Outsourcing often refers to the practice of acquiring certain products or services that used to be produced internally by companies. Although outsourcing some of the business functions is possible both within a home country and abroad, the term outsourcing usually refers to the international sourcing of products and services. The phenomenon has gained rapid development in the end of the 90s and continues to develop in the XXI century. It is further facilitated by improvements in technology and communication that reduce uncertainty and help to manage complex outsourcing relationships.
One of the most commonly outsourced functions is basic manufacturing, which is often labour-intensive and does not require expensive technology or sophisticated knowledge and skills. It is usually transferred to the countries with lower labour costs and more favourable business environment. The main benefit of outsourcing is cost reduction. While originally lower costs allowed companies to distinguish themselves from their competition, today it is more of a hygiene factor in many industries and the only way companies can meet cost pressure. Cost reduction is not only derived from lower labour costs, but also less strict laws and more favourable tax environment. Moreover, outsourcing allows companies to focus on their core competencies and to improve other areas of their business, such as marketing activities, which add more value to the company than manufacturing.
However, despite the apparent benefits of manufacturing outsourcing, the decision to outsource is associated with a number of disadvantages. Firstly, it leads to a partial loss of control over manufacturing processes, thus limiting the ability to react to market demand fast enough and to implement lean manufacturing techniques. This is further aggravated by the physical and cultural distances in case of international outsourcing. Secondly, outsourcing may lead to the loss of knowhow and limit quality control.
In general, outsourcing relationships have both positive and negative effect on the organization and it is necessary to conduct a deep cost-benefit analysis before undertaking outsourcing activities in the organization.
