5.4 Flashcards
What is outsourcing?
The use of third-party subcontractors for carrying out non-core activities of an organization in order to improve operational efficiency and reduce production costs.
Advantages of outsourcing
The organization is freed up to concentrate on its core activities and strategy
The organization gains from the specialized services and cost advantages of the third-party partner
Outsourcing helps to rationalize business operations, hence cuts costs and improves efficiency and profitability for the organization.
Disadvantages of outsourcing
Quality issues and concerns can arise with the use of subcontractors
There are costs involved in monitoring and maintaining professional relationships with subcontractors
There can be potential conflict of interest with third party providers.
What is offshoring?
Relocating part of or all of an organization’s functions or processes overseas in order to take advantage of lower labour costs or other competitive advantages.
Advantages of offshoring
Wages may be significantly lower in other countries, allowing the firm’s costs to be reduced. The price can then be reduced (to gain a price advantage) or kept the same but allowing the firm to gain a higher profit margin.
Similarly, employment laws in overseas nations may be less stringent, making it easier and cheaper for a business to operate.
Offshoring means the organization can focus on its core competencies.
Job creation and career opportunities in the host country.
Disadvantages of offshoring
Offshoring is often associated with unethical business practices, e.g., such as the use of child labour and mistreatment of workers in low income countries
There are potential problems arising from cultural issues and language barriers, possibly leading to misunderstandings and conflict.
There may be concerns about quality control and quality standards with overseas workers. Monitoring the quality of output of an external party is more difficult than doing this in-house.
Offshoring can initially lead to redundancies in the domestic economy. Staff cuts and retrenchments need to be handled sensitively, yet can also be very expensive if severance payments (compensations) are made.
What is insourcing?
The use of an organization’s own resources in order to fulfil a specific job, function or project instead of it being outsourced to a third party provider. The firm’s own employees do the work.
Advantages of insourcing?
Insourcing involves the use of existing resources and employees, so this can be cheaper than using an outsourced provider. This is especially the case if there are no significant capital investment costs involved.
It enables an organization to have better control of its operations.
It helps to develop institutional knowledge (the collective historical and cultural awareness and understanding of skilled and experienced workers).
It maintains or creates jobs in the local and domestic economy.
It is suitable for start-ups businesses and smaller organizations with little or no experience in using subcontractors.
Disadvantages of insourcing?
Employees may not have the required knowledge, abilities or experience to perform the tasks. By contrast, outsourced specialists could be more effective and productive.
Multinational companies that want to expand in overseas markets cannot rely on insourcing as a growth strategy.
What is reshoring?
The practice of bringing back business functions to the domestic country from oversea
Advantages of reshoring?
Higher quality products for consumers
Greater control of production processes
Reduced risks
Operational efficiency
Avoidance of tariffs (import taxes)
Domestic employment
Disadvantages of reshoring
High costs - Reshoring can be expensive as the costs of reshoring production facilities are likely to be high.
Resourcing needs - There may be a lack of local expertise
International relations - A reshoring decision is likely to damage relationships with foreign offshoring producers and suppliers.
Time lags - Businesses with offshoring activities are likely to be tied in for some time due to contracts with overseas producers. The decision to reshore often requires the termination of such contracts although this will take time to execute.
