Background
Offshoring is a mode of outsourcing that means that some of the operations of the firm are carried out in a foreign country. Outsourcing is done to reduce the cost of production and get the best talent in another country. Many companies from the United States are offshoring their services because they want to prevent certain activities in the country or to overcome government regulations. However, the main reason for offshoring is to reduce labor expenses. Feasibility study is hence carried out to evaluate the cost-effectiveness of this type of outsourcing because manufacturing firms or companies have however realized that the cost involved when off shoring cannot be justified. The three factors that that have made offshoring become a standard practice in the manufacturing sector is government regulations, extensive telecommunication and internet capacity and the need to tap skills and talents at a lower cost.
In this study, we shall analyze the supermarket chain wall mart that is one of the American companies that had offshored their manufacturing companies to China. Walmart took some of their manufacturing plants in China more than a decade ago. However, there are claims that Walmart is considering taking back the manufacturing plants back to America. The estimated value of manufacturing plants of Walmart in china is $50 billion hence for such a company to consider moving back there must be some underlying reasons that we would like to evaluate which are causing manufacturing firms from United States to move back. Is the labor cost advantage lost in the emerging and developing markets?. Analysts in the recent past suggest that these countries are no longer attractive as an offshore manufacturing destination.
Introduction
This Feasibility study shall examine the problems that manufacturing companies from the United States face and why the majority of these companies are considering moving back in the United States. The companies mostly offshore their production functions because they want to get cheaper supplies or raw materials which are readily available in these markets. However, due to rise in the cost of fuel in china and India the companies are reshoring their manufacturing plants. A decade ago American companies manufactured their products in China and other countries, but due to the rising wage over the year coupled with a lack of protection of intellectual property the companies are finding out that there are a lot of difficulty in these markets.
Some of the countries that have been used as offshoring destinations by United States manufacturing companies include china, India, Philippines, Ireland, Russia and Poland. All these offshoring destinations have all this factors in common; great talent and skills that are offered at a lower cost paralleled to the domestic rates, extensive telecommunication capacity and internet ubiquity which enabled companies to get work done seemingly anywhere. However, the regulations established by the governments of these countries vary which either favor or affects the uptake of foreign services. Taxes levied by the authorities of these countries increases the cost of carrying out business in the country. In India, the legislators made a law that that required an outsourcing firm to have a director from the country. Subsequently, this led to a reevaluation of the costs and benefits that is brought by offshoring.
Reasons for offshoring
Labor costs
In any manufacturing plant, labor takes a substantial cost of the budget set for the company. Offshoring means moving the manufacturing plant to another country so as to reduce the costs involved. Some of the reasons why work becomes costly are because one has to cater for the health benefits of the workers. Analysis is carried out by a production company when it wants to make a decision on how best to carry out its operations efficiently to reduce the costs of labor. The benefits of a company that makes the decision offshore to include increasing or decreasing employment as determined by how much they want to produce, this is also known as flexibility. Countries such as India, Philippines and Indonesia have a cost of labor that is far much less when equated to the cost of labor in America or any other developed country. A study carried out by research firm Synovate in 2012 shows that the average income in the developing countries where many manufacturing companies are carrying out their activities is 13% of the wages in the United States.
Overhead costs
Overhead is the indirect cost in involved in any manufacturing process. These overheads include the services, such as water, gas and electricity which are the utilities that enable the manufacturing plant to run. The other overhead costs include quality assurance personnel, material handlers, and equipment technicians and receiving personnel; all these are categorized as indirect labor. In the less developed countries, the indirect costs are significantly lower compared to developed countries such as the United States. In addition, the cost of services or utilities such as electricity and water in the developing countries is usually higher compared to the United States. In the analysis of the companies that offshore their activities we are going to see how these overhead costs affect the financial position of the manufacturing company.
Gain access to human resource that is unavailable in the country
When a production company makes a decision to offshore its plant to another country, it carries out a feasibility study on the labor market to determine whether the country can take the job needed. In china, there is a lot of talent when it comes to computer engineering and IT skills. This has led to scramble of talent in this country by manufacturing firms in the United States. For the companies that do not need a lot of skills in manufacturing they opt to train the natives on the job needed to be done. The companies also gain access to management expertise that may be lacking internally.
Focus
Manufacturing can take a lot of time for the company, but when a company takes some of its plants to another country; it focuses on the sales and marketing function. Subsequently, the energy is focused on increasing the sales of the products hence increasing its margin. In addition, offshoring of some of the business processes increases the market because it provides new markets in the countries that the country is operating in.
Source: http://www.statisticbrain.com/outsourcing-statistics-by-country
In the last few years, manufacturing companies in the United States that have their plants in other countries like China have been returning jobs back to America. A survey conducted by the Boston consulting group shows that many companies that had offshored they are manufactured to China are considering returning back home. Walmart is the company that we are going to analyze and see whether the company has enough grounds to suggest that it is cheaper for them to manufacture their products back at home
It has been established that operating plants represent a far much better options in terms of profit margins. According to a survey carried by Boston-based group, human resources mobility is a source of concern. It becomes impossible to relocate senior staff with their families in overseas destinies as Shanghai with its alarming levels of air pollution. The managers opt not to relocate to offshore plants for fear of contracting the environment related medical conditions.it necessitates the need to recruit additional local staff, further ballooning labor costs.
Secondly, there has been a paradigm shift in economics of manufacturing. The wages in Asia were previously low but it’s not the same case today. High level skills in Asian countries demand better pay and militant trade unions are agitating for better pay commensurate with rising cost of living. The situation has been exacerbated by rising oil prices that are essential in the production, as a result, of internal wars and external aggression in traditional producers of the commodity for instance Iraq.
The dynamics of migration of a significant segment of the Chinese population, mostly wealthy and educated has had an impact on American firms reshoring. In 2013, a survey carried out by a Boston and co. Indicated that approximately 30% wealthy Chinese are considering shipping out their assets to other countries or have done so, curiously to note that only 1 out of 10 people in China who do not want to move out. The Huron report continues to indicate that about 40% of the high net-worth-Chinese want to take their investments and families out of China.it raises a fundamental question for American firm, why take your money to where others are taking away?
The fourth reason has to do with technology costs. China has been a receipt of manufacturing technology over some time. It becomes easy to counterfeit the products at lower costs further dwindling the sales revenue in the international market. The weak intellectual property rights regulations have not helped in averting the counterfeiting of the original bands which cost more compared to the counterfeit. This necessitates the need to look for an environment that guarantees that safeguards against such. Furthermore, the host countries, with time have acquired foreign technology to create essential supply lines.
The competitiveness of foreign firms was largely due to the presence of strong partners in the offshores. A country like china was able to leverage the processing and mining earth minerals to entice manufacturers to the country.in such scenario, China increased its stake in the foreign firms with an adverse effect on the business, as most profits were ploughed back to the host country.it gets to the point where getting the labor supplies and parts are sourced locally at exorbitant prices. It necessitates the firms to cut ties with local partners to save cost.
There is the problem of compromised quality in offshoring.in developing countries the product may not meet the quality standards set by Parents Company. This may injure for the reputation and consequent impact sales. Characteristic of the developing countries, workers are underpaid and slackness in observing laid down procedures. The implication of environmental pollution means that it is doing more harm than good. With a global concern of environmental compensation for the polluting countries to reduce carbon emissions in developing, it becomes necessary to relocate to avert future costs.
The increasing foreign currency means that the offshoring firms have to spend more in doing business. The value of Chinese currency (RMB) has appreciated by 25% against the U.S dollar in 2010.This meant that goods produced in china were far more expensive when taken to other international markets. It has been established that American workers have proved to be more productive than their offshoring destination counterparts.
The growth of local industries has pushed the minimum wages up by raising competition for labor. In order to appeal and retain the best labor force firm have to increase the labor cost. The rising cost of land by virtue of appreciation means that overhead costs are increasing the cost of doing business. The international tax regimes may be unfavorable to the firm. This makes a company miss out on tax rebates and holidays afforded in their countries only to be slapped with more taxes in other countries.
In conclusion, offshoring does save costs. A study in India showed that outsourced lawyers saved approximately 50 us dollars per compared to employees to undertake a document review. The quality of labor being compromised means that it has an adverse consequence on the economy. The main benefit is cutting costs in terms of overheads, labor, transport and environment. The ideal is to have firms near the customers. This way we have lean and efficient firms to scrap the wastage and inefficient.it also helps in exercising controlling costs and ease in decision making to avoid offshoring. The rework and scrap rates are reduced; additional expense is avoided.
I would advocate selective offshoring of departments, to gain the best of both worlds. For the sake of keeping external markets and tapping in benefits accrued to the host countries. It is easier to control budgets and reduce wastage on this kind of arrangement. In case things go south, you will not make wholesale changes to improve profitability.
References
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