier in India although the company had the

production capacity for producing all the goods in-house only. The reason behind the

outsourcing of the task to India was that of lower price as the profit margin in the above


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order was so less due to cut-throat competition that the production of the goods has to be

done at a lower cost, that is why the goods were outsourced to India.

According to firm 1 Several tasks in a trading company get outsourced to different

companies or suppliers. On one hand the contra of outsourcing is that there is no direct

access, but it is given by controlling the supplier or outsourcing company. The pro is that

you can concentrate on the main business referring to product development and sales and

can calculate outsourced tasks. Disturbances in case of illness do not influence you.

Firm 2 has been supplying goods to its clients for the past twenty years and states that

they have supplied the goods to almost all the major brands in Europe. According to the

partner of the firm when we first went to conduct the meeting with the companies in

Germany, they were shocked to see the quality of the goods and that too at such a cheap

price. But now due to the increased competition in the internal market everyone is

offering goods at a very low price to the clients and due to this more and more companies

which previously used to produce all the goods in-house have started to contract out there

work to external suppliers. This presents that there are inner competition among the

Indian suppliers as well and every individual firm is offering goods or services at a lower

price than others, lowering down their return margin. This is also one of the reasons

behind the European companies getting attracted to the Indian companies.

Also Firm 2 states that We generally give the jobs on contract to our suppliers in order

to complete the job. This helps us to reduce fixed cost of the firm. The same work is done


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outside with lesser capital investment and fixed cost. The difficulties faced in doing so

are the control over the suppliers and their delivery time. Due to outsourcing the firm

can save in their capital asset, which can be utilized for other purposes as well. Firm 3

outsource promotional items for its clients to a Chinese manufacturer because we cant

produce the same for such a lower price. They have got the advantage on the price and

the quality is also very good.

But reduction in cost is not the only concern for every firm. There are also problems in

doing so. Sometimes according to the C.E.O. of firm no. 3 Cost reduction by cost

comparison in buying - but it is also very important to get good quality for an appropriate

price. So it does not serve to us and to our clients when getting a very low price but also

the quality of the goods are terrible. When you tend to go for lower price goods you

cannot always expect high quality. It is even difficult to handle the supplier and the

clients when things go wrong in the goods. Quality comes before the price and also

quality is the base of the firms strategy and they will not negotiate this for the goods kept

in-house just to match in a foreign country pricing. Therefore this firm reduces cost by

keeping the minimum stock level as far as possible. It is therefore seen that looking for

reduction in the costs of production can be harmful for the companys image due to

problems like inferior quality of goods or services.

For the importers, transportation cost is a very important matter to consider. Air is the

most costly mode of transportation whereas transportation of goods by rail or water is

comparatively cheaper. The logistics manager of firm 6 used to plan the buying for their


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company, 6 months in advance and place orders to its suppliers. This helped them to get

their goods transported by keeping time in hand. By this, we no longer use air transport

and all our transports are by sea. This reduces our costs by 7%. This way planning in

advance helps them to reduce costs but then it has one disadvantage also. Being in the

retail industry of fashion items, trends are constantly changing and to plan the buying in

advance is very difficult task.


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4.2: The Make or Buy Decision

Which is better make or buy?

Make vs. buy is a question to be dealt with lot of care and attention. It is of great

importance to decide whether to manufacture the goods in-house i.e. Make or purchase

the same from the external suppliers available in the market i.e. Buy.

According to the Transaction Cost theory the decision whether a company should make

or buy will always be made in regards to the possibility for cost reduction (Williamson,

1985). The strategy of Supply chain is a related thought since either make or buy; any of

the two choices will have an impact on a companys operational performance. There are

chances of company doing the outsourced activity better by focusing on the activity but

this lead to chances in resulting lesser focus and attention on the core competencies

(Barthelemy & Adsit, 2003). The decision to make or buy is also determined by

advantages aimed to the betterment of a companys competitive advantage in the market

(Porter, 1985).

Make versus buy means which activity of the firm will be carried inside the firm (make)

and which activity will be carried outside the firm (buy). In todays market many firms

do manufacture their own products and at the same time buy from the market. There are

lot of changing technologies and resultant emergence of the flexible manufacturing

strategies, than work to eliminate at least some of the transaction costs for investments in

specific assets. Today consumers are demanding higher quality specialized goods.


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Therefore the firms manufacture those parts in which they are specialized and the area in

which they are more expertise while buying the rest production components from the

outside suppliers. Due to this many firms prefers to buy than manufacturing their own

products. For example, today due to high labour cost and higher production cost firms in

Europe (even big brands) have started importing high quality merchandise from Indian

and China.

There are some key points, which are kept in consideration before making the decision. A

firm will manufacture where they have an advantage over the others in terms of cost and

quality but if the production cost is more or goods are of inferior quality, outside

suppliers will be asked to provide the components. The decision whether to make or buy

is very important and therefore requires careful handling of the matter. There must be a

centralized managerial effort to coordinate among the make or buy decision. The

complex products are more likely to be produced internally, while less complex products

are procured through buying from the market or suppliers.

Transaction costs are the additional costs incurred by the economic interaction costs

above and beyond contracted price including the acquisition of costly information, the

costs of monitoring performance, the cost of committing specific assets and the costs of

handling complexity. (Fitz Roy R. Felix, Acs J. Zoltan and Gerlowsk A. Daniel).

Transaction costs differ from the production costs. It is used more in Economic terms.

It is very necessary that at least one of the parties may be required to modify some of its

resources to very specific needs. Williamson (1985: 55) Asset specificity as durable


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investments that are undertaken in support of particular transactions, the opportunity cost

of which investments is much lower in best alternative uses or by alternative users should

the original transaction be prematurely terminated. It refers to the degree to which

Capital Assets are specific to Transaction and thus cannot be redeployed to other uses

without sacrificing the majority of its productive value.

The most popular example for the consequences of assets specificity has been the

relationship between General Motors and Fisher Body between 1919 and 1926. After a

10 year contractual agreement was signed in 1919, GM's demand for closed-body cars

increased to extent that it became unhappy with the contractual price provisions and

"urged Fisher to locate its body plants adjacent to GM assembly plants, thereby to realize

transportation and inventory economies." [Williamson, AJS, p.561] Finally, Fisher Body

was merged into GM in 1926 after Fisher had resisted GM's location demands. As

R.Coase recalls, "I was told [by GM officials] that the main reason for the acquisition

was to make sure that the body plants were located next to General Motors assembly

plants." (Coase, 1993) "

Asset specificity is usually considered to be an argument for vertical integration. The

main idea is that specificity induces opportunistic behavior, and that vertical integration

reduces this problem of opportunism. (Ola Kavoloy, 2003). Vertical Integration or

make vs. buy decision has been described as the paradigm problem of TCE.

Monteverde and Teece (1982 b), made the first test of vertical integration examining the

effects on asset-specificity, for the decision to produce components internally or


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externally. They sorted out list of 133 automobile components each coded as either made

or bought. There thesis is that the greater is the applications engineering effort

associated with the development of any given automobile component, the higher are the

expected appropriate quasi-rents and, therefore, the greater is the likelihood of vertical

integration of production for that component (cited by Shelanski A. Howard and Klein

G. Peter, 1995)

If there is no asset specificity or investment specificity, we have a competitive market

with no need for contractual incentive schemes. Then the old rule would apply, saying

that the best manager of an asset is its owner. (Ola Kavoloy, 2003)

Analyzing all the five interviews and the literature review it can be said that buying helps

to get variety of goods and services, and the firms have different choices to select the best

suited for their firm i.e., which product or service are better for their stores and for the

growth of the firm, which is not possible in manufacturing in-house.

According to the firm 1 It is much more efficient to do regular business, well calculated,

than forcing turnover, because the spiral of increasing turnover results in delusion of the

real profit situation. Over proportional increase of turnover looks busy, but decreases the

success of all members of the company and the necessary happiness of everybody

to work together successfully. So the circle is closed to have a happy private life

and enjoying the profession. Some firm think its better to do less work rather than

increasing the turnover and do quality job. This leads to the conclusion that people can do


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regular business activities rather than getting involved in the complex activity of

manufacturing. This will also save the firm from capital investment and trying to get

more and more result from the same.

In every business there are some amounts of minimum monthly costs like rent,

electricity, staff, telephones, etc. and it is necessary to overcome these expenses and earn

profit. It is also necessary to see what the profit margin is. If firms sells their products at

a lower margin then they will have to look at internal manufacturing also so that the cost

of the goods becomes less, but then at the same time like firm 6 if the profit margin is

high then it is better to concentrate on the core activity like regular sales and its

development rather than internal manufacturing of the goods.

According to the firm 3 the question of make or buy depends from job to job. Some

things are better to be done internally whereas others are better to be bought from the

market. Our clients keep the core activities in-house and outsource non-core functions.

Generally sampling and activities at which the clients are specialized are kept in house

and rest are outsourced. Also when it comes to bulk quantities the jobs are outsourced

rather than manufacturing internally.

According to the firm 2 Well this of course is a very complicated question. It depends

from company to company, firm to firm whether to make or buy. For one company

manufacturing may be the only option whereas for the other company getting thing done

from outside and manufacturing both may be suitable. Therefore it depends. But this

question was responded and answered very clearly in an explicit manner by the Purchase


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manager of firm 4 which says that if a firm is looking from a short term point of view and

which is well within the efficiency set of the firms in-house development and production

team, the first thing the firm should do is to evaluate the same from the market and judge

between the two, I would always happily recommend that you should go for in-house job

rather than buying from external sources. But if a firm is looking from larger and longer

term-view concept and which is not within the efficiency and capacity set by the firms in

house development and production team and where there is leader in the same group

available in the market chosen by all the other firms in the same industry, his preference

would always be buying rather than in-house manufacturing. According to his experience

even if the buying would appear expensive here he will always opt for this option only

because unless there is a planning or have any interest of becoming competitor with that

leader which is available in the market he will always find its products cheaper in the

long-run.


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4.3 Advantages and Disadvantages of Outsourcing:

What are the advantages and disadvantages of outsourcing?

If we look at outsourcing from a laymans point of view, the activity of outsourcing

would appear as a waste of money, time and energy, as well as an unnecessary

complication. Why is it necessary to send business to some other company in the same

country or abroad, when the work can most likely be done better at home? If we look

outsourcing from a legislators point of view, it serves as an objection to captivating jobs

of our own countrymen. Different people have different view points to the same term.

But if we see outsourcing from a businessmans point of view, it is a fortunate thing

allowing businesses to outsource the noncore activities of the business, leaving the

businessmen free, to totally concentrate on the core activities of the business and the

areas of the company where it specializes.

Undoubtedly the most attractive and dynamic advantage of outsourcing is the cost

effective reason. Labour, IT and other services in the Europe are very expensive if we

compare to India and China. Lets avoid complicated business language and say that the

activity of outsourcing is principally an option that offers these services at a much lower

rate but highly productive mass work force. Fo

Documents

Outsourcing in Retail