5.4 Location Flashcards
Ways of reorganizing production, both nationally and internationally (AO3)
This section of the syllabus requires students to understand the following ways of reorganizing production, both nationally and internationally. Name the 4 ways
- Outsourcing (subcontracting)
- Offshoring
- Insourcing
- Reshoring
Define the term ‘Outsourcing (subcontracting)’
State what classifies an Outsourced Activity
Define the term ‘Subcontractors’
State TWO ADVANTAGES and DISADVANTAGES of Outsourcing (subcontracting)
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.
Outsourced activities are those judged to be non-essential or those that can be passed on to an external provider due to their expertise.
Subcontractors are these ‘external providers’/outsourced firms (producers or suppliers) that perform the non-core activities for their clients (other businesses). E.g security firms, cleaners and caterers
ADVANTAGES:
1. The organization is freed up to concentrate on its core activities and strategy
2. The organization gains from the specialized services and cost advantages of the third-party partner
3. Helps to rationalize business operations, hence cuts costs and improves efficiency and profitability for the organization.
DISADVANTAGES:
1. Potential conflict of interest with third-party providers.
2. Quality issues and concerns can arise with the use of subcontractors
3. There are costs involved in monitoring and maintaining professional relationships with subcontractors
The Reasons for a Specific Location of Production (A02)
There are 10 ‘Reasons for a Specific Location of Production’ - State and Explain All
- COST AND AVAILABILITY OF LAND - Rents are higher in busy central business districts and popular locations (due to clustering) than in rural and remote areas. This often results in higher prices charged by firms to maintain profit margins.
- COST AND AVAILABILITY OF LABOUR- to gain access to cheaper and/or better-skilled labour.
- NEARNESS TO MARKETS -
being located closer to customers helps a firm gain competitive advantages by having reduced transportation costs and greater convenience for customers - LOCAL INFRASTRUCTURE -
physical and organizational structures and systems necessary for society to function e.g transportation, motorways, schools, legal courts, hospitals etc - GOVERNMENT INCENTIVES -
“Enterprise Zones” are the locations identified by the government that are in need of economic regeneration and development (i.e have high unemployment rates, poverty etc) . Businesses may choose to locate in these areas due to the existence of government incentives, such as grants and interest-free loans to cut a firm’s production costs to provide incentives for firms to relocate to these areas. - CLUSTERING -
Firms often choose to locate near other firms operating in related industries to benefit from passing trade and demand for products in complementary markets - BULK-GAINING INDUSTRIES -
Bulk-gaining industries make products that weigh more after production than before production, i.e., the product gains weight during the production process. Hence, these industries need to be located near to the customer. - BULK-REDUCING INDUSTRIES:
Bulk-reducing industries make products that weigh less after production than before production. As it costs more to transport heavier resources, bulk-reducing industries usually have their manufacturing bases located close to the sources of raw materials. - STRATEGIC REASONS-
For instance, multinational companies often locate in overseas markets in order to bypass trade protectionist measures - THE COST OF LIVING-
This is a measure of how expensive it is for people to live in a particular geographical location. This includes rental costs, petrol prices, food prices, utilities. This is needed in order to attract suitably qualified and experienced workers, by setting suitably attractive wages and salaries.
5.4.2 Ways of Reorganising Production, both Nationally and Internationally (A03)
Define the term ‘Offshoring’
State a few examples of operations that an organisation might outsource
State TWO ADVANTAGES and DISADVANTAGES of Offshoring
Top Tip : Outline the differences between Outsourcing and Offshoring
Definition:
relocating part of or all of an organization’s operations overseas to take advantage of lower labour costs or other competitive advantages
Examples of typical offshored functions and processes include:
1. Customer call centres
2. Manufacturing
3. R&D
4. ICT
ADVANTAGES:
1. Lower costs BECAUSE wages can be lower, allowing for prices to be reduced
2. Less Stringent Employment Laws - makes it easier and cheaper for operation
3. Job creation and career progression opps in host country
DISADVANTAGES:
1. Associated with unethical business practices, e.g., such as the use of child labour and mistreatment of workers
2. Cultural issues and Language barriers, leading to misunderstandings and conflict
3. Control of Quality Standards- Monitoring the quality of output of an external party is more difficult than doing this in-house.
TOP TIP!!!!!!!!!!!!
Outsourcing can occur within the same country or overseas and involves using external parties (called subcontractors) for specific tasks or services.
Offshoring specifically refers to the relocation of aspects of an organization’s operations to a location overseas. This can, but does not necessarily, require the use of subcontractors based abroad.
5.4.2 Ways of Reorganising Production, both Nationally and Internationally (A03)
Define ‘Reshoring (sometimes referred to as onshoring)’
Name some reasons for ‘Reshoring’
State TWO ADVANTAGES and DISADVANTAGES of ‘Reshoring’
Definition:
The practice of bringing back business functions to the domestic country from overseas, i.e., it is the opposite of offshoring.
Some reasons for restoring (onshoring):
1. Political instability in host country
2. Cost advantages have been reduced
3. Domestic government is providing financial incentives
ADVANTAGES:
1. Greater Control of Production - closer supervision and more rigid laws and regulations to ensure quality
2. Avoidance of tariffs - meaning lower costs and potential for lower prices
3. Domestic employment - brings jobs back to home country
DISADVANTAGES:
1. High costs - BECAUSE of restoring product facilities without guarantee of lower expenses
2. Time lags - tied in for some time due to contracts with overseas producers.
3. International relations - damage relations with offshore suppliers etc.
5.4.2 Ways of Reorganising Production, both Nationally and Internationally (A03)
Define ‘Insourcing’
Name some reasons for ‘Insourcing’
State TWO ADVANTAGES and DISADVANTAGES of ‘Reshoring’
Definition:
The use of an organization’s own resources to fulfill a specific job, function, or project instead of it being outsourced to a third-party provider.
Hence, insourcing (or in-housing) enables the business to retain full control of its operations.
ADVANTAGES:
1. Cheaper - BECAUSE of the use of existing resources and employees.
2. Better Control over operations
3. It maintains or creates jobs in the local and domestic economy.
DISADVANTAGES:
1. Employees may not have the required knowledge, abilities or experience to perform the tasks (unlike outsource specialists)
2. Increased workload for employees - stress, lower quality standards achieved etc
3. Multinational companies that want to expand in overseas markets cannot rely on insourcing as a growth strategy.
