Management practices: Factors to Consider when Offshoring

Under some conditions, management practices can alter or be changed in order to improve organizational efficiency and productivity.

Various techniques are used at different times of the fiscal year. The notion of offshore is well explored in this work. The reasons for such an initiative are discussed, as well as the implications for the company. The report also discusses the benefits and drawbacks of implementing this method in organizations. This comes after an assessment of the importance of offshore to firms in both developed and developing countries. The paper seeks to provide insight into what the overall notion of organizational management comprises.

Offshoring

Offshoring refers the practice of acquiring products or services from another country or the act of relocating production to another country other than the current region of production. The term is at times confused with outsourcing, a term that is completely different in meaning. Outsourcing in itself is simply the process of contracting specialized employees in certain areas from other companies and recruiting them to complete a certain task. Offshoring mainly takes place between developed and developing countries. For instance, there are instances when companies based in the United States transfer production operations to developing nations in Africa. This has a positive impact both on the home country and the host economy.

Factors to Consider when Offshoring

To make a decision on whether or not to offshore its labor and other production resources to another country, there are some factors that have to be taken into account. To begin with, the company has to analyze the costs of the strategy. Production has to be able to meet the costs and produce profits to keep the company a going concern. A complete investment appraisal has to be done to ensure that the company is able to sustain its production operations. The second consideration is the location. While evaluating the host country, location is also an important factor when considering the company’s future investments. The target economy has to be equipped with amenities such as effective transport and communication networks to facilitate a smooth flow across the supply chain (International Business 2).

A risk assessment of the home economy also has to be taken into consideration. While analyzing risk levels, the company has to look into economic factors such as currency value, inflation rates and price levels. Political factors also have to be looked into and the relationship between the home and target country must be evaluated. This reduces investment risks by large margins before the decision is made on whether or not to proceed with the offshoring initiative. The other factor to be considered is the turnover rates. High employee turnover rates are likely to make the whole process flop. While deploying labor and other resources to another country, the management has to be certain of the sustainability of the whole process. Factors such as fair remuneration and effective compensation plans must be initiated to reduce possible employee turnovers. Finally, the management needs to determine whether there are skilled personnel and employees in the target region (Kehal and Varinder 121). Within its premises too, the company must possess qualified staff that is competent enough to drive all the production operations in the host economy.

Driving Factors to Offshoring

There are different reasons that make the management resort to offshoring initiative. Though not a new concept, offshoring has become more common the developed countries. The Following are some of the factors that lead to management resort to offshoring resources in production and manufacturing.

Globalization

Cuterela (138) defined globalization, from the business aspect, as the business practice that takes place irrespective of political and social boundaries. From this definition, trade barriers no longer pose a problem to the world economies from transacting business with each other. The emergence of Multinational Corporations (MNCs) has been the greatest achievement of globalization. Given the ability of countries to interact freely in commodity and financial markets, managers now believe that it is easier to offshore production factors. Due to international differences in production factor prices, the management evaluates different locations and opts for those economies in which the prices are least charged. This ensures that the production takes place at lower costs, leading to high profit margins.

Wage differences between countries such as the United States and China can lead to a workable offshoring strategy. Production factors such as labor and land are better priced in some economies. Since the main aim of any business entity is to maximize on the returns on its investment, the management considers these countries in which production prices might be lower.

Exogenous Factors

Elimination/ Reduction of trade barriers

With increasing diplomatic ties among developing and developed countries, most companies now opt to offshore most of their production operations. Given little or no trade barriers, the products are easily sold within the target country. This leads to high profits generated from operations (Gorg 27-28). Furthermore, the distances are reduced significantly by the company engaged in the production process.

Reduction in Transport Costs

The cost of international travels continues to reduce over the years. Faster transport has led to low taxation on international businesses and production operations. This encourages most companies in developed countries to invest in the developing states. Offshoring has become more pronounced in the 21st Century due to reduced costs of travel overseas.

Technological Shift

Technology acts as an enabling factor that facilitates smooth flow of operations in offshoring. Due to advancement in telecommunication technologies and virtual reality, companies can now coordinate operations remotely. Furthermore, the development of Web 2.0 Applications and Enterprise Resource Planning programs now enable effective management of operations across borders (Kehal and Varinder 181). This has led to speedy growth in the offshoring transactions.

Pros and Cons of Offshoring

Offshoring has both advantages and disadvantages both to the company and the economies involved. These are evaluated below.

Pros

Economies of Scale

By transferring its operations to another country, a company not only benefits from the costs involved in production but also practices economies of scale. The costs of other factors such as electric power, internet connectivity and rent might be cheaper in other countries. This leads to large scale production at reduced costs. Due to economies of large scale production, the company can make up to 70% cost savings.

Close Collaboration Regulation

There is an increased company control of the production and manufacturing processes due to closer physical engagement. Shared space collaboration supports effective monitoring of the tasks taking place in different ventures of the organization. The management is in direct interaction with all the branches and despite the distances, supervision can easily be done. This increases operational efficiencies.

Government Policies

Prior to concluding an offshoring decision, the management must compare different government policies. The final decision leads to an economy with supportive government policies that make it easier to transact business across borders. This raises revenue for the firm and maintains its financial position.

Cons

Cases of Unemployment

The strongest critics to offshoring strategy argue that it creates high unemployment rates to the local economy. For instance, companies like Nike and Caterpillar have been accused of taking jobs away from Americans in their offshoring strategies. This is so because these companies transfer most resources but source labor from the target economies. In such cases, the local economy is disadvantaged (Trefler 10).

Cultural and Social Differences

Despite the fact that all economic and political factors may be favorable to investment decisions regarding offshoring, cultural differences may hinder the lifespan of the strategy. Different countries have unique cultures and practices that may not favor the products or services produced by the company. The management has to consider evaluating all the cultural and social factors before venturing in a different country.

Conclusion

As a result of globalization and development of enabling factors such as technology, offshoring has become a common practice in the world. The agreement mainly exists between developed and developing countries since the production is cheaper in the latter. Despite the advantages and disadvantages associated with the initiative, most governments now strive to have favorable policies to encourage investment by developed countries into their economies. Offshoring, therefore, has become a common investment option adopted by most companies in developing countries. Most companies widen the scope of their operations by means of offshoring the production activities to developing nations.

Works Cited

Trefler, Daniel. Offshoring: Threats and Opportunities. Washington DC: Brookings Trade Forum. 2005. Web. Mar. 22, 2017.

Gorg, Holger. Globalization, offshoring and jobs. United States: WTO Publications. 2011. Web. Mar. 22, 2017.

Cuterela, Sandu. Globalization: Definition, Processes and Concepts. National Defense University. 2012. Web. Mar. 22, 2017.

Top of Form

Kehal, Harbhajan S, and Varinder P. Singh. Outsourcing and Offshoring in the 21st Century: A Socio-Economic Perspective. Hershey, Pa: Idea Group Pub, 2006. Print.

International Business. Offshoring. 2009. Web. Mar. 22, 2017.