Outsourcing Decision Making: A Case Study Of Nike

Literature Review

The report gives an overview of outsourcing of a US based Sportswear giant Nike (nike.com 2018). The company outsources the production of footwear to the various manufacturing plants across the world. China however has the largest share of manufacturing plants. However, Nike also has manufacturing plants in South Korea, Thailand, India and Vietnam. Offshore outsourcing is viewed as the key tool in reducing cost. The key advantages lie in reducing the project timelines and ensure savings due to lower cost of labor. Nevertheless, the internal and the external factors for outsourcing lay in achieving the economies of production, development of manufacturing process and technological advances, improvement in the customer-service delivery process, improvement and focus on the areas of core competency and lack of qualified and trained work force.

According to Adrian and Alexandru (2012), the outsourcing concept is derived from the term ‘outside resourcing’ that focused on deriving resources from outside. The decision to outsource indicated the use of the external resources for developing business. They also stated that transfer of material and the human resources for chosen provider accompanies outsourcing. It also included the task of substituting the domestic service in the long term and medium relationship with the enterprise of the customers. Outsourcing is viewed as the future trend that ensures benefit to the partners but there exists voices that question the impacts of the phenomenon. In recent times, there has been much focus on the strategy of outsourcing.

According to Adeleye (2011), the past two decades have increasingly turned into outsourcing that referred to the externalization of the work activities initially performed in house. The decision for outsourcing was made for enhancing the competitiveness and improving the business performance and operations. In the year 2010, according to Canadian research and advisory firm, global outsourcing helped in generating close to US$ 425 billion. There have also been substantial changes in the employment from traditional distinct employer model towards the more complicated inter-organizational employment that comprised of the multiple employers, clients and the suppliers.

David (2015) stated there have been many discussions about outsourcing in the past couple of years. The history of the outsourcing remains embedded in history of growth in Modern Business Enterprise that sprang in the second half of 19^th century. However, the 20^th century has brought about a huge leap in the communications and the technological innovation. With the initiation of third generation the industry embraced process and offshore outsourcing. Globalization has made the free trade economies increasingly complex and difficult in managing. The decision for outsourcing remained in the maintenance of the support task of the local suppliers. This not only helps in cutting down the cost but also helped the companies’ in making better use of the localized domain knowledge.

Another industry report mentioned that IBM for example entered into $5 billion manufacturing outsourcing with Sanmina- SCI Corporation that is solely a manufacturer of electronics contract (Bulkeley, 2013). Here financial reasons justify the outsourcing but the decision for outsourcing although agreement supported the sole business strategy at both the companies. Outsourcing has focused on the nonessential tactical activities such as manned stations for security and the payroll processing. In recent times the strategic operations encompass the core activities such as logistics and manufacturing that impacts the business if not performed well. However, the best of the companies pursues it as the critical revaluation of the positions along the value chains of the industry aimed at improving the state of finances in business.

Analysis

This is to note that most of the manufacturing companies have various reasons for outsourcing its production however the key impetus lies of the decision to outsource boils down to the reduction in the cost. In fact there are various key benefits that can be derived from shifting the production for manufacturing components or the entire product in an offshore location. The key reasons for the offshore manufacturing have been the cost (Tate et al. 2014). However, by outsourcing the expensive process and the other assembles during the process of manufacturing it has been possible for dramatically reduce the production cost and thereby pass on the savings to the customers. Although, offshore manufacture will cut down cost but should never compromise on the quality of the engineering and the proper inspection of the products before overseas shipment. It is thus necessary for developing a process for inspecting each of the assemblies and the manufactured product for ensuring consistence maintenance of quality.

The long term impact of the outsourcing decision result in the loss of the US jobs thereby benefiting the less developed nations that outweighs the cost of the rich countries of United States (Dolgui & Proth, 2013).  In other words, outsourcing leads to higher wages and enhanced job opportunities in the developing countries where the US outsources. As the outsourced products remains cheaper in the offshore factories therefore sometimes priority is assigned to quantity not quality. The workers might have to produce huge quantity of products on an hourly basis on a particular day which might cause the quality to immensely suffer. As far as sales and profit are concerned the decision for outsourcing enhances the profits and sales of the products. Profitability increases since US based firm Nike chooses to outsource to a specific country with low cost of labor (Bertrand & Mol, 2013). Outsourcing also enhances the reputation by contributing to an increase in the economic efficiency. Proponents puts forward that this can be done by the distribution of the task to the people having appropriate skill level for doing the task thereby allowing these laborers in becoming more productive.

The recommended strategies for moving company towards improvement at each measures of success are as follows:

• By Outsourcing the Right Activities: The choice of activity to outsource represents a key step in offshore outsourcing. It is important to not give up the competitive advantage of the company (Schniederjans, Schniederjans & Schniederjans, 2015). It is very important in retaining control over the aspects that makes the business unique. In case Nike is a leader in price, it is important to not outsource it. In other words, it is vital for not changing the parts of the company that receives most appreciation. Besides, it is also important to avoid outsourcing the areas that directly impacts the customers.
• Through Consideration of all the Outsourcing Cost:Maintenance of outsourcing relationship has its own costs. For instance, choice of the appropriate vendor might not only incur fees but also involves other sources. Besides, negotiation and drawing contract of some of the instances carries legal fees and travel cost.
• By Choosing the Right Help: Many factors needed to be considered while making a choice to begin a business relationship. Great price and quality product are the decision making factors but there are other factors also that holds immense importance. These factors include location, flexibility, experience, language, tax laws or the cultural barriers.
• By Maintaining Control over the Outsourced Components:It is vital for remaining in touch with elements of the business while outsourcing (Gunasekaran et al., 2015). The ideal way of doing it is having staffs whose key responsibility lies in overseeing relationships. Such employees should be the skilled managers who well understands the corporate vision and monitors the outsourced activities.

Conclusion: 

On a concluding note, it can be said that outsourcing represents a greater option in making the work process easier in handling. People working in the local company choose in outsourcing work so that they are capable of focusing on the core process of the business. Through the report, one can understand that benefits of outsourcing are quite substantial which ranges from the cost savings and the efficiency gains in delivering higher competitive advantage. The recommended solutions however enables in incorporating outsourcing decision into successful corporate strategy for implementation and sustainability.

References:

Adeleye, I. (2011). The Impact of Outsourcing on Business Performance: Insights for Employers. Human Resource Management Journal, 3(1), pp.26 – 44.

Adrian, V. and Alexandru, D. 2012. Outsourcing. The Concept. Theoretical and Applied Economics, 19(6), pp.51-58.

Bertrand, O., & Mol, M. J. (2013). The antecedents and innovation effects of domestic and offshore R&D outsourcing: The contingent impact of cognitive distance and absorptive capacity. Strategic Management Journal, 34(6), 751-760.

Bulkeley, W. (2013). IBM Sets Big Outsourcing Pact For Servers With Sanmina-SCI. [online] Available at: https://www.wsj.com/articles/SB1041953625288806544 [Accessed 9 Dec. 2018].

David, H. (2015). Why are there still so many jobs? The history and future of workplace automation. Journal of Economic Perspectives, 29(3), 3-30.

Dolgui, A., & Proth, J. M. (2013). Outsourcing: definitions and analysis. International Journal of Production Research, 51(23-24), 6769-6777.

Gunasekaran, A., Irani, Z., Choy, K.L., Filippi, L. and Papadopoulos, T., 2015. Performance measures and metrics in outsourcing decisions: A review for research and applications. International Journal of Production Economics, 161, pp.153-166.

nike.com 2018. [online] Available at: https://about.nike.com/ [Accessed 9 Dec. 2018].

Schniederjans, M. J., Schniederjans, A. M., & Schniederjans, D. G. (2015). Outsourcing and insourcing in an international context. Routledge.

Tate, W. L., Ellram, L. M., Schoenherr, T., & Petersen, K. J. (2014). Global competitive conditions driving the manufacturing location decision. Business Horizons, 57(3), 381-390.