Outsourcing as a Globalization Strategy
Outsourcing as a Globalization Strategy
A lot of factors have influenced the ever-increasing pressures that resulted to intense competition in the global manufacturing industry. New trends in the business operations strategies, more interactive business relations among different market players as well as the customers’ increased involvement in maintaining the quality of products and services continue to demand efficient and productive measures among contract manufacturers and service providers.
The business, in order to effectively execute any business strategy or plan, should be able to determine first and identify the resources that are available in the company (, 2002). Studying and examining the opportunities of the available resources will help in constructing a business plan which will be profitable. The characteristics of the business should be clearly laid out and the ideas that will be made available should be thoroughly researched (2002). This will provide relevant information that the general management can utilise so as to be able to allocate the funds of the company in the most effective way. If the company knows the nature of the business, the further steps in formulating strategic business plan will be easier.
Manufacturing companies were able to answer and meet the specifications of their customer base by utilising the current technological advancements in the past decades. Innovations in computer features, networking strategies, and telecommunication products facilitated business organisations to invest on market researches, company development, and effective re-engineering measures to create quality products and provide efficient services. As a result, outsourcing strategies have been widely accepted in order to reduce expenses, improve productivity, operations management, and delivery, and concentrate on upgrading the company’s technological expertise.
The role of Contract Manufacturers (CM) in providing the needs of partner organizations have resulted to more sophisticated electronics parts that improved the quality of electronic products that are made available in the market. Their different designs and distributions services enable improvements among industries that practice outsourcing in delivering the demands of the consumer population. As such, maintaining the success of outsourcing entails continuous dedication in developing efficient and effective delivery options and business relations through proactive as well as improved information, operations, and supply chain management initiatives.
In this paper, it is interesting to know how big business organizations which depend highly on efficient delivery and distribution procedures gain their success in the competitive market environment by examining the strategic implications of outsourcing as well as the benefits and costs of such business strategy.
In the traditional supply chain management used by business organisations, a lot of people, time and money are invested upon to ensure that the demands of the consumers will be handled in the specified date and time required (, 2002). Before being able to place an order of shipment of products and even services, several transactions are consulted between the product supplier or the service provider to meet the demands of the consumers and clients.
The supply flow normally includes the intention of order, quotation, confirmation, delivery, payment and handling of receipts (, 2001). Normally, great amount of time is consumed in the mere planning of the purchase orders of a particular business company. And since most of the time the transactions involve not only a single client or customer, especially in the case of huge product and service providers, business establishments need to deal with sub-suppliers with several forwarders from which a number of consolidations are exchanged (, 2001). As such the workload and time that the inventory managers handle defines the proceeding business processes that follow and thus, predict and maintain the success and profit of the whole business organisation.
In this regard, Supply Chain Management (SCM) has become a key strategic initiative for companies to improving service and reducing costs in order to remain competitive in today’s global economy (, 1998). SCM is business strategy focusing on the quick response to ever-changing market needs and shortened purchasing lead time, also adds value to increasingly demanding customers at the least cost and time (2002). Today, we cannot rely on a single party to fulfill the sophisticated needs of customers; we need a total commitment and full collaboration, integration and synchronisation among all business partners (1999).
The Model of Continuous Improvement offers a lead on how to manage a business enterprise especially those operating in the international business environment. It highlights the relationship between the tools or resources of a particular business organisation with the people working in the company and the systems that that the company employ in processing their transactions. The concept of culture, communication and commitment is given importance in overall and continuous improvement of a business firm (, 2004). These concepts should be inculcated and learned by the members of the company so as to ensure that the business will run smoothly to improve the business organisation in the midst of industrial change.
Almost all industries have been undergoing continuous explosion in products, technologies and dynamic customer requirements. This fierce global competition has resulted in the decision by many OEMs to outsource manufacturing in order to concentrate on R&D, marketing, and sales. Since the Industrial Revolution, companies have grappled with how they can exploit their competitive advantage to increase their markets and their profits (1996). 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, organisations attempting to compete globally in the 1970s and 1980s were handicapped by a lack of agility that resulted from bloated management structures (1996).
However, most organisations were not totally self sufficient; they outsourced those functions for which they had no competency internally. Publishers, for example, have often purchased composition, printing, and fulfillment services. The use of external suppliers for these essential but ancillary services might be termed the baseline stage in the evolution of outsourcing. The main business purpose for outsourcing is to enhance the value of an organization’s offerings to its customers. (1996) calls this “smart” outsourcing, which indicates a careful selection of functions to be outsourced based on strategic decisions.
(2001) presented a study evaluating the implications of 50 supplier-manufacturer relationships in the area of product development. There were three new product development projects which were utilised for the analysis of the inter-organisational relationships. The contributions of both parties were analysed focusing on the products’ (a) design scope or the types of problem-solving activities used, as well as the (b) level of task interdependency or effects of the interaction between the manufacturer and the supplier to the product innovation practices. The results of the study indicated that the success of their relationship is highly dictated by the distribution of tasks and the type of problem-solving approaches as well as their continuous coordination during the entire project. It was emphasised that resolving the differences between the suppliers and the manufacturers likewise contributed to the positive performance outcomes of the relationships through the exchange of efficient short-term business strategies and long-term dedication to learning enhancement.
Meanwhile, (1999) conducted a study on international procurement focusing on the significance of technological uncertainty in developing supplier assurances and structuring supply relationships in the Pacific Rim global organisations. The findings of their study indicated that mutual commitment to business relationship among suppliers and manufacturers/buyers can lead to increased level of mutual dependence of both partners. Moreover, since the relationship-specific investments among suppliers are reciprocated by buyers through shared information, learning and market adaptation are enhanced. As such, uncertainty contributes to the generated gains and advantages on the supplier side through cooperation so as to provide flexible, continuous and stable business relationship assurances. They learned that suppliers adapt demand-stabilising strategies to establish business relations as a result of technological uncertainty among manufacturers/buyers while dependence-balancing strategies are reinforced in high competitive market industry. In relation to this, , (2002) looked into the relationship of environmental volatility with opportunism in cross-cultural interfirm relations. They highlighted the importance of cultural sensitivity in cultivating commitment which is relevant in establishing cross-border business relationships. They identified and examined the driving forces of upholding commitment in the international business operations as well as its implications and influences to the business’ performance in a year’s time.
In this regard, companies employ detailed business plans and strategies in order to gain several benefits from its competitors such as increased profits and enhanced customer relations as company objectives. The application of strategies directed towards the achievement of these objectives naturally requires the allocation of financial resources. However, while the company is capable of providing a budget, the outcomes should be able to recover these allocations in order to prevent capital losses. Thus, the company should employ strategies and create objectives that are compatible to the capacity of the company and what it intends to achieve.
In the electronics industry, increased market competition identifies continuous adjustment and improvement in the production lines, outsourcing and supply chain management of companies. Interdependence and participation of suppliers and manufacturers in product design, innovation, as well as research and development characterise the current international business environment resulting to market volatility (, 2001;, 2002; 2003). In response to the increasing price pressure and competition due to market volatility, original equipment manufacturers (OEMs) turned to outsourcing practices to electronic manufacturing service (EMS) providers (2004) as contract manufacturing grew offering design, assembly, and test services (, 2001). The high cost of acquiring leading-edge, technology-based equipment and an accompanying highly skilled research and labor force makes contract manufacturing a highly attractive alternative for many companies (, 1998;, 2004).
These organisations usually share proprietary corporate data with external suppliers and partners while ensuring maximum security to enhance efficiency across the product lifecycle by streamlining procurement, production, fulfillment, and distribution processes (, 2001;, 2002; 2003) which requires integration of applications and data across multiple geographically dispersed supply chain partners, as well as internal integration with legacy systems (2002; 2003). This trend is the result of OEMs focusing on their own core competencies such as research and development (R&D), or marketing (, 2002) while outsourcing manufacturing to EMS providers who can perform and deliver the service better, cheaper and faster (, 2000;, 2002).
The commissioned research activity by (International) Ltd, Hong Kong Ltd and Ltd (2004) regarding the initiatives of electronics companies in Hong Kong to shift from being OEM to ODM investigated the use of knowledge management tools that enhance electronics manufacturers’ product design capabilities and speed up ODM developments. The research activity found out that (1) pro-active selling and higher profit margins are major driving forces for developing ODM business; (2) marketing knowledge and intuition were critical success factors when shifting from OEM to ODM; (3) difficulty of identifying market need was the major barrier for company transform from OEM to ODM; (4) there is no absolute single roadmap that leads to ODM; (5) project-based product development team structure is most common; and (6) most innovations were generated from customers’ or suppliers’ ideas.
According to (2002.) electronics manufacturing services (EMS) providers are facing the dual challenges of industry consolidation and the lingering effects of economic recession worsened by the impact of ecommerce regarding both supplier selection and supplier customer interface. As larger original equipment manufacturers (OEMs) expect top tier EMS providers to support manufacturing operation investments and ventures, mid-tier EMS companies who engaged in a follow-the-leaders strategy continuously struggle to find viable niches. As such, (2002) looked into the strengths, weaknesses, opportunities and threats (s) in current EMS-OEM relationship trends and made recommendations for effective strategies to maintain and grow customer relationships among these industries. The recommendations cover the (a) impact of e-commerce trends in supplier selection and supplier-customer linkage, (b) potential areas of conflict in OEM needs/practices vs. limitations of the EMS business model, (c) impact of consolidation on customer retention, and (d) impact of geographic migration trends for high volume manufacturing on business practices for mid-tier and lower-tier EMS providers. The recommendations of the study focus on the strategies to retain and grow existing business while identifying new business opportunities aligned with effective core business models (2002).
According to (2004), possible outsourcing sites are found all over the world. In Asia for instance, the Philippines and India have flourishing offshore capacities. Poland and Russia of the Eastern Europe also have thriving offshore components. In the American sector, South and Central regions also have strong outsourcing potentials. Of course, Mexico and Canada, as United States neighbors, offer outsourcing options for American companies. Typically, these countries are commonly known as near shore options as opposed to the far shore alternatives. While these countries have already made their mark on the outsourcing business, other countries are also opening its doors for the current trend. One of which is China. Recently, China has transpired into the competitive business environment based on its extraordinary development rate. In software outsourcing for example, China is determined to enlarge its market in Southeast Asia, Japan, South Korea, Europe and America. While India is the present and undisputed leader in outsourcing, by 2006, China will become the next dominant business competitor. By that time, both India and China will be generating greater than US$27 billion each in revenue (, 2004).
China is among the newest and biggest economies that had opened its doors towards the latest business trend when it comes to outsourcing capabilities. Based from gathered literature, China possesses several potentials that make it an attractive nation for outsourcing. Its huge population, enforcement of new legislations as well as enhancement of technical education had made China a potential outsourcing nation that even rivals India (2004). In fact several companies from the West like (, 2004), (2004), (, 2004) and (2004) have already outsourced its operations in China. However, like most business strategies, outsourcing tends to put clients at a disadvantage particularly due to the use of outside vendors (, 1998). In the Chinese setting, certain barriers in culture and language tend to make Western companies hesitant in partnering with Chinese businesses (, 2003;, 2004). In spite of these problems, benefits appear to outweigh the difficulties in outsourcing in China. Moreover, there are certain considerations to make Chinese outsourcing more rewarding. These include (a) rapid and sustained economic growth, (b) accession to WTO, (c) stable government and policy support, (d) investment in technical education, (d) growing manpower with skilled technologies, (e) improvement of basic facilities and infrastructure, (f) healthy internal environment, (g) remarkable reduction of development costs, (h) emerging middle class, (i) offshore manufacturing, (j) physical proximity to major markets and cultural similarities, and (k) international connections (, 2003;, 2004;, 2003)
Benefits and Costs
Outsourcing manufacturing is one of vital business and supply chain strategies which are one way companies are revolutionising business operations to deliver better products faster at lowest cost possible (1998). It is a kind of supply chain collaboration model and strategic alliance approach, which allows the OEMs to concentrate on product development, sales and marketing (2003). It eventually helps business organisations to gain competitive advantage of increased product availability, reduced inventory; minimized total logistics cost and rapidly introduce their product to market without a significant investment in plans for capital equipment (, 2000).
Normally, there are two types of outsourced services, technology and business process. Each can be inert partial to the subsequent areas. The first type of outsourcing is the technology services. This type covers the electronic commerce (e-commerce), infrastructure (networks), software (applications), telecommunications and website development and hosting. The second type of outsourcing is the business process outsourcing. Under this type of outsourcing are customer contacts (customer relations management), equipment, finance/accounting, human resources, logistics, procurement/supply chain management and security.
There are many reasons for outsourcing in a company or an organisation. The most common reasons for outsourcing are the needs for expertise, that is due to lack of learning curve and re-creating; manpower, for having not enough staff; time requirements, because of the limited time available to accomplish the job; needed for economics, owing an overall cost savings; shifting of responsibility as for deniability; and removing of stumbling blocks in keeping the work for flowing.
The Value Stream Mapping method (, 1985; 1991) used most significantly to reduce and decrease wastes in the production process among manufacturing companies is one of the many business processing outsourcing models that promise efficient and cost-effective production. This model is a visualisation tool which originated from the Toyota version of Manufacturing that aims to identify, demonstrate and decrease waste in the production process of manufacturing companies. Since waste does not add value to the final product produced, VSM provides measures to assist management, engineers, production associates, schedulers, suppliers, and customers in recognizing the root and causes of wastes. In effect, VSM serves as a communication tool as well as a strategic planning and change management tool among business organisations belonging to the manufacturing industry (, 1997).
The VSM method maps the flow of materials and information from the raw material state of the product, all throughout the manufacturing process, until the shipment of the finished goods. Moreover, the VSM method visualises the current state of the manufacturing process activities by mapping out the cycle times, down times, in-process inventory, material moves, and information flow paths. The process include the physical mapping of the Current State (See Figure 1) as well as the Future State (see Figure 2) which serve as the foundation of further improvement strategies of the company. Among the commonly accepted wastes in the Toyota production system include (a) overproduction, (b) waiting, (c) transport, (d) inappropriate processing, (e) unnecessary inventory, (f) unnecessary motion, and (g) defects (1997).
According to (1996) in his review of the current literature, outsourcing is a trend that will continue. There are many benefits to outsourcing, including freeing up management resources, sharing costs, creating integrated networks, building new organisation structures, training staff, and interfacing with other information systems. Outsourcing offers a company functional specialisation and flexibility (1994). On the downside, some of the negatives include difficulties in maintaining confidentiality, retaining control, and confronting transition problems.
The case studies pioneered by (2003) examined the codevelopments across a supply chain by highlighting the importance of researching good information as well as effective information management styles which directly affect the stipulation of chip production projects among semiconductor suppliers and manufacturers. The study discussed how they both were involved in setting the tradeoffs and boundaries in undertaking product development initiatives. The findings presented the profits and advantages to the manufacturers in deciding whether to “buy” or “make” the products particularly on the considerations made when they decide to “make” production modifications with the suppliers for codevelopment efforts. As such, manufacturers should opt for generally applicable modifications not just in their production line but also the extent of its application to the whole industry because it will lead to innovation due to increased supplier investment on follow-on knowledge creation for upgrades and field support, and will likewise decrease equipment costs (2003).
Other considerations include intellectual property rights issues, prompt access and launch of the modified equipment, and increased production outputs. (2003) concluded the study by emphasising the importance of mutual knowledge accumulation between suppliers and manufacturers as well as its implications to long-term industry structure which contributed to the advent of contract manufacturing and outsourcing trends in the semiconductor industry. In this light, collaboration and synergy during codevelopment projects benefits the members of the supply chain and supports the short and long-term goals of the suppliers and the manufacturers (, 2003).
(2002) stated that there have three major outsourcing drivers: (a) economic - expense reductions, cost control and containment; (b) strategic - sharing risks, gaining access to new resources, achieving quicker time to market, as well as exploiting internet opportunities; and (c) technical - access to new technology; access to special expertise, coping with increasingly sophisticated risks and keeping up with the increasing complexity and speed of technology changes. (2000) reports that by using the outsourcing concept has found that time to volume was cut by 25%, giving an additional $100 million US contribution to revenue, and on average, an iteration of the prototype phase is eliminated and the remaining four are shortened by more than a week. Moreover, electronic document packages, once manually assembled by engineers over one to two days can now be assembled automatically and directly by the EMS providers in a few minutes (, 2000).
According to (2005), some OEMs are planning to take back portions of strategic sourcing responsibilities from EMS providers to regain control of sourcing strategic high-value components particularly the purchasing controls and functions and in effect, maximise the benefits of tighter supplier relationships. This is upon realisation that both OEMs and EMS providers are still handling strategic activities of sourcing decisions, as well as supplier relationship management., According to , senior vice president of supply chain consultancy, “OEMs are losing their relationship with component suppliers” resulting to decreased levels of services and putting at risk necessary component allocations (, 2005).
(2003) investigated the role of relational norms in the governance of relationships between the US manufacturer and an independent distributor in the export market across four industry sectors in which the use of foreign distributors is the norm: (a) heavy equipment and machinery, (b) appliances, (c) medical equipment, and (d) electronics. The study claimed that the manufacturer’s use of relational norms to enhance its competitiveness in the export market examining both the direct and the indirect effects of relational norms. Moreover, the manufacturer’s use of relational norms is affected by (a) cultural distance, and (b) a manufacturer’s relative dependence on its foreign distributor. Finally, the study also provided information regarding the influence of hostility of the legal and institutional environment on the relative dependence of a manufacturer on its foreign distributor. The study particularly contributed to the understanding of governance structures in international distribution channels by considering relationships between organisations that operate in different cultural and legal/political environments and the uniqueness of relationship building in the international context in order to acquire competence in managing international channel partners (, 2003).
However, in the past few years, the landscape of the EMS industry has been both competitive evolving from an assembly services industry to an end-to-end product service solutions industry (2004). The business relationship, and the overall supply chain networks between OEMs, EMS providers as well as the related business partners have become increasingly sophisticated and complex as characterised by complex supply chains which are integrated internally across different functions as well as externally with upstream suppliers and downstream customers (OEMs) (2000; 2001). Due to intense competitive pressures in the electronics industry, faster time-to-market, lower total manufacturing and logistic costs, effective communication, information sharing and better asset utilisation are requested so as to maintain the competitive power in the market (2000;, 2000;, 2000;, 2000).
The decentralisation of manufacturing, fulfillment, and support operations creates a myriad of challenges in the OEM's newly outsourced supply chain network. (, 1999) highlighted some of market challenges for EMS providers. These include (a) the demands on efficiency in product lifecycle information management () to strengthen their supply chain, critical during the product introduction as well as the end-of-life stages, (b) the consolidation and integration of the supply chain and reduction in the number of supply chain partners as a cost-cutting measure post-recession, and (c) ODM’s design capabilities, assembly, and manufacturing along with other services, blur demarcation between EMS and OEM (, 1999).
As such EMS providers should have very wide view and exhaustive plans on setting up the supply chain strategies through the e-business models and IT support systems which are crucial to integrate diverse business partners and to guide the internal functions in the actualisation of the companies’ logistics goals and business strategies. Studies have been conducted in order to address the current challenges in the supplier-manufacturer relationship among OEMs and EMS providers.
Indeed, making a business successful in a particular setting demands crucial and detailed studies and examination of the factors that will generate the best results that will serve the aims and objectives of the company. In this light, owners of big business organisations operating in a competitive business environment should be in constant look out with its competitors and the overall status and events in the industry. Taking advantage of the opportunities and intensifying the strengths while minimising the risks and weaknesses of a business firm greatly helps in predicting the success in business enterprise.
Examination on the business strategies and plans in order to answer to the demands of clients and customers through efficient delivery of such needs will not only increase the profit of an organization but will likewise gain the trust and competence of the clients and business partners. Efficient management of delivery options in a particular company and looking into the problems encountered in operating the business may enhance the likelihood of a business corporation to attain its goals as enterprising organization.
The need to improve manufacturing services entails high quality electronic products that can be delivered using efficient supply chain management principles applications. Implementation of efficient supply chain strategies is crucial in ensuring success in the industry by satisfying the needs of the customers to gain competitive advantage. In this regard, it is relevant that there should be an understanding of the specific roles of service providers, original manufacturers and distributors in the industry. Clarifications of how outsourcing strategies in the manufacturing industry can be designed to provide advantages to both business partners should be laid out objectively. Moreover the importance and significant functions of both the OEMs and the EMS providers are highlighted that enable them to meet the standards and demands of the consumer market.
In order to provide better services contract manufacturers should be innovative in offering better product quality along with faster delivery system which could be availed cheaper compared to their competitors pricing. Adaptation of effective supply chain strategies and practices is one of the crucial factors for the successful implementation of outsourcing. They should be able to come up with plans and designs that will strategically position them in the highly competitive, diverse, and complex business environment that is experienced at present.
Search Our Library. Search by Keyword, Author or Title