Benefits and downsizes of building manufacturing operations outside the US (OUS)
IntroductionIn today's global business environment, companies must be prepared to change many aspects of their business operation for the purpose of achieving competitive advantage in the global market. These changes are necessary, as they align the company's operations with the moving of the global economy and represent a foundation for the company's global sustainability.
An important area of these changes is the choice for geographic locations or dislocations used in the manufacturing process. The following paper represents an attempt to identify the benefits, as well as downsizes, that are associated with locating manufacturing and/or production in other countries (Hill, 2011). Specifically, this paper will focus on the advantages and disadvantages related to companies originating from the US.
Benefits of building manufacturing operations outside the US
There are several benefits for companies of American origin that are related with their moving of manufacturing facilities outside of the USA. In general, these benefits can be categorized in 5 distinctive groups, based on the factors that enable these benefits. These five groups are related to labor costs, environmental regulations, access to raw materials or components, proximity to customers and tax benefits (Koslow, 2012, p. 202-208). A brief description of each is given in the following section.
Labor costs. The cost of labor is one of the most important reasons for moving operations abroad. However, this is a complex factor that is dependent on several others that have to be taken into consideration when calculating this cost. These include, but are not limited to the amount of available work force that is skilled enough, the level of productivity and the expected rate of inflation of wages. The first one is especially important, as regions with large population don't always produce the expected or desired skills, which means that work force training must be taken into account (French, 2006, p. 9-15).
Environmental regulations: This is also a factor of considerable significance, especially in recent years, which is mostly due to raising environmental conscience in various, particularly in developed, countries. Such conscience has impacted the manufacturing or production processes of almost every business and industry, as there is seldom a manufacturing facility which is not associated with some level of impact to the environment (Jenkins, Barton, Bartzokas, Hesselberg, Knutsen, 2002, p. 157-173). Due to these reasons, moving the manufacturing facilities to other countries have none, or very little regulations regarding the environment and its protection can significantly influence the cost of manufacturing in general.
Access to raw materials or components: Although this factor cannot be measured against the previous two stated in terms of significance, it still represents a portion of the total manufacturing cost that cannot be neglected. Indeed, locating the manufacturing facility in a location where raw materials can be cost effectively provided, can reduce the overall costs in terms of import and transport.
Proximity to customers: The costs of the supply chain can be significantly diminished if the target market is close to the manufacturing or the production facility (Hill, 2011). This is one of the most important reasons why foreign companies move to the USA for example, and it is an important reason for US companies to move outside, especially when that "outside" refers to a large and emerging market, such as China, India or Brazil, for example.
Tax benefits: This is a also a complex factor, but many companies take it into consideration when moving to other locations. In fact, if the company operates on more locations, it has as many opportunities to lower the burden of overall taxing (Koslow, 2012, p. 202-208).
As was already mentioned, these are not the only benefits that the company can achieve if moving its manufacturing facilities outside of the country of origin. The retention of full control over the production and the quality of products is certainly one that also has a great importance (Cherunilam, 2010, p. 502-515). However, although the list of advantages is long, all the previously stated leads to a conclusion that most of the reasons for moving operations abroad is to achieve lower cost of products, and this is one of the two main factors, along with differentiation, that ensures competitive advantage of the company (De Toni, 2011, p. 35-40).
Downsizes of building manufacturing operations outside the US
According to Cherunilam, the downsizes or disadvantages of moving manufacturing operations outside the country of origin can be numerous and seriously affect the sustainability of the company. Among the factors that are considered to be the most significant downsizers are restrictions on certain technology, lack of skilled work force, production stalls due to problems in the country's infrastructure (Cherunilam, 2010, p.502-515). The possibilities of change in the currency, various political issues, the enhanced logistic costs, increase of the management complexity and other issues also present serious risks for the facility placed in another location.
Application of global management operations in practice
In order to furthermore analyze the benefits and downsizes of moving manufacturing operations abroad, a successful US company has been examined. Nike has been chosen as a global market leader and a company that has successfully retained its competitive advantage in a striving global environment for many years.
Nike is the biggest world producer of athletic footwear, sports equipment and apparel. It employs over 28,000 people and is present in over 160 countries over the globe. In addition, it has more than 770,000 workers in factories contracted by Nike in 49 different countries. The success story of Nike shows that the benefits of moving manufacturing abroad can be substantial. Nike began its path to success with manufacturing in Japan in the middle of the 19 century. When the costs in Japan grew around the 1970s, Nike moved the manufacturing to Korea and Taiwan. When these countries started to grow economically, which led to rising of costs, Nike moved again, and to developing countries such as Indonesia, Vietnam, China, and Thailand. This strategic movement is aligned with the theory stating that low cost is one of the two factors that ensures competitive advantage (Youssefi, 2008, p. 1-9).
Although the company faced much turbulence in its history, a number of which related to labor issues in their overseas facilities, it has successfully managed to overcome these problems, and this was done by the use of strategic planning of global operations. The labor issues raised in the company often originated from factors such as those that were mentioned above - different cultures, religions, behaviors, different social, economic and political conditions in the countries of operations, different political and legal systems (Youssefi, 2008, p. 1-9).
All of these issues have led the company to invest a serious effort and resources into changing its global operations with the purpose of overcoming the problems that were threatening the company. In light with this strategic approach in management of operations, Nike has undertaken a number of actions on a global scale and these actions included for example the implementation of the company's Code of conduct, the implementation of United Nations Global Compact Ten Principles and etc. This clearly indicates the role of the global management of operations and its effect on the business in general (Youssefi, 2008, p. 1-9).
Deciding to move manufacturing operations abroad
When a company is making a decision of whether or not to build manufacturing facilities outside of the US, it must carefully analyze all of the benefits and downsizes listed above, and try to measure the ones against the others from the perspective of one overall objective - maximization of the return for the shareholders. This analysis is comprehensive and must be conducted in detail, as it takes into consideration many different aspects regarding the newly chosen territories. Many questions must be answered by the company prior to making the decision, which must be based upon the answers of these questions. Some of those questions are given as follows:
- Are you familiar with the cultural and language barriers of the country of choice (these include variations in traditions, beliefs, religion, behavior etc.)?
-How will these differences and/or barriers influence you business?
- Are there economic issues that might influence the business and how?
- Are there political issues that might influence the business and how (political instability)?
- Are there legal issues that might influence the business and how (any specific laws and regulations that need to be taken into consideration, the extent to which the legal system is developed etc.)?
- Have you conducted market analysis in terms of operation setup and cost of production (are there skilled workers, what are their wages, how developed is the infrastructure of the country and how it will affect the supply chain, where are the products to be marketed, what are the logistic costs etc)?
-How complex will it be to manage the manufacturing facility and how it will be conducted?
- Has a model of market entry been chosen and if so, why that model?
Although this list is far from being complete, it shows some general guidelines that are to be used when making the decision of whether or not to build a manufacturing facility abroad.
References
Cherunilam, F. (2010). International business: text and cases, Wheeler Publishing, p. 502-515
De Toni, A. (2011). International operations management: lessons in global business. Gower Publishing Ltd., p. 35-40
French, R. (2006). Driven abroad: the outsourcing of America, RDR Books. p. 9 -15
Hill, C. (2011). Global Business Today. 7th ed. McGraw Hill
Jenkins, R., Barton, J., Bartzokas, A., Hesselberg, J., and Knutsen, H. (2002). Environmental regulations in the new global economy: the impact on industry and competitiveness. Edward Elgar Publishing. p. 157-173
Koslow, L. (2012). Business abroad, Routledge. p. 202-208
Youssefi, P. (2008). Nike | Generation III, Harvard University, 1-9. Retrieved from http://www.unglobalcompact.org/docs/issues_doc/human_rights/Business_Practices/Nike%20complete_EHRBP%20II.pdf
