Running head:OUTSOURCING

Outsourcing
BUS 644: Operations Management
Tane Charlie Javel
Dr. Donald Platine
11/03/2014

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Introduction
To keep it brief Vonderembse describes outsourcing as Goods and services obtained
from outside suppliers (2013). Outsourcing is also considered to be the most thriving and
effective cost strategies that is mostly used by firms, companies and businesses that are looking
to be leaders in finding cheap labors while making the most profits. This phenomenon is most
common due to how accessible it is to find extremely cheap labor in other countries such as India
and China. It is estimated that about 230,000 jobs are lost each year in America as a result of
outsourcing(Dixon, 2008). The industries that are most likely to rely on outsourcing the most
belongs to the Manufacturing and IT sectors which is reported of doing 43% and 53% of their
total work.. The main reason that firms have reported in supporting outsourcing is due to how
low the labor is in those countries, in other word cost control. Few companies actually credit
their decision to outsource on the fact to gain access to new resources.
Outsourcing can be used in a number of industries, one example would be for accessing
management expertise.. With a rating of 7.1 and workforce of 1,430,000,000 people dedicated to
outsourcing sector India tops the chart. Their cost index is mark is 8.3 and resource skill mark 6.
Indonesia comes second with overall rating of 6.9 and resource skill mark 4.3 with a workforce
of 1,033,000,000 people. Their cost index is 8.6. And china placed third in the ranking with the
780,000,000 sized work forces and overall rating of 6.4. Their cost index mark is 7 and resource
skill mark is 5.6. (StatisticBrain, 2011).

What is Outsourcing?
Companies can say anything they want as to why they choose to outsource their business,
but ultimately outsourcing is a cost reduction strategy. An example of outsourcing is for
example, Apple, Inc. choosing to have a specific part of their devices be built in China rather

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than in America so they can save money. In todays technology advance stated and not having to
wait on snail mail, communication is more effective and therefore outsourcing as a strategy can
make companies a lot of money and keeping labor cost relatively low. Located below is a graph
depicting some of the main reason that firms chooses to outsource.

Trade off between inputs for the productivity improvements

The four factors of production are Land, Labor, Capital and Organization and they are all
involved in the total production. Keep in mind that there is always a trade-off when the four
factors are involved, for example, if Land is expanded in a firm, than more than likely Labor will
have to be increased in order to keep up with the production of more Capital. Just a reminder
Capital in this case is not technically related to money, but the product that is in the making.
Consequently, if one of the factors is increase then, more than likely the other three will be
affected.

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Any Firms productivity calculation will be base on their ability to reduce the cost of production
while replacing them with different inputs. Firms can focus on adding value capital and labor
inputs as well as replace processed material inputs for capital and labor inputs. Productivity is
the level of output achieved from an activity divided by the inputs consumed to make the output
((Vonderembse & White, 2013). As mentioned above there are relatively four inputs that one
must focus on and at time, there must be trade-off in order to increase productivity. One tradeoff can be cheaper labor can increase experience curve. Another trade-off can be the fact that if
Land is at a cheap rate, than labor does not have to be so high also, there are more resources left
over for labor. Organization can expand much faster and capital as well. Keep in mind Capital is
the product that is in the making. So, if Capital is lowered or increased than the other three does
ger affected dramatically. For example, if more Capital is being produced then, the organization
can be expanded due to sales, of course, the land will need to expand as well, and there will be a
need of more labor to accommodate the need. The above image depicts the cycle of how each

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input support the next one and how the cycle can move smoothly.

This image represent how when a company gives its all to any aspect, whether it is to their
employees health, or environmental issues, that it comes back to the company. The healthier
your workers, the better they are able to complete their task meaning the more successful the
company is.

Graph: Experience curve

(Harvard Business Press, 2010)

Advantages and disadvantages of global sourcing versus U.S. production
Advantages of global sourcing

Expense more time on core business activities by outsourcing the ancillary activities.
More flexibility to change.

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Increased efficiency in non-core business.

Avoid expense in latest technology by outsourcing those activities.
Business operational risk is being reduced by sharing the operational activities.
There exists a swift and rapidness in the total business processing band operational;
activities.
Extremely inexpensive manpower, which lowers production cost, therefore making the
overall price or the actual product and/or service becomes cheaper for consumers

Disadvantages of global sourcing

Sometimes confidential elements can be revealed when activities are being shared
between firms.
Job loss from local labors and a decline of economics. It takes jobs away from domestic
employees, thus, affecting the countrys economy negatively.
Outsourcing is mainly done for cost reduction however; sometime there are hidden costs
that may obstruct the cost effectiveness.
One problem with outsourcing is one that I experience and that is the language barrier.
Especially with phone companies.

(Flatworldsolution, 2013)

Graph: challenges in outsourcing

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Description of a product of a low-labor-cost country

There are plenty of countries that produce garments at what most in the United States would
consider low-labor costing. One of the lowest is the lovely Bangladesh, a developing country and
is one of the leading countries in the exportation of garments. While an individual in America
making $500 a month is barely surviving, a family in Bangladesh is surviving on 60-70 dollars a
from working in the garment industry.

Graphs: Garments industry in Bangladesh.

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As depicted by the chart above textile and apparel are top in outsourcing. Bangladesh has
the lowest cost structures when compared to other countries, because of that and because of
cheap labors that is available, the outsourcing of the garments industry is booming over there.
This industry is definitely one where women have outnumbered the men, where it shows 80%
are women.
Recommendation of a low-labor-cost country based on inputs, trade-offs, and going global
advantages
Considering low labor cost and availability of labors and total industrial facilities also
considering the industry as growing in that particular country, Bangladesh is being recommended
as the low-labor-cost country. Also, above both china and India are becoming a market for
Bangladesh. So, it is a lucrative market for garments product. Labor is the core input which can
be traded off with capital or land. In addition, it has sound cost leadership advantages. Anyone
that go into business, does not go into it hoping that it does not grow. Therefore, if you want your
business to grow, then it is crucial that you aim to go global. First advantage of going global
would be for growth, which will lead to more diversify employees, and improve product
satisfaction. For a company to go global means a chance at having more potential customers or
consumers to advertise your product or service. More customers means more money. Not to
mention, in todays day and age, going global is the future and all the cool kids are doing it.
From a Shop level of organization, you can guarantee your customers to receive better service.
Another advantage of going global mean that you will have to be able to explain your product
and service and multiple languages, which mean that a Spanish-speaking customer does not have
to feel alienated. Learning each locals language means that the customers will trust you more
and see you less as a foreigner just after their money.

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References
Accel-Team. (2013). Accel-Team. Retrieved October 8, 2013, from Accel-Team website:
http://www.accel-team.com/productivity/productivity_02_how.html
Dixon, P. (2008). The Future of Outsourcing-Impact on Jobs. GlobalChange, 1-7.
Flatworldsolution. (2013). Flatworldsolution. Retrieved october 8, 2013, from Flatworldsolution
private LTD.: http://www.flatworldsolutions.com/articles/advantages-disadvantagesoutsourcing.php
Kiechel, W. (2010). The Lords of Strategy. Cambridge: Harvard Press.
StatisticBrain. (2011, July 20). StatisticBrain. Retrieved October 8, 2013, from Statistic Brain
website: http://www.statisticbrain.com/outsourcing-statistics-by-country/
Vonderembse, M., & White, G. (2013). Operations Management. San Diego: Bridgepoint
Education, Inc. .