Outsourcing Production to Cheap Labour Countries

In this remarkable report, we will be investigating the reasoning in why some firms tend differentiate from their competitors by outsourcing to alternative countries such as Europe, Rather then the general practice of outsourcing to low-cost Asian countries due to their cheap labour costs. In addition, we will be looking at the various factors which are involved within a Supply Chain and how firms operate. Outsourcing doesn’t have a definitive definition but can be viewed as contracting out a business function, which is usually processed internally to an external source (Overby, 2007). We will be using Cousins (2008) book on Strategic Supply Management and other various resources to provide theoretical insights in dealing with this matter.

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What is Supply Chain Management?
Supply Chain Management or known as the acronym of (SCM) is a procedure that companies utilise to ensure that their supply chain is proficient and cost-effective. In addition, SCM is the supervision of various firms involved in the stipulation of manufactured goods and services required by the end consumers (Harland, 1996). Furthermore it is a systematic strategy devised for business functions within a company and the companies within the supply chain in order to boost effectiveness of the companies and the supply chain (Mentzer et al, 2001). One of the numerous reasons why companies have a keen interest in SCM is that companies find themselves heavily reliant upon having effective supply chains in order to compete in the midst of global economic market (Lambert, 2008).
Ultimately the role of SCM is to increase profitability by adding value thus creating efficiencies which will translate to customer contentment (Stock and Boyer, 2009). Enhancement of supply chain will result to the cost decreasing, lower inventory levels, lead times, uncertainties and improved performance resulting to superior products ensuing to greater customer service (Fisher, 1997).In contrast, the benefits of SCM has been questioned by theorist concerning the lack of pragmatic research regarding the benefits allocated to SCM ( Stock et al,2010). Lamming et al. (2000) had stated prior research on SCM has been primarily focused on the automobile industry, whereas in other industries the networks vary in nature providing no theoretical basis for other managers to implement into their companies. This can be regarded in basis of why firms tend to outsource to alternative countries in order to best meet their strategy.
The make-buy decision
Several researchers of market and firms as Coase (1937) and Williamson (1971) have analyzed whether companies should make or buy their products. The make-buy decision revolves around companies choosing between manufacturing goods in-house, or purchasing from an external provider. The two most significant factors to regard are cost and availability of producing capacity. Firms decide whether to outsource or not, depending on the additional value of the process, as firms could be more efficient if they assign their limited resources to their core activities strengthening their competitive advantage (Barney, 1991).
The choice of producing or buying of products depends on various obstacles that a firm may face. This can be uncertainty or juxtaposing information of the market transactions that lead to incentives to act opportunistically (Williamson, 1975). Research has shown that firms lean to manufacture the origins of their competitive advantage via focusing on their core competencies and outsource the non-value-added competencies (Quinn & Hilmer, 1994). For example, Porsche would rather not make their car tires and outsource them to established brands which specialise in tires such as Bridgestone. This is because Porsche has no expertise in tire manufacturing and would be rather expensive making their own.
Buying & Making each have their own personal benefits and weaknesses, as Buying would give the firms the power to negotiate competitive bids from suppliers, and utilize another firm’s expertise. In contrast buying can result to increase of costs in activities such as searching for right suppliers, monitoring suppliers or suppliers disappointing. Whereas, Making will reduce costs for activities such as monitoring quality or legal contracts due to full control. Firms however do face the problem of costs and not particularly being an expert in a particular field.
The reasoning why Zara chose to outsource in the Europe is due to their strategic alignment. Zara’s production is primarily 80% in the Europe, 50% of which is in Spain due to their headquarters being near. With strategic agreements in place with local manufactures, they can ensure timely delivery and service. This strategic and local partnership will enable Zara to maintain flexibility and produce vast new items annually meeting their strategy and consumer demand.
Sourcing strategies and supply chain configurations
Preceding the consideration to outsource, firms must establish a sourcing strategy. Sourcing strategy is an arrangement to see which part of the firm is best to outsource. Outsourcing allows companies to focus on their core activities (Gilley and Rasheed, 2000). Successful sourcing strategy will need detailed understanding of the firm’s business strategy and what is needed for purchasing. Which can be further understood via Kraljic (1983) purchasing model. Purchasing costs have risen and count for majority of the costs covering the goods (Gadde and Hakansson, 1998). It is important due to that “In many firms, the value of purchased materials, components, and systems accounts for 50-80 percent of the total cost of goods sold” (Cammish and Keough, 1991, p. 23). Therefore this strategic interest in purchasing has a significant importance in a firms total cost and potential profit.
It can be said that the sourcing strategies of retail clothing has altered from a production-driven to market-driven apparel manufacturing (Taplin, 1999). Firms make various decisive sourcing strategies which involve firms which purchase items routinely because of its low value/cost and low supply & technical risk. In addition, firms which seek the best deal ensure buyer power instead of supplier power, and a strategy used for cost reduction. Furthermore firms which opt into a high risk/high on impact for the business, this is usually an important product in the buyers business.
Supply chain configuration is complex procedure in SCM where decision making and problem solving is part of the process to make the supply chain effective as possible. Firms must alter their supply chain in order to suit the changing political, economical and technological developments. Supply chain configuration is effective to deal with differentiation and customisation within a supply chain (Yan et al. 2003) consequently able to cater specific supply chains according to the diverse customer requirements. Similarly to Zara’s strategy in clothing, is according to the seasons and customer interest in fashion.
Strategic supplier selection
One of the crucial aspects in SCM is to establish a flow of products or materials from various suppliers in order to meet customer demands. In today’s increase of customer expectations, enforcement of new regulations, global economical turndown and fierce competition it is paramount for firms to sustain core suppliers in order to survive. Strategic Supplier selection and evaluation plays a vital function of purchasing and supply management functions (England and Leenders, 1975, Lewis, 1943). Weber et al (1991) states that, “it is impossible to successfully produce low cost, high quality products without satisfactory selection and maintenance of a competent group of suppliers”.
In supplementary , Kumara et al (2003) states that “strategic partnership with right suppliers must be integrated within the supply chain in order to contain costs by eliminating waste, improving quality, improving flexibility to meet end-customers’ value expectation, and reducing lead time at different stage of the supply chain.” The need to select the most excellent supplier is an important strategic choice for supply chain efficiency (Kumara et al, 2003). In extension it is a strategy to boost the competiveness of the supply chain (Lee et al, 2001).
Aligning supply with corporate strategy
Aligning supply with corporate strategy will amplify income, reduce costs and increase a firm’s competitive stance. It can also help firms gain market share by the use of IT, as this can go about increasing competitive advantage by maximising the value of information technology (Pappp,2004) This will enable appropriate changes that can be made according to the diverse customer needs. It can be further understood by the ‘Strategic Alignment Model’ which can determine to which extent the company should be aligned (Henderson and Venkatraman, 1990) this is done to align the weak areas within a firm by continued analysis of management.
Benefits of alignment will enable higher rate of fulfilling customer requirements, ability to control costs, aligning inventory for tailored needs and having clear effective goals and standardised processes thus meeting customer demand effectively and concisely.
Aligning supply with corporate strategy certifies customer needs, firm’s operational strategy and capabilities. It helps firms understand the culture and leadership style within its organisation. Alignment brings much potential and prospective as it can reduce delays and errors saving time (Henderson and Venkatraman, 1990). Furthermore it establishes greater competitive advantage to the organisation in the marketplace (Henderson & Venkatraman, 1990).
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