The Concept Of Outsourcing Business Essay
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Published: Mon, 5 Dec 2016
Since the Industrial Revolution, companies have grappled with how they can exploit their competitive advantage to increase their markets and their profits. The model for most of the 20th century was a large integrated company that can “own, manage, and directly control” its assets. In the 1950s and 1960s, the rallying cry was diversification to broaden corporate bases and take advantage of economies of scale. By diversifying, companies expected to protect profits, even though expansion required multiple layers of management. Subsequently, organizations attempting to compete globally in the 1970s and 1980s were handicapped by a lack of agility that resulted from bloated management structures. To increase their flexibility and creativity, many large companies developed a new strategy of focusing on their core business, which required identifying critical processes and deciding which could be outsourced.
The idea of outsourcing is not new. It started way back in the 1700s when manufacturers started shifting the manufacture of goods to countries with cheaper labor during the Industrial Revolution, following the precepts of Adam Smith in his book ‘The Wealth of Nations’. The history of outsourcing to India is an interesting story. Even after over a decade of competitive global outsourcing, most of it still goes to India. Reaching this pinnacle in outsourcing has been a long journey. As land, sea, and later, air routes developed between the 15th and 21st centuries, more nations started to outsource trade to other nations, eventually leading to outsourcing to India and other nations.
TABLE OF CONTENT
ANALYSIS AND INTERPRETATION
RECOMMENDATIONS AND CONCLUSION
Concept of Outsourcing:
Outsourcing is an effective cost-saving strategy when used properly. It is sometimes more affordable to purchase a good from companies with comparative advantages than it is to produce the good internally. An example of a manufacturing company outsourcing would be Dell buying some of its computer components from another manufacturer in order to save on production costs. Alternatively, businesses may decide to outsource book-keeping duties to independent accounting firms, as it may be cheaper than retaining an in-house accountant.
Outsourcing is an allocation of specific business processes to a specialist external service provider. Most of the times an organization cannot handle all aspects of a business process internally. Additionally some processes are temporary and the organization does not intend to hire in-house professionals to perform the tasks. Once the task is outsourced to the service provider, he will take the responsibility of carrying out the tasks and maintaining the organization’s assets.
However prior to outsourcing any component of your business to a third-party vendor, it is essential to understand the advantages and disadvantages of outsourcing. Although outsourcing presents a variety of benefits to your organization, it could also pose difficulties if not outsourced to the right service provider.
The most commonly outsourced streams of business include:
Web Design and Maintenance
Reasons for Outsourcing in a Manufacturing Industry:
When most people think of the term outsourcing in regard to a manufacturing company, they immediately think of moving production out of the United States to another country or offshore outsourcing. Manufacturing companies have a myriad of reasons for outsourcing production, but the main impetus for deciding in favor of outsourcing usually boils down to one thing: cost reduction.
Part of any analysis for a manufacturing company deciding to outsource any of its operations includes the cost of labor. Labor remains one of the biggest costs of any manufacturing company. Having employees on the company payroll means paying them a competitive wage and, for most companies, it also means providing some form of employee health benefits. But outsourcing labor costs doesn’t always mean moving the production to another country. Companies can outsource labor simply by using workers from temporary agencies instead of having employees on the payroll. Benefits for the company that outsources its labor include the flexibility of increasing or decreasing staffing needs as required, a lower hourly wage paid to a temporary worker than that of a comparably skilled fulltime employee and less employee healthcare benefits expenses.
Many United State companies have outsourced their manufacturing to eliminate the overhead cost associated with operating a manufacturing facility stateside. These overhead costs include utilities, such as gas, electric and water, and the maintenance required to operate production equipment. Other overhead costs include indirect labor such as quality assurance personnel, equipment technicians, material handlers, and shipping and receiving personnel.
Some manufacturing companies have gained increased flexibility by outsourcing their production. Typically, production gets outsourced to a contract manufacturer, or a company that produces goods under the label or brand of another firm. Contract manufacturers might produce goods for two or more companies, and even for competitors within the same industry. Since the contract manufacturer has more production capacity (the ability to produce more goods) than the original manufacturing company, it can respond to increased production requirements faster than the original manufacturer. Instead of the original manufacturer making a capital investment in new equipment to increase its production capacity, it informs the contract manufacturer that it requires more goods. Although the requested increase (or decrease) in production might change the terms and costs associated with the original production contract, it’s more flexible than making a one-time capital investment that could sit idle if the increased demand diminishes.
Some companies have experienced extreme paradigm shifts that have prompted them to outsource their manufacturing. A company that realizes its core competency, the thing it does best, is the sales and marketing of its product and not the production of its product may often choose to outsource its non-core activity, or the manufacturing of its goods. With the production outsourced, the company can now focus its resources, both human and financial, on the areas that increase revenue and profit. Normally, outsourcing reduces manufacturing costs, so if the company increases its revenue through a better focus on sales and marketing; it increases its profit margin as well.
Pros & Cons Associated With Outsourcing the Manufacturing Industries:
Swiftness and Expertise: Most of the times tasks are outsourced to vendors who specialize in their field. The outsourced vendors also have specific equipment and technical expertise, most of the times better than the ones at the outsourcing organization. Effectively the tasks can be completed faster and with better quality output
Concentrating on core process rather than the supporting ones: Outsourcing the supporting processes gives the organization more time to strengthen their core business process.
Risk-sharing: one of the most crucial factors determining the outcome of a campaign is risk-analysis. Outsourcing certain components of your business process helps the organization to shift certain responsibilities to the outsourced vendor. Since the outsourced vendor is a specialist, they plan your risk-mitigating factors better.
Reduced Operational and Recruitment costs: Outsourcing eludes the need to hire individuals in-house; hence recruitment and operational costs can be minimized to a great extent. This is one of the prime advantages of offshore outsourcing.
Risk of exposing confidential data: When an organization outsources HR, Payroll and Recruitment services, it involves a risk if exposing confidential company information to a third-party.
Synchronizing the deliverables: In case you do not choose a right partner for outsourcing, some of the common problem areas include stretched delivery time frames, sub-standard quality output and inappropriate categorization of responsibilities. At times it is easier to regulate these factors inside an organization rather than with an outsourced partner.
Hidden costs: Although outsourcing most of the times is cost-effective at times the hidden costs involved in signing a contract while signing a contract across international boundaries may pose a serious threat.
Lack of customer focus: An outsourced vendor may be catering to the expertise-needs of multiple organizations at a time. In such situations vendors may lack complete focus on your organization’s tasks.
With all these pros and cons of outsourcing to be considered before actually approaching a service provider, it is always advisable to specifically determine the importance of the tasks which are to be outsourced. It is always beneficial for an organization to consider the advantages and disadvantages of off shoring before actually outsourcing it.
Amongst the processes involved in conducting a research, the choice of a research
method and design, probably, plays the most crucial role. According to knowledge base research design basically is the “glue that holds the research project together.” Without it, the researcher might try fixing the project but everything will eventually fall apart.
The methodology consists of a combination of primary and secondary research, each validating the other.
Continuous tracking of news, events and trends from all over the world. Data obtained are sorted and classified into various heads-industry, segment, company, etc. Information is continuously updated and maintained in templates.
Desk research using advanced search techniques. Continuous tracking is supplemented with subject-specific research including analysis from various sources, opinions, interviews and publications available on the topic.
Data is collated and analyzed dedicated to outsourcing and off shoring research. Considerable time and effort is spent on validating and authenticating findings. Company profiles presented in the report are based on published sources such as annual reports, company press releases, and news reports from reputed publications.
ANALYSIS & INTERPRETATION
Titan is the leading manufacturer of watches, clocks and jewelry. Started jointly by Questar Ltd, Tata Sons, Tata Press and Tamil Nadu Industrial Development Corporation in 1984 at Hosur to manufacture watches in collaboration with French company. Focused on cost reduction, as competitive advantage to improve operational profitability and Titan is the Market leader in India for watches. Many Challenges were faced by Titan, Post’ 1999 after the Government of India changed the EXIM policy as the market was open for many foreign competitors to enter in India and offer their products at a cheaper price than Titan. Titan zeroed on outsourcing as a competitive differentiator to reduce costs The Case discusses in detail about various outsourcing initiatives taken by Titan successfully.
Outsourcing refers to getting those things done by outside which were done internally. Outsourcing suggests that organizations focuses on few chosen core competence supported by long term outside partnership to do the rest. An organization can decide to outsource any of its day-to-day operations by analyzing and deciding a Make or Buy choice. Any “Buy” choice is an activity that can be outsourced. It’s as simple as doing it in-house and getting it done outside.
Earlier, the cost management in manufacturing was achieved by backward integration and gaining ownership of manufacturing facilities. When the competitive pressure started growing, Customers started demanding quick delivery, companies realized the need to optimize their operations and supply chain to reduce costs. This was one of the major factors manufacturing to choose outsourcing. For manufacturing it is easy to acquire new technology through outsourcing rather than investing in fixed overheads infrastructure. Outsourcing provides Plug-Play choice and provides option to terminate an operation that will not meet their business goals.
Outsourcing Decision Taken By Titan:
Till 1999 Titan was an undisputed leader in manufacturing watches, clocks and Jeweler in India. It had only one major competitor HMT (Hindustan Machinery and tools) but a weak one. In 1999, Government of India relaxed EXIM policy. This policy deals with Export and Imports goods. As per the new policy, the quantity limitation on importing components for making watches was removed. Also import duties were reduced.
This change in policy changed the entire business environment. Till now Titan through their world class manufacturing was able to maintain a cost leadership in India. However this change in policy caused competition from two sides of the market. First one is on the unorganized sector. As the components become cheaper and import quota limitation removed, the unorganized sector can sell watched at much lesser price than Titan by importing from countries like Hong Kong and Taiwan. On the second, new Exim Policy allowed multinational companies to come in and offer their line of products in India through heavy investments in marketing and lesser prices for their products. This was the major reason for Titan to look at outsourcing their manufacturing though they had world class manufacturing setup. Titan only focused on assembling and outsourced rest of all the manufacturing.
Moreover Titan’s over a period of time established strong dealer network across India and Marketing was their core strength. Outsourcing helped them free up capital from investing in machineries and directed them towards investing in marketing.
Operation Excellence and technology was no longer differentiator in the market place. Titan also realized they can import the components at a cheaper price and focus on creating Volume sales to maintain their leadership position
Finally rising employee costs were another important factor for Titan to turn towards outsourcing, as the employee costs alone was 11.2% of revenues in 2000. The above were the reasons for Titan to opt for Outsourcing their manufacturing functions.
Viability of an Outsourcing:
The viability of an outsourcing decision can be measured by the results that are being achieved after outsourcing the activities. These results can be categorized into cost savings, revenue and profitability increase, new products innovation and maintaining or improving company’s leadership position in the chosen market. By consistently achieving these results organization maintain the competitive advantage. Companies will be successful in outsourcing when they identify, improve and exploit their core strengths and choose the right outsourcing partner dependable on a long-term basis.
In the case of Titan, outsourcing helped itself reposition in the market by focusing on their core strengths and maintain their competitive advantage of offering best quality watches at lower prices to their customers in domestic and international markets. Outsourcing turned out to be a viable option and a source of competitive advantage for Titan.
FINDINGS & RECOMENDATIONS
The following are the facts and results that support the statement.
Titan through outsourcing was able to introduce two new products Dash, children watches and Fastrack aimed towards youth. These watches were priced at lower prices as the components were sourced at lowest prices from Hongkong and Taiwan. Titan only assembled them in their factory. If they had to manufacture these watches investment in machineries alone would have cost them Rs.2.5 MN. Titan was able to effectively avoid investments in fixed infrastructure and spend them on their core strength
Outsourcing offered them ability to get access to new technology for manufacturing Fastrack watches at a cheaper prices
Titan was also able to focus internally on improving their production efficiency to reduce the lead times on key operations which in turn helped in reducing cost of operation and improving productivity
Though international brands gave stiff competition in the premium watch segment, Titan still had market share of 75%.
These initiative helped Titan to become market leader with 25% market share of total domestic market by 2001. Titan also posted a profit Rs.2.5 MN. Titan was able to expand in new line of business like Tanishq.
Titan demonstrated that by effectively exploiting their core strengths and successfully outsourcing the rest was able to offer their customers wide variety of quality watches at an affordable prices. Thus Outsourcing helped in maintaining their competitive advantage.
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