Background of the Issue
With increasingly difficult organizational structures and continuously evolving markets, modern companies face more severe competition. This competitive market environment is no longer determined by the high level supply and demand curve and product features, as it used to be somewhat forty and even thirty years ago. Contemporary businesses have to learn to compete on price and upstream effectiveness to be able to develop sustainable competitive advantage in their respective markets. Past decades put in focus an emerging trend of production and manufacturing outsourcing, where large corporation found a great cost advantage in offshoring their operations in lower labor cost countries, such as India, Bangladesh and, of course China (Parker, 2005). The paramount factors that make international sourcing attractive for the companies are grounded on the reduced production and labor costs, which until recently represented the largest portion of the total final good cost.
Recent developments in economic and industrial landscapes, however, outline new trends in production and manufacturing that illustrate reducing gap between the production costs in developed and developing economies. This, along with increased advantages of shorter lead times and leaner supply chains makes reshoring a considerable alternative for modern businesses. The purpose of this report is to analyze the latest developments in the field of international sourcing and evaluate the pros and the cons associated with both, offshoring and reshoring practices. The primary argument of this work is: “Reshoring is not ‘the correction of offshoring mistakes’, but the reaction to the change in the global business landscape and a logical response to the evolving profile of supply chain costs.”
Offshoring vs Reshoring
Rationale of Offshoring
It is hardly possible to find a large multinational corporation that continues producing its core product in developed European country or America or, at least, does not have partial production in one of the offshoring superstars in the core outsourcing regions in Southeast Asia, Eastern Europe and South America. Global Ranking on top outsourcing locations illustrates a significant disparity among the countries as well as cities. As such, Bangalore and Mumbai in India have taken the place of recent superstar Guangzhou and Chengdu that currently occupy 1st and 2nd and 34th and 35th positions respectively (Tholons, 2013). Organization, like, Lenovo, IBM, Apple, Boeing, Airbus and many other industry leaders in their respective fields have shut down their local factories to either open own production in China and Taiwan or to outsource production to the large manufactures, like Foxconn (Huffington Post, 2012).
It is evident that the global market of outsourcing has been experiencing rapid growth throughout the past decade. Today´s outsourced market represents almost double of the 2000 volume and accounts for USD$ 82.9 billion. It is interesting to note, however, that the over the period of 2012-2013 this figure dropped dramatically by 16,4% that raises concerns and questions in regards to the popularity of global sourcing and new emerging trends in the global business environment (Statista, 2014; Appendix I). The fact is that global outsourcing is not solely determined by the cost advantage. To understand the complexity of the decision, taken in regards to outsourcing, it is important to understand the complete picture.
Let us try to gain a better insight into the rationale of offshoring that drove the trend for several decades. Outsourcing allowed the companies benefiting from three core strategic elements: performance and best practices, cost management and access to resources. First of all, from the perspective of the best practices and performance, companies that build their operation on outsourcing activities prove to benefit from off-load turnover impact, better access to expertise and experience base and reduced “off the shelf” resource requirement. Focus on core capabilities is critical for sustainable growth strategy (Mclvor, 2005). As such, Apple Inc. outsourced 100% of its production and manufacturing and focused organizational international assets on design and product development As a result of this strategy the company has been effectively addressing the issues of short product lifecycle and constant demand for innovation. Secondly, cost management element outlines such advantages as reduction of total investment portfolio and asset-lighter strategy, benefits that come from leveraging the portfolio of suppliers and consequently higher bargaining power, and, finally, availability of internal capital for investment in core areas. Finally, outsourcing is a great way to gain fat access to management expertise and effective production processes, available in outsourcing locations due to the economies of scale and highly-focused manufacturing expertise. For the companies, like Boeing, where production of highly technological equipment and system is the key for successes, especially in top level jet production, outsourcing of IT solutions to India has been critical for price competitiveness (George, 2001).
Emerging Reshoring Trend
The past decade and actual statistics on the volume of outsourced services outlines an emerging trend of changing geographical landscape of global production. The article ‘Made in the USA’ On The Rise As Manufacturing Costs Drop by Moodley (2013) is an interesting compilation of the empirical and theoretical studies, conducted by Pricewaterhouse (PWC), Boston Consulting Group (BCG) and other independent research companies. The point that the author is making is that we are moving towards a new era, where global production and manufacturing trends are no longer determined by the labor and total production cost. The statistics shows that the cost gap between the US production and outsourcing of the activities to China, Mexico and India has been continuously reducing over the past seven years, and the forecast reveals some surprising figures. It is expected that China production cost will reach 100% while Indian manufacturing will account for 82% of the production alternative in the United States (Appendix II). These forecasts, along with the realization of the input of the total supply chain cost put more pressure on the companies in re-evaluating their manufacturing processes. Moodley (2013) argues that already today, total saving on supply chain costs reduced from 33% in 2005 to only 14%. The reality is that a lot of large corporations, such as Samsung, Airbus and Rolls-Royse, have already started to shift their production facilities to the home countries or the United States that is arguably becoming a new ‘trendy’ sourcing location. Even more are considering to make a move in their production maps (Appendix III).
The Outcomes of Reshoring
In spite of all the benefits to that outsourcing of production and manufacturing processes brought to the companies, the trend of offshoring has been in the focus of economic and ethical debates for as long as it exists. Why, will all the clear advantages, is outsourcing is a controversial issue? First of all, outsourcing of production from one country to another cannot be done without strong economic consequences, such as shift in employment rates, wages and export volumes. Secondly, because outsourcing of production to a country with lower labor cost and underdeveloped employment regulation creates a number of challenges in terms of Corporate Social Responsibility (CSR) and business ethics.
The recent trends of reshoring the production to the US alone reflect impressive figures of employment growth and job creation. Based on the research, conducted by the BCG group, if the forecasted shift of production from China to the US will meet the expectations, additional 2.5 to 5 million factory jobs will be created, reducing current unemployment rate of 7.4% to 4.4%. The Economist (2013) provided the statistics of 7.1-7.8% growth in real wages, in China in 2000-2008, triggered by the growing demand for manufacturing. The same figure illustrates the unfortunate reality of the developed countries, where outsourcing has been negatively influencing the levels of real wages and boosting unemployment levels in production sector.
Another issue that should be discussed in view of the emerging trends in production and manufacturing is the ethical background. Weber (2006) argues that along with the outsourcing of the production, the developed world managed to “outsource the tragedies” of child labor and the critical lack of work security and safety. The ethical argument in this situation refers to the fact that while developed countries managed to create robust labor legislation and bring employment standards to the highest level, China, India, Bangladesh and other superstars still suffer from poor business ethical standards and critical levels of employment legislation breaches. With that in mind, large multinational corporations are more and more focused on its CSR policies and integrated Code of Ethics with their suppliers (Benn and Bolton, 2011).
Long history and diverse experience of international businesses have drawn very controversial picture of offshoring. The fact is that, like any other occurrence that touches upon international business environment, production and manufacturing outsourcing trend has several faces. Those, who support the trend, can find numerous arguments to explain the benefits that offshoring brought to society. First of all, offshoring created natural segmentation trends that helped some countries build on their international position as specialized markets. The examples include Ecuador as major exporter of bananas, India as the call center service provider and IT ‘brain’, Ethiopia as the largest coffee production market. Secondly, offshoring is the way to take jobs to the poor countries and give a boost to their economies. Finally, ‘offshoring’ allows international corporations not only benefitting from production and manufacturing cost-efficiency, but also from bringing into play specific and rare expertise, which they could not develop in-house. Those against the phenomena, on the other hand, will not lack the evidence of the damaging nature of this trend. Some of the major issues, discussed by the opponents of offshoring, include ethical and economic side of the question. First of all, it is evident that offshoring practices failed to fully and structurally address the challenges of labor market responsibility, such as child labor, safety and security standards and quality issues. Secondly, global production and manufacturing market has dubious impact, where ‘giving to poor’ often proves to be ‘taking from those in perils’. In other words, jobs generated by American companies, outsourcing their operations in China, are created at the cost of unemployment growth in the United States. The point is that the difference in the ways ‘offshoring’ is seen by international community illustrates that ‘reshoring’ can under no circumstances be considered as the way to fix the mistakes of ‘offshoring’. Bringing the production back to the home countries is the result of strategic adaptation to the changing business environment, caused by many reasons. Some of the most evident drivers of reshoring are the growing labor cost in offshoring countries; internationally recognized crisis in transportation industry that changed the profile of supply chain costs; and the ethical issues, created by the ‘blind spots’ of outsourcing, such as labor inequality, inconsistency in quality standards and other CSR-related elements.
Based on the latest developments, it is possible to conclude that offshoring of production operations will continue to grow, and corporations will increasingly invest in hiring employees and expanding their activities outside of their home countries. Offshoring proved to be an effective response to the global dynamism and increasing cost pressure and will continue to remain in the core of the competitive edge for international businesses. Changing economic and political landscape, however, will likely to further affect the distribution of superstar sourcing locations. Under the influence of ethical and social responsibility pressures, the cost of production and labor will continue to grow globally (Heineman, 2012). With that in mind, the complexity of attractiveness evaluation for production outsourcing will increase further, placing forward the total supply chain cost and the impact of the lead times on business productivity.
Benn S., and Bolton D. (2011). Key Concepts of Corporate Social Responsibility. New York: Sage Publications. Print.
George F. (2001, June). Boeing Business Jet Analysis. Aviation Research. Business & Commercial Aviation. Available at: http://compair.aviationresearch.com/database_files/TheImage_20.pdf
Heineman B. (2012). In Defense of Responsible Offshoring and Outsourcing. Harvard Business Review. Available at: http://www.businessweek.com/management/in-defense-of-responsible-offshoring-and-outsourcing-02222012.html
Huffington Post (2012). Apple, Foxconn Scandal Highlights Exploitation of Chinese Workers By Foreign Firms. Available at: http://www.huffingtonpost.com/2012/03/07/apple-foxconn-scandal_n_1325930.html
Mclvor R. (2005). The Outsourcing Process: Strategies for Evaluation and Management. Cambridge, UK: Cambridge University Press. Print.
Moodley (2013, August). Made in The USA’ On The Rise As Manufacturing Costs Drop. CNBC News. Available at: http://www.nbcnews.com/business/made-usa-rise-manufacturing-costs-drop-8C11022215
Parker B. (2005). Introduction to Globalization and International Business. London, UK: Sage Publications. Print.
Statista (2014). Global Market Size of Outsourced Services from 2000 to 2013 (in Billions U.S. Dollars). Statista 2014. Available at: http://www.statista.com/statistics/189788/global-outsourcing-market-size/
The Economist (2013). Here, There and Everywhere. Special Report Outsourcing and Offshoring. The Economist. Available at: http://www.economist.com/news/special-report/21569572-after-decades-sending-work-across-world-companies-are-rethinking-their-offshoring
Tholons (2013). 2013 Top 100 Outsourcing Destinations. Ranking and Report Overview, January 2013.Tholons. Available at: http://www.tholons.com/TholonsTop100/pdf/Tholons%20Top%20100%202013_Rankings%20and%20Report%20Overview.pdf
Weber K (2006).The Factories of Lost Children. The New York Times Online. Available at: http://www.nytimes.com/2006/03/25/opinion/25weber.html?_r=0
Appendix I – Global Outsourcing Volume
Appendix II – Outsourcing Production Costs (% of US Cost)
*Source: The Economist, 2013.
Appendix III - Companies´ Intentions in Regards to Sourcing and Production
*Source: The Economist, 2013.