Category: Outsourcing

The Problems Of IT Outsourcing

Outsourcing is the act of giving an inside work to an outside company. This might seem to some people a bit confusing in terms of that if a company can not do something is that means you do not suppose to go to them and take a job from them. In a more general view , yes this is true ,but when it comes to the truth. Company A is not specialize in making databases ,so for this it asks Oracle to make it for them , not the whole project just the database. In this term company A will make sure that the database is built in much more effecint way since it is the most important part of their job and they do not want to miss this part of the project up since it is very crusal. This will get us to some of the main problems in this field. If they are handing their most crucial part of the project ( in some cases) what happen if this company is not as good as company A though it is?

Problems

As for the problems we will only take the major problems that affects more general outsourcing companies and their partnership.

Cost

It all comes to the cost. Any company that outsource their job their first consirn is “money” as any other companies. When dealing with oursourcing, the outsroucing company will ask for a good amount of money to insure that any of the dealt problems are solved ( since no one outsrouce without having a problem, mostly). This unfortinatly is always the problem. Outsourcing companies will always fight to take a job from large companies and this will always have a “cheap” company that will sell it services for a convising amount. This will make any company that want to outsource jumb into the line to ask for it. Not knowing that this is not the right company to deal with. They might get the job done , but is it worth dealing with much more complicated problems in the future?

Rushing to meet a tight deadline

Another problem when dealing with outsourcing is time. Time always is more important than even money itself. This is what always happens. Company A give company B a job to do (Outsourced) ,but what company A want is for this job to finish within 3 weeks. Company B agrees because they want the money, but company B in the middle of development face a problem that needs more than 3 weeks to be solved correctly. What will happen that company B will not solve the problem ,but rather find a way around it ,but by that time everything has gone out of the plan. Eventually everything will fall apart as it has from the beginning.

Poor communication

Communication one of the major part in life, not just in business. Having a poor communication meaning you can not transfer the correct idea that you have in your mind to the person in front of you. Meaning this will result in the misunderstanding of your thoughts and imagination. Having this as a problem means you will never get what you want. Not connecting to the outsourced company and not transferring the right idea about the problem means paying more to fix problems that may happen in this structure. Remember we always have a deadline which in itself a problem as we said ,but also adding the problem of poor communication it means everything will run out of your hands and will always result in nothing that what the company wants.

“he State of Indiana wanted to outsource modernizing its welfare processing system. They wanted to transform it, introduce a new service delivery model to reduce costs and fix violations. The goal was to allows people to use the system online, be able to make a claim personally or over the phone.”

A deal worth of 1.6 bilion dollar that ended up in a loss to the state of Indiana. I t was a horrable way time for IBM a leading company in the IT bussniss. IBM is one of the leading leaders in the market yet they still faced this crisis that lead to the unimaginable loss to both sides. This means that this is not just depending on how a big of a company you are. If you are not aware you will loss no matter what.

The Advantages Of Outsourcing In The United States

Outsourcing is when companies obtain a good or service from a foreign supplier, instead of using internal suppliers. There is much controversy about whether job outsourcing is beneficial or detrimental to the US economy. Some people argue, that job outsourcing is detrimental to the US economy because it causes job loss, however job outsourcing is actually beneficial to the US economy, because it creates jobs and boosts economic growth in foreign countries, it allows for product specialization and monopolization, it lets the US get goods and services at cheap prices, and provides US companies with a larger talent pool to select from.

People who argue against outsourcing claim that outsourcing enables other countries to “steal” blue-collar (industrial) jobs from US citizens. They claim that job loss causes economic hindrance because unemployed people become a handicap in the US economy. And lastly, some people claim, that outsourcing causes US economies to remain stagnant and underdeveloped because there is no more “activity” in outsourced industries.

However, outsourcing is actually beneficial to the US economy because it boosts economic growth in the US, and in other parts of the world, by providing both white (professional) and blue collar jobs to people who need them. Madison Correnti, a Financial Analyst at Applied Materials, explains how different parts of the world, including the US, benefit from outsourcing. She explains, “Outsourcing by U.S. companies to foreign countries stimulates investment by these foreign countries. This investment helps boost those countries’ economies by improving their standards of living and providing jobs for the unemployed. With these economic improvements in foreign countries, this allows them to be a part of the global market by enabling them to buy more exports from the U.S” (Correnti). What looked like a loss of US jobs was actually a boost in revenue and economic growth. By stimulating other economies, the US is actually stimulating its own growth. Mark J. Perry, a scholar at the American Enterprise Institute and a professor of economics and finance at the University of Michigan Flint, explains the misconception about stolen jobs. He reveals, “Just like it makes economic and business sense for thousands of foreign companies to outsource jobs and production from their countries to every US state (perhaps because the US is one of their major retail markets), it also makes economic and business sense for thousands of US companies to outsource jobs and production from the US to foreign countries, perhaps also because overseas markets now represent more than 50% of retail sales for many US-based companies” (Perry). US jobs aren’t being stolen by other countries; they are being recycled throughout the world. Mark explains why the partial win-lose concept of outsourcing is not applicable in today’s dynamic and interconnected world. Outsourcing is an elaborate process and isn’t simply a situation in which America either wins or loses. Multiple countries are being benefited in varying amounts. In the case of the US, retailers are able to make much greater profits, and the economy is able to prosper. The US is able to provide jobs to other countries which are in dire need of them. In the end, the US gains a financial advancement and the other countries gain a fluid economy. The long term benefit is that the US is able to build a relationship with other parts of the world, and is able to make lasting trade agreements. Business between the US and other countries will stimulate other businesses to grow, and thus will provide more jobs for the individuals who need them.

Secondly, outsourcing is favorable to the US economy, because it allows for product specialization and monopolization. George Coontz, a senior analyst at State Farm explains the concept of comparative advantage, and how this method of product making is the best for producing high-quality goods. He explains, “Comparative advantage means that if a certain country can produce a good or service more efficiently than another country, then this country possesses the comparative advantage. This country should elect to produce this good or service, while the other country should produce goods for which they have a comparative advantage. Both countries trade with each other to obtain the goods for which they have a comparative disadvantage. This promotes economic growth and prosperity.” Competition between countries in one area of expertise hinders the progress of innovation. It hurts the overall world economy because now, companies are losing valuable time and money while competing with one another. By using comparative advantage as a tool for economic prosperity, companies are able to fail fast and use their valuable resources to create quality products that can be desired by the whole world. Madison Correnti, puts the situation into simple words when stating, ‘The other part of outsourcing is this: it simply says where work can be done outside better than it can be done inside, we should do it,’ said by Alphonso Jackson, former U.S. Secretary of Housing and Urban Development.” Through outsourcing, specialization can spur innovation and development in technologies. Comparative advantage allows countries to specialize and gain mastery in a specific industrial sector. Comparative advantage is a win-win situation for both the US as well as other countries. Hungry US consumers can get products at cheaper prices, and countries with a large labor pool can invest in developing detailed manufacturing processes.

Furthermore, outsourcing is beneficial to the US economy, because it allows the US to get goods and services at cheap prices. With the US’s growing demand for cheap goods, outsourcing can be a major benefit for companies looking to make huge profits. George Coontz further, explains the phenomena of comparative advantage, and how it ties in with outsourcing. He explains, “Outsourcing is an example of a real-life application of comparative advantage. Many developing countries have a surplus of labor, and therefore, the cost of this labor is low. Consequently, companies elect to utilize this low-cost labor by outsourcing labor-intensive jobs, such as call centers, to these countries.” The US is able to acquire goods at cheaper prices and other areas of the world benefit from employment (Coontz). But how much benefit does the US actually receive? Satwik Seshasai, a the Chief Technology Officer for NextDocs, and Amar Gupta, a Professor of Entrepreneurship/MIS and Senior Director for Research and Business Development reveal that “Of the approximately $1.45-$1.47 of value derived from every dollar spent offshore, U.S. firms receive $1.12-$1.14, while foreign firms receive only 33 cents of the value. Further, … Outsourcing provides an aggregate benefit to the U.S. economy of $16.8 billion” (Seshai and Gupta). Through an economic lense, companies are able to get value for money. By outsourcing US jobs, companies are able to spend less on wages, and more on innovation. They are able to lower the costs of their products because they don’t have to include the labor costs in their retail prices. Because they can offer goods at cheaper prices, US companies can be more competitive in the world economy. Overall, the US economy is able to stand self-sustained and is able to provide jobs and quality products to its citizens’.

Lastly, outsourcing is advantageous to the US economy because it lets US companies have access to a larger talent pool. As Elizabeth G. Chambers et. al, Board Director and Advisor of C-Level Marketing Strategy, and Growth Leader at Financial Services and Digital Businesses, explains, “Better talent is worth fighting for. At senior levels of an organization, the ability to adapt, to make decisions quickly in situations of high uncertainty, and to steer through wrenching change is critical. But at a time when the need for superior talent is increasing, big US companies are finding it difficult to attract and retain good people. Executives and experts point to a severe and worsening shortage of the people needed to run divisions and manage critical functions, let alone lead companies.” Outsourcing white-collar jobs don’t cause a loss of blue collar jobs in the US, so this type of outsourcing does not directly hurt the US economy. But where can US companies find these white-collar specialists? Zafar Iqbal and Aasim Munir Dad who is Faculty in Administrative Sciences, and have Ph.D.’s at the School of Business & Management at the University of Gloucestershire, point us in the right direction. They explain that “ ‘Global Talent’ motivates firms to gain and maintain competitive advantage and offshore talent is cost effective as well… There are 22 million graduates available in India for both public and private companies including 1.2 million engineering graduates, 600,000 doctors and the number of graduates produced in India are about 200,000 every year” (Iqbal and Munir Dad). By outsourcing white-collar jobs, US companies get talented and hardworking individuals. Not only are these talented workers hired at lower prices, but they also are not causing blue collar jobs to be lost, (jobs which the US is in need of). Outsourcing white collar jobs benefits the US because allows for diversity and growth in companies. US multinational companies (companies which function in multiple nations) are not only able to provide for the US but for the entire world’s needs’.

In conclusion, the US should continue to promote and allow outsourcing. Not only does the US get huge financial benefits, but other countries economies’ are stimulated during the process. The US gets access to cheap labor and cheap manufactured goods, while people in need of blue-collar jobs, get jobs. Outsourcing is a win-win situation for both the US as well as other countries. It is a tool which enables US companies to access larger talent pools and it lets the US specialize and monopolize certain sectors of the industries. Because US blue-collared jobs are being lost due to outsourcing, US multinational companies should limit the number of jobs they outsource, so American individuals can be employed. US companies should also try to prioritize the employment of US citizens so that the local US economy can flourish in conjunction with the larger world economy. The next time you hear the title, “US jobs Being Stolen,” take a moment to consider the other positive benefits that outsourcing provides to the US.

Works Cited

1. Coontz ’04, George. ‘Opinion: The Benefits and Costs of Outsourcing Jobs.’ digitalcommons.iwu.edu. The Park Place Economist: 2008.
2. Correnti, Madison. “Outsourcing Overseas and its Effect on the US. Economy.” ncbfaa.org. National Custom Brokers and Forwarders Association of America, Inc.
3. G. Chambers, Elizabeth. Foulon, Mark. Handfield-Jones, Helen. M. Hankin, Steven. G Michaels III, Edward. “The war for talent.” mckinseyquarterly.com. The Online Journal of McKinsey & Co: 29 Aug. 2007.
4. Iqbal, Zafar. Munir Dad, Aasim. “Outsourcing: A Review of Trends, Winners & Losers and Future Directions.” ijbssnet.com. International Journal of Business and Social Science: July 2013.
5. Perry, Mark. “We hear about US jobs outsourced overseas (‘stolen’) but what about the 7.1M insourced jobs we ‘steal’ from abroad?” aei.org. AEIdeas: 9 Nov. 2018 .
6. Seshasai, Satwik. Gupta, Amar. “Global Outsourcing of Professional Services.” ebusiness.mit.edu Mit Sloan: January 2004.

The Challenges And Solutions Of Outsourcing Service In Thailand

Outsourcing is ‘the process of arranging for somebody outside a company to do work or provide goods for that company’ (Oxford Dictionary, 2019) and it has three main advantages including the cheap cost, no full-time employee and the latest development from outsourcing firm (The Economist Magazine, 2008). Currently, worldwide organizations including Thailand have changed their structural foundations by using the outsourcing model. Outsourcing has various type of operation for collaboration companies such as service, IT, finance, logistics or manufacturing. Though there are significant positive impacts for owner and investor of organizations, there are still much negative impacts on the customer, specifically local service by outsourcing. Chakrabortty (2014) states that UK citizens use local public services which are served by third parties in Barnet, and they do not know anything about the local information or area. For example, salary statement for the local council staff member is made in Ireland, library customer services are first routed to Coventry, parking services are handled in Croydon, Benefits of the city are managed in Blackburn, and also deaths, births, and marriages are still organized in other cities. It can be seen that this situation is one of the problems of local services by outside firms who know nothing about local information. This essay suggests that service outsourcing is the cause of the problems for the customers therefore some solutions for service outsourcing must be in the place. The aim of this essay is to analyse the difficulties of service outsourcing and seek solutions to service outsourcing in Thailand.

It has been widely accepted that operation with outside companies has a positive impact. Service outsourcing makes the local customers that have incurred inconvenience situations, especially local service, for local customers. Thailand also has several functions which have been operated by outside companies such as logistic service from Hong Kong, IT service from China or travel platform from Singapore. There are two main problems in service outsourcing in Thailand. Firstly, it is difficultly to communicate with outside service firms who do not know about local information for operation or provide service. To illustrate, the woman who wanted to buy a bench and install it on a local mountain which named as her family’s name as well as that make call centre employee who did not know about either the mountain or how to handle such presents to confuse for serving her (Chakrabortty, 2014). It is obvious that the outside call centre have not had effectively enough to serve the local customer. Secondly, it is quite difficult to contact customer service, which has been managed by the outsourcer. According to Chakrabortty (2014), callers in the local area have to wait in the line all the time, and they have possible opportunity to be thrown off the line by call centre when things get too busy. As can be seen that the residents have awkward contact with the call centre increasingly depend on their quantity of service outsourcing councillors. The local people in Thailand have suffered these problems with their service outsourcing.

There are problems to local customer from service outsourcers. Thus, this essay suggests some solutions to these problems. Firstly, service outsourcing in Thailand has no enough local information to serve Thai customers efficiently. The study of Williams (2017) indicates that positive performance can increase by supporting of locally hired managers because local managers have accumulated local social capital information, which can help them to successfully improve a locally responsive strategy and reduce the negative effects of performance including in the case of China. It is clear that the solution to this problem is hiring which must engage local managers in each vital city in Thailand. The local managers provide the local information to service outsourcing firms for serving high service performance, which is supported by Williams et al. (2017). Secondly, almost service outsourcing in Thailand always busy and the callers also challenging to contact them. The way to improve this problem is a collaboration with another service outsourcing. Reference to Gurvich (2012) reveals that he considered the call centre operated under an overflow mechanism from customers. Callers are first directed to in-house service of service outsourcing. Then, when the waiting room is full, another outside service will open the other stations for callers who do not still gain serving. This solution can reduce the time of customers who access to contact with local customer service by service outsourcing and also decrease the risk of throwing off their line by a call centre in the heavy-traffic period. As can be seen from the report that these solutions can solve the problem of service outsourcing. Service outsourcing in Thailand should apply these solutions to their service organizations for increasing positive service performance.

To sum up, this essay has explored the problems of service outsourcing in Thailand and suggested some solutions to the problems. The problems of service outsourcing include the confusion of service outsourcing serves some services or operations to the local customers in Thailand that causes poorly service performance, the difficulty to contact the customer service which is provided by service outsourcing. And the solutions to improve these problems includes the employment for local managers in Thailand might increase service performance by suggestion from local managers who know local strategy, information and culture in each city of Thailand as well as the collaboration with another outside providers will probably open enough server for serving all customers who want to contact call centre in Thailand. Therefore, service outsourcing in Thailand has some problems while it has some solutions to improve.

Outsourcing: The Benefits And Risks

Introduction

The idea of outsourcing has been around for hundreds of years, but it did not become a prevalent practice in the United States until the seventies. The term outsourcing, however, did not appear in science until the 1990s (Trocki, 2001). The functions that are outsourced varies greatly based on the needs of the individual business but the most frequently outsourced functions are human resources, facilities management, IT, accounting and finance and procurement with IT being done the most.

While outsourcing may be necessary for most businesses to remain competitive in today’s market, it still maintains an air of controversy and is surrounded by negative connotations to many employees of the same businesses. From the management’s perspective, it is a cost saving tool that can greatly impact their bottom line and keep the shareholders content. In stark contrast, from the perspective of the workers that potential layoffs and job reassignments would directly affect, they only see years of hard work and loyalty going overseas and their quality of life at risk. It is imperative that business executives are cognizant of all potential consequences of a decision to outsource. This paper will explore the benefits and risks of outsourcing and the impact that it plays on the U.S. job market.

The Benefits

The potential benefits of outsourcing a portion of a business’s functions are too numerous to not at least be considered in any business model. The most popular sectors that utilize outsourcing are health and pharmaceuticals, defence and government, IT, retail, telecommunications and media (Krosse, 2020). Even school districts have followed the trend as positions like bus drivers, custodians, cooks and substitute teachers are often contracted to outside agencies (Hux and Nichols, 2016). The big question is why? The reasons provided in Figure 1 provide some insight into this ever growing phenomenon.

Cost Savings and Access to Intellectual Capital

Not surprisingly, cost savings is the number one reason reported for outsourcing in Deloitte’s 2016 Global Outsourcing Survey. When implemented correctly, a company could see a savings of 30% – 40% within the first year as a direct result of outsourcing (Engardio, Arndt, & Foust, 2006). These savings primarily are attributed to labor costs which also includes having no training and recruitment expenses as offshore agencies carry those costs as well. Similarly, by utilizing outsourcing, an organization has access to an unlimited pool of talent. This in turn allows companies to accelerate innovating products and the ability to fund development projects that were unaffordable previously (Engardio, Arndt, & Foust, 2006). Further, outsourcing talent allows for a shorter lead time. This is true for CEO Bob Miller of OnStor Inc. who has partnered with HCL Technologies Ltd. for engineering services. He says “If we want to recruit a great engineer in Silicon alley, our lead time is three months,’ whereas ‘With HCL, we can pick up the phone and get somebody in two or three days.’ (Engardio, Arndt, & Foust, 2006).

Enhanced Service Quality and Efficiency

Another reason many companies choose to outsource certain functions to a BPO company is to improve their customer service. By using outsourced contractors, many customer service actions are performed quicker. Likewise, the difference in time zones allows for live customer service centers to be available around the clock for a fraction of the costs. The improved customer service often leads to large gains in efficiency as well. For example, the CFO of Penske Truck Leasing, Frank Cocuzza, says “the $15 million in direct labor-cost savings are small compared with the gains in efficiency and customer service” (Engardio, Arndt, & Foust, 2006).

The Negatives

As with any innovative strategy, there are always trade offs to the perceived positives. It is no different for the practice of outsourcing. There are potentially devastating risks that must be surveyed when making a decision to outsource. The risks are so great that a new business paradigm was created in the U.S. and abroad called Enterprise Risk Management (ERM) in which the “ framework provides guidance for boards of directors and senior management for analyzing all core business strategy decisions from an ERM perspective” as detailed in Figure 2 (Beasley, Bradford & Pagach, 2004).

Human Capital Risks

Employee displacement is the first downside most people think of when discussing outsourcing. Wisconsin-based manufacturer Paper Converting Machine Co. (PCMC) cut its US employees from 2000 to 1100 in a combined effort to compete and remain profitable (Engardio, Arndt, & Foust, 2006). With the layoffs also comes demoralization of the employees that remain and the possibility of subsequent operational slowdowns, employee turnovers, and even employee strikes if their sentiments are not given appropriate consideration (Beasley, Bradford & Pagach, 2004). Fortunately, employee backlash has encouraged some legislation aimed at curbing the increase of offshore agreements. For example, efforts in California and New Jersey had led to a bill (Senate No. 494) proposing a mandate that American wages be paid for state government work no matter where the work is performed (Beasley, Bradford & Pagach, 2004). Similarly, displaced workers required to train their replacements will be owed severance pay and possibly retention bonuses which would add costs for the company. Further, additional costs may occur for a global business process outsourcing company to hire a legal team if unionized laborers file a class action lawsuit.

Legislation/Regulatory Risks and Privacy Risks

An important consideration that must be addressed when discussing a decision to outsource is what regulations need to be followed in the home country and in the country hosting the work being performed. This includes but is not limited to, differing tax and labor laws. Privacy, security, and confidentiality must also be factored in. A data breach by an outsourcing partner that results in damages from unsecured transactions could lead the parent company open to legal and regulatory actions (Beasley, Bradford & Pagach, 2004).

Strategic/Market and Financial Risk

The strategic/market risks associated with outsourcing can be considerable and are often unpredictable. They stem from unanticipated travel required to effectively manage and develop infrastructure to support off-site operations, costs from IT software and hardware requirements, and costs from monitoring the outsourced performance of quality, security, and availability metrics (Beasley, Bradford & Pagach, 2004). Financial risks also arise from proposed federal legislation that could restrict an organization from accessing financial assistance and/or other federal grants (Beasley, Bradford & Pagach, 2004).

Operations Risks

The potential operational risk surrounding outsourcing is another key component in the decision to move functions offsite. The top 3 locations for outsourcing are India, China, and Malaysia with India outranking them all (Davis and Davis, 2012). For U.S. firms this creates an issue of language barriers and time zone differences. Further, the quality of the work being done by the contractors may be subpar and damage the reputation of the parent company. This is especially true for outsourced customer service call centers that often employ workers with heavy accents which may be a turn-off for U.S. consumers who find it difficult to understand them.

Implications to the U.S. Job Market

The implications that outsourcing provides to the U.S. job market are great. While the growth that each organization achieves by offshoring some of its functions is a positive for the job market, employee layoffs can be detrimental. By taking away gainful employment domestically, U.S. workers are left to settle for lower-paying positions that can lower their quality of life. On the other hand, when properly implemented, the growth from an organization’s decision to outsource could aid in creating new and more specialized jobs in the U.S. that will make the previously displaced workers more well-rounded and highly sought after. With continued pushback against offshoring, some employers are moving their operations back to the U.S. Starbucks, for example, announced plans to relocate some of their production of coffee mugs back to a dormant plant in Ohio after they had been moved to China (Davis and Davis, 2012).

Conclusion

The decision of whether or not to outsource is a major decision for every organization. Thorough analysis and planning on the part of the management team is necessary for it to actually achieve any of the potential positives. Overall, however, it can be a highly profitable venture for the company and a catalyst to enhance the growth of the U.S. job market. A good balance of investing in human capital while outsourcing some specific functions, considering all factors would ultimately benefit us all.

References

1. Beasley, M., Bradford, M., & Pagach, D. (2004, July). Outsourcing? At your own risk: before outsourcing any process or function, it’s essential to assess the risks enterprise-wide. Strategic Finance, 22+. https://link.gale.com/apps/doc/A118890706/PPBE?u=jack26672&sid=PPBE&xid=010dc2ebSalopek,
2. Davis, C. E., & Davis, E. (2012). A Potential Resurgence of Outsourcing. CPA Journal, 82(10), 56–61.
3. Deloitte’s 2016 Global Outsourcing Survey (Rep.). (2016, May). Retrieved December 5, 2020, from https://www2.deloitte.com/content/dam/Deloitte/nl/Documents/operations/deloitte-nl-s&o-global-outsourcing-survey.pdf
4. Engardio, P., Arndt, M., & Foust, D. (2006, January 30). BusinessWeek Online. Retrieved December 5, 2020, from novella.mhhe.com website: http://novella.mhhe.com/sites/0078685435/student_view0/unit5/chapter14/businessweek_online.html
5. Hux, Annette R., and Joseph R. Nichols. ‘The financial and political impacts of labor-outsourcing in rural school districts.’ Education, vol. 136, no. 3, 2016, p. 275+. Gale OneFile: Economics and Theory, https://link.gale.com/apps/doc/A447178150/PPBE?u=jack26672&sid=PPBE&xid=75244cf1. Accessed 16 Nov. 2020.
6. Krosse, S. “(2020). The Ultimate List of Outsourcing Statistics.” MicroSourcing, MicroSourcing International Ltd., 16 Aug. 2020, www.microsourcing.com/learn/blog/the-ultimate-list-of-outsourcing-statistics/.
7. Słoniec, J. (2016). NEWS IN THE IT OUTSOURCING AND TRENDS IN ITS DEVELOPMENT. Journal of Positive Management, 7(4), 3-18. doi:http://dx.doi.org.lib-proxy.jsu.edu/10.12775/JPM.2016.019
8. Trocki, M. (2001), Outsourcing. Metoda restrukturyzacji działalności gospodarczej, Państwowe Wydawnictwo Ekonomiczne, Warszawa.

Research Methods to Study Impact of Outsourcing on Competitive Strategies and Cost in Pharmaceutical Industry

Introduction:

In a competitive business environment, companies need to minimize the cost of production so that they can offer products or services at a lower price and can attract customers. Every company has limited resources to meet the business’s operational requirements. For better business operations, companies apply different strategies. Outsourcing is also a strategy that is used if a firm is not able to meet the operational requirement to produce a product. Outsourcing is a strategy used by different companies to reduce production costs by transferring some part of the work to an external supplier rather than producing it internally (Ellram & Billington, 2001). It’s a cost-saving technique if used properly. Sometimes, it is more affordable to purchase a product or semi-product from outside. Outsourcing allows a firm to free up its resources which can be used in more important issues and invest in high return opportunities. Pharmaceutical companies are increasingly outsourcing research activities to academic and private contract research organizations (CROs) as a strategy to stay competitive and flexible in a world of exponentially growing knowledge, increasingly sophisticated technologies and an unstable economic environment. The decision of outsourcing in pharmaceutical companies is a bit hard because, in such companies, a lot of confidentiality is involved. Concerning the decision about either in house production or outsourcing, companies have to be very careful by considering all those factors which can affect the firms’ future growth and competitive position.

Problem Statement

To reduce production or other business operational cost, companies choose outsourcing strategy. But in pharmaceutical companies, it is not simple to decide whether to outsource operations or not. Formulas, patents and other intangibles are the key assets for pharmaceutical companies. Outsourcing of business operations can involve a risk of disclosure of secrets to the competitors. And it can remove the competitive advantage of a certain firm which is looking for outsourcing.

The third party to whom operations have been outsourced can disclose secrets of the firm to competitors. Also, some government departments have completely lost control over preparation, development, and realization of projects, which consequently results in weak control over increasing costs. To respond to the growing pressure on prices, it was usual for the pharmaceutical industry to correspondingly increase its expenditure on R&D, to boost profitability with the introduction of innovative treatments. Thus, the cost of conducting research and development started doubling every year.

Outsourcing lead to negative effects when used only as a cost-reducing strategy to improve short-term performance. The consequence may be the loss of internal know-how and expertise as well as higher total costs in the long term. Outsourcing research also bears potential risks due to project complexity and loss of flexibility. The industry is facing a lot of challenges due to rising costs accompanied by longer development time of drugs, fewer replacement drugs, changing technology and higher litigation and patent costs.

Questions:

Question 1. What are the factors to consider when deciding on outsourcing?

Factors like timeline, total cost (including licensing/royalty fees, payment schedules, rush charge, location of supplier, intellectual property issues, reputation, methods, and more. Trade-offs are often required between time, quality, and price.

Question 2. What is the relationship between competitive strategy and outsourcing?

This question deals with the strategies than marketers take to gain competitive advantage over other drugs in the market. Does outsourcing leads to a competitive advantage or addition of unnecessary costs. The relationship is influenced by various factors like limited financial budgets and skills to manage reallocation of resources. Added complexity of managing and monitoring an outsourcing process and vendor can easily overshadow the cost reduction of R&D work.

Question 3. What will happen in the long term?

Outsourcing is been advantageous in short term as there are

Literature Review

The history of outsourcing is deeply embedded in the history of the growth of the Modern Business Enterprise, which sprang up in the latter half of the 19th Century. The use of external suppliers for these essential but ancillary services might be termed the baseline stage in the evolution of outsourcing.

The study indicated that there is no significant direct relationship between outsourcing and performance but there is a difference in the impact depending on the firm strategies. Firms following cost-based strategies benefited more from outsourcing than firms following differentiation strategies. The results of the study showed that clinical trials were the most area of outsourcing. Clinical trials that were outsourced within the home country were completed faster. However clinical trials that were outsourced to vendors in foreign countries had a decline in the performance. These trials cost more which implies that the country differences may increase the transaction and production costs.

The inconsistent findings in the literature on the offshoring outsourcing performance relationship could be because most of the prior studies were done only with the firm as the unit of analysis and performance was measured as total sales or profits of the firm (Bhala et al. 2006; Gorzig and Andreas, 2002; Gilley and Rasheed, 2000). For instance, Mol et al. (2005) distinguished between global and regional outsourcing and measured the performance effects at the firm level but did not find any significant relationship. The authors recommend the use of better measures of outsourcing performance such as reliability, quality, and innovation. These studies show that further research is required to examine this relationship between performance and offshoring and outsourcing at the project level (Gilley and Rasheed, 2000; Mol et al., 2005).

Muyang Hu studied some hidden costs involved in outsourcing in pharma. With an increase in chronic diseases like cancer, there is pressure on healthcare budgets. It is not possible to provide supervision during the research of some drug leading to misunderstanding between parties and cost increase may occur. This occur because vendors do not have same standards and mission. The hidden cost issue might get more serious when dealing with foreign companies across international boundaries. The hidden costs discussed in the study were related to extensive training required to provide in-depth knowledge and specifications of a particular drug. There are also many government and political regulations that may lead to delays and hence increased costs. This increased cost might reduce or even eliminate the savings by having an offshore outsourcing vendor in some cases. Hence in-house research is needed to control the increasing costs and control. She also stated that in 2010 development costs of new drugs were between $4 billion to $11billion per drug and can be reduced if produced in home country.

A research done by Anu Gummerus on what kind of regulatory tasks are outsourced in the pharmaceutical industry and what are its consequences. She conducted the study through email surveys in various countries like Finland, Germany and Sweden. The survey received 71 responses out of 147 completed surveys. The most outsourced task was related to research and development and was given to Contract Research Organization (CRO) and it was one of the expensive tasks. The CRO has to assure uniform quality of its personnel knowledge and skills. Conclusion of the study was that outsourcing will prevail but the companies should plan the outsourcing carefully and compare possible CROs or it will lead to addition to costs with no result.

Aims and Objectives:

This research aims to identify the impact of outsourcing of production in the pharmaceutical industry. The research will focus on the following points.

• Reduction in production cost of 10% or more by outsourcing business operations
• A company is operating overseas and it is outsourcing its operations, what kind of risks are involved
• The firm has a competitive edge over its competitors, what risk is involved with that core competency.

Justification of the project, significance and practical value

With the increase in competition in the market, companies have to offer better services at reasonable prices. For that purpose, they have to put their best to achieve market share and growth (Chaturvedi, S. 2005). On the other hand, economies or companies have limited resources to meet unlimited desires. To overcome this deficiency, companies have to opt for a different set of innovative strategies, through which they can achieve maximum output with minimum resources.

One company can’t perform a hundred percent in all its business operations. To minimize the cost, they prefer to get services from experts in relevant business activity. The concept of outsourcing is very common nowadays in the business world. Pharmaceutical industries are also using this strategy to minimize their operational costs.

But pharmaceutical industries have confidentiality in their work. Their actual assets are patents and formulas. By sharing this stuff with the third party for production purposes, they can lose market share and competitive position in the market. This study will elaborate on all the impacts of outsourcing on such companies. The pharmaceutical industry is suffering through a challenging period in its evolution with the traditional methods of drug development continuously expanding. Successful pharmaceutical companies have considered the need to leverage resources, and in result, they have come to rely on specialist external sources provider who are expert in certain business activities (Piachaud, B. S. 2002)

Three types of costs are involved in outsourcing or in-house production (Vining, A.1999). Production cost, bargaining cost, and opportunity cost. Production cost is the cost involved in producing the product in house or by third party through outsourcing. Bargaining costs may involve the contractual cost at present and any change in future time due to uneven circumstances.

It also includes the cost of monitoring either the third party is working as per the requirement. Bargaining cost increases when both or either of the party is working for self-interest, not for mutual interest. Opportunity cost is a cost that includes choosing an alternative by sacrificing the other one. So, companies have to be very careful while making decisions regarding outsourcing the business processes by keeping in mind all the issues and risks. This research will try to clarify all the hidden aspects behind this kind of decision making

The outcome of this research will help pharmaceutical companies to make a decision either in house production or outsourcing. This study will consider all those factors which can be important in decision making. Managers can make a clear projection of how much can they save by using this strategy. Companies always try to minimize their expenses and maximize their profit so that they can increase the wealth of shareholders. Though different companies follow different cost-cutting strategies but most of them can be unsuitable for major stakeholders for example employees.

The selection of a good strategy for the company is an important decision by considering the benefit of all stakeholders. All the research questions/objectives as identified in the proposal will be answered based on the data collection, finding, and analysis. This research will benefit in the future to the companies to decide on outsourcing by considering all the factors which will be presented in the study.

References

1. Boulaksil, Y., & Fransoo, J. C. (2010). Implications of outsourcing on operations planning: findings from the pharmaceutical industry. International Journal of Operations & Production Management, 30(10), 1059-1079.
2. Cooper, D. R., Schindler, P. S., & Sun, J. (2003). Business research methods.
3. Ellram and Billington, purchasing leverage considerations in the outsourcing decision, Permagon, European Journal of Purchasing & Supply Management 7, 2001.
4. Piachaud, B. S. (2002). Outsourcing in the pharmaceutical manufacturing process: an examination of the CRO experience. Technovation, 22(2), 81-90.
5. Pharmaceutical Research and Manufacturers of America (PhRMA), 1998. R&D — the key to innovation. Pharmaceutical Research and Manufacturers of America (PhRMA), Washington, DC.
6. Reitsperger, W. D., Daniel, S. J., Tallman, S. B., & Chismar, W. G. (1993). Product quality and cost leadership: compatible strategies? MIR: Management International Review, 7-21.
7. Quinn, J. B., & Hilmer, F. G. (1994). Strategic outsourcing. Sloan management review, 35(4), 43.
8. Chaturvedi, S. (2005). Outsourcing in the pharmaceutical industry. Bionity. com, White paper.
9. Vining, A. (1999). A conceptual framework for understanding the outsourcing decision. European Management Journal, 17(6), 645-654.

Legal Issues in Outsourcing: What Businesses Should Know

Outline

Lately, the U.S. has seen an immense development in outsourcing links and it is the first individual to seek advice before settling up an offshore agreement confessed by experts, is an attorney. Most businessmen can’t rely upon legal advisors to skill up their levels that is essential to consider all the authorized issues included. As a result, the fundamental legal issues for offshore outsourcing, organizations ought to ground in themselves so as to evade any disagreeable growth later on. This paper will present a high-level overview of offshore outsourcing and its legal considerations.

Introduction

Outsourcing can be described as the key usage of 3rd parties to complete out their occupations that are newly dealt. It can give various focal points. Among these are bringing down of costs for the outsourcing party, compensation for nonappearance of internal abilities, releasing of managerial and supervising work power to focus on their core skills and critical level issues, and availability of recent technologies.

A portion of the upsides of outsourcing incorporate decreased expenses for the outsourcing party, more prominent upper hands, expanded productivity, and accessibility of best practices. Then again, it likewise has drawbacks like decreased in-house experts, contrasts in administrations given, trouble in the executives, and security threats.

Outsourcing has its disadvantages too, such as reduction of in-house competence, complete dependence on 3rd party, decrease in staff resolve, sudden contrasts in level of administration gave, the incurrence of greater expenses when an organization is constrained to utilize its own time and assets to prepare the supplier, incurrence of greater expenses because of the supplier’s consistency with local laws, unpredicted challenges because of social contrasts.

Following are the genuine issues with regard to the services that are most famously outsourced: stock control, innovative work administrations, information preparing administrations, interpretation administrations, client call focuses, innovation administrations, programming improvement, and business forms.

Terms of outsourcing Agreement

The Agreement is the essence of the outsourcing game plan as it will be the managing contract by which the merchant and the client seek after their particular commitments. Here are the different terms of the agreement that pulls off the outsourcing-

• The Agreement Terms
• The Services to be Provided
• Intellectual Property’s Ownership
• Confidentiality of Data and Trade Secrets that includes Ownership duties of the representatives
• Guarantees and assurance
• Refusals
• Force Majeure
• The Choice of Law and Jurisdiction
• The Wrap-Up.

The Agreement Terms:

As to the Agreement Terms, the client ought to consult for a brief period with restoration choices, giving it more prominent adaptability in proceeding with or ending the re-appropriating relationship.

The Services to be Provided

With respect to the Services to be given, it is essential that the client put forward its desires as explicitly as could reasonably be expected because of the way that without them, there are no target criteria for dealing with the outsourcing relationship. The Service Level Agreement (SLA) can be seen as a record that spreads out the performance standards The SLA will present the base assistance levels as indicated by a quantifiable measurement, and furthermore put forward the sentence for inability to meet the basic assistantship.

Guarantees

A Guarantee is basically, a confirmation that the client ought to anticipate from the merchant which is the vow that the seller can and will give the services as characterized in the agreement. On the off chance that the Guarantee is broken, the merchant will, as a rule, be answerable for all legitimate risk and the client may end the agreement on the off chance that he so wishes.

Force Majeure

Force Majeure truly signifies ‘more prominent power’. Force Majeure provisos pardon a gathering from risks if some unanticipated event outside the ability to control that gathering keeps it from playing out its commitments under the agreement. Remember that Force Majeure statements are proposed to pardon a party in particular if the blunder performed couldn’t be maintained a strategic distance from by the activity of due care by that association. When arranging Force Majeure provisos, ensure that condition presents some particular instances of acts that will justify the execution under the statement, for example, wars, cataclysmic events, and other significant occasions that are distinctly outside a party’s control.

Refusals

Refusals are legally binding arrangements that ceil the point of risk. The most well-known refusal in an outsourcing relationship is typically the assertion that the seller won’t be subject for any accidental, uncommon, or subsidiary harms emerging out of the utilization of third-party programming or benefits. The Customer ought to acknowledge that refusals will be a piece of the agreement, all things considered, the Customer should ensure that the disclaimers or refusals don’t revoke the Guarantee and Indemnity areas.

Ownership Issues

The assurance of ownership for IP existing before the execution of the outsourcing organizing the plan is essential, especially with respect to the end of the relationship. The agreement ought to determine which party claimed which IP resources before the outsourcing was executed. There are a few ways to deal with sharing ownership rights in regards to IP that is improved during the outsourcing arrangement :

• The client claims all the IP, with the merchant having the plausibility of utilizing the IP through a permit understanding
• The vendor possesses all the IP, with the client taking a permit
• Sharing of responsibility for IP resources
• Joint ownership for IP.

Conflictingly, joint ownership is one of the least comprehended and most confounded sorts of ownership conceivable as joint ownership laws separate licenses, copyrights, and trademarks. Concerning the licenses, each joint owner may make, use, sell, and import the patent/licensed formulation without the assent of different owners. Be that as it may, all co-creators must participate in legal action. With respect to copyrights, every co-owner is qualified to permit non-restrictive licenses in order to convey and duplicate the copyrighted work.

In the matter of trademarks, joint ownership is feasible just in conditions where the co-owners have set up, a structure to guarantee joint power over the nature of merchandise and enterprises to be sold under the imprints. Without this structure, the trademark might be legitimately articulated as having been part of it.

Privacy Issues

The U.S. has never portrayed a thorough privacy law. Yet, to keep up sensible security the laws do exist that force commitment. The Agreement must indicate that the client holds ownership of the information it submits to the vendor or merchant with respect to these laws and that the information is to be kept carefully private.

With reference to the client’s employees, clients, vendors, or accomplices, a commonly satisfactory convention for dealing with and preparing this data must be in place on the off chance that the seller will have direct or indirect access to the data.

Moreover, to the stretch that the client has posted or circulated protection proclamations, the client will be relied upon to be in full consistence with these announcements concerning ownership and privacy of information.

Jurisdictional Issues

The agreement should put down the following decision of law and jurisdictional issues

• Which nation will have authority over the discussions?
• Which nation’s tangible law will apply to debates?

These points are frequently difficult for evident reasons, each party needs its very own area to have control and it’s very own region’s laws to be applied. Frequently, the gatherings will consent to the sovereignty and substantive law of the district where the rupture has happened. Nevertheless, with the approach of the Internet, this arrangement is significantly less effective as a geological assurance of an unlawful act happening in the internet is almost incomprehensible. Whether the parties want elective question goals systems or not is another question that emerges like an intervention. The client must comprehend that specific courts will not hesitate to overrule legally lawful provisions as to locale and administering the law.

Termination Issues

The Termination provision is immensely significant as it precedes the conditions under which the client may leave the outsourcing relationship. Next is the list of basic reasons whereby the client may practice termination rights:

• Termination for accommodation
• Termination for a material break
• Termination for money-related emergency
• Termination for change of control of the merchant
• Loss of permit
• Termination for inability to meet services and execution levels

The client will consistently need the privilege to terminate benefits. The issue with this methodology is that the merchant will typically demand a comparable right. The client will need the privilege to terminate the merchant’s, Material Breach. The party’s meaning of Material breach isn’t straightforward and may require extensive arrangements as the parties contend over what set of conditions establish materiality.

To spread out in the agreement is the potential solution for the client as well as the explicit occurrences that comprise material break. The threat of this methodology is that it might possibly miss some situations. Another conceivable legally authorized solution is to allocate an expansive definition to material break.

However, the issue with this methodology is that it frequently prompts differences concerning whether the situation at issue fall under the definition. A feasible contractual path is for the client to authoritatively give itself the privilege to decide materiality be that as it may, this arrangement will quite often be vigorously challenged by the vendor.

The client may likewise need the capacity to terminate for different responsibilities for the merchant. For the most part, the client abuses this privilege in those circumstances where the responsibility for the merchant is significantly critical to the client. The client will likewise need termination rights for those conditions whereby the seller loses a permit that is important to give services.

At last, the client will need the capacity to terminate the agreement when the seller neglects to meet services and execution levels. So as to stay away from contention regarding what establishes disappointment, the agreement should spread out with particularity, the careful measurements as per which, failure can be estimated.

Statutory Issues

In conclusion, the client must know about a few resolutions to which it might be subject. The first is the Sarbanes Oxley Act. This demonstration was passed so as to reestablish financial specialist trust in the commercial center after a few emergencies of respectability, for example, the Enron failure. The demonstration applies to open organizations that get ready or issue review reports for other open organizations. For reasons for this paper, this demonstration pronounces that associations are liable for -making such review reports for their seaward sellers, and guaranteeing that they have set up, sufficient powers over financial reporting by their coastal vendors.

Outsourcing types and services

As said before, organizations primarily outsource non-substantive responsibilities for different reasons. The service providers are relied upon to offer productive help that doesn’t require a lot of further customization. A portion of the responsibilities that are as of now outsourced are :

1. Infrastructure Outsourcing

It incorporates tasks like overseeing data centers, systems, and applications. To set up the tasks with best practices in the infrastructure it requires operational brilliance.

2. Transaction-Oriented outsourcing :

This kind of outsourcing includes contracting that organizes the security of information and security insurance. The roles of the transactions are accounts handling, charging, finance, outsourcing, transaction preparing, etc.

3. Strategic Business Process Outsourcing

This needs calculated concerns such as mastery in selecting, yet the competitive contrasts happen regarding the client relations and legitimate comprehension of the customer prerequisites. Operational administration, executions, HR enrolling, and so on are a few instances of outsourcing.

4. Programming and IT applications

The advancement of IT applications requires lateral thinking and remarkable ways to deal to take care of an issue where an answer doesn’t exist right now. It is additionally critical to have the option to recognize future prerequisites and current updates effectively.

5. Business system meeting:

Requires the executive’s characteristics like initiative, task aptitude, an appropriate comprehension of the advancements bound by the future-driven developments that can be applied to different customers during interviews.

Perspectives on adopting outsourcing

Strategic perspective

In terms of outsourcing models and business roles, the fast increment in the IT business has rolled out an improvement. Organizations have ended up using this training as a hotspot for operational greatness and business advancement despite the fact that the significant explanation behind outsourcing has at first been the mission for a decrease in costs. This has changed outsourcing from a transitory purpose of answer for a long-haul business technique.

Presently, associations are separating the core tasks of their business from non-center perspectives to reassess the key standpoint. Reports propose that around 66% of huge associations have been engaged with outsourcing. The estimation of outsourcing contracts has expanded by 44 percent all through the world from 2003-2004. Organizations like Intel and Apple have their assembling procedures taken up by overseas producers.

Economic perspective

Financial constraint The significant test for the associations has been to control the degree of accounts without settling down with the advantages of progressions in innovation as there is a persistent increment in business pressures as for spending budget. Since the associations face consistent weights to adapt up to their rivals, they wind up depending on complex frameworks. Thus, interest in innovation consistently has gotten unavoidable.

Reduce investments in assets Outsourcing improves the re-engineering procedure as well as benefits the utilization of accounts in the inside administration of assets. It encompasses making an interest for current advancements and improving proficient and specialized abilities.

Convert fixed costs to variable costs The products that drive the business parts of an organization that are generally fixed is by the employee-related expenses and their related interests or investments. During times of defeat in deals, this can now and again be of greater expense. The way toward outsourcing can change these fixed expenses as the specialist’s co-ops have bigger sizes of economies and can cost as needs are based on the request.

Organizations will, in general, outsource fundamentally as a result of the accompanying reasons.

Cost

Organizations at times overlook a slight distinction in the nature of the product as it empowers remarkable inner cost reserve funds. There can be items that can be carried at lower costs somewhere else with similar quality.

Specialization

Numerous organizations that have providers for assembling, by and large, decide to outsource their items. Businesses look for outsourced items to accomplish a higher caliber. For instance, a PC fabricating organization can redistribute for improving smaller-scale chips, rather than making it all alone. It is additionally a bit of leeway when organizations need more gifted representatives in-house.

Flexibility

In the event that a business needs a minor contribution to assembling an item, it is pointless to fabricate the entire manufacturing unit for themselves. Outsourcing has the upside of paying just for what you need instead of paying for representatives in any event, during personal times.

Focus on core activities

While there are a lot of business tasks in the organization, it is the center exercises that offer an upper hand over others and run them into benefits. Thus, there can be an expanded spotlight on the center exercises when different angles are redistributed.

Conclusion

To sum up, offshore outsourcing can possibly give remarkable cost investment funds and time. Although, as mentioned above, there exist numerous lawful contemplations that an organization must consider before and during the outsourcing course of action. In regard to the multiplication of offshore outsourcing, case laws and statutory law are as yet being created and tried. In this unique circumstance, legitimate direction can’t be depended upon, to be completely sided by side of these changes. Therefore, it is fundamental that business elements teach themselves, in any event on a simple premise, with the major legal subjects attendant with offshore outsourcing.

References

1. Colson, Randall. HIPAA and Outsourcing: The Impact of Business Associate Rules Under the Final Privacy and Security Standards, Haynes and Boone, LLP (2003).
2. Covaleski, John. (2004) ―Outsourcing of Work Means Influx of Legal Issues.‖ Referenced on September 24, 2006, from Law.com, www.law.com/jsp.law.
3. Covered Entities as Employers—How Does HIPAA Apply? (2005) Pepper Hamilton LLP. Fanning, Ellen. (2004).
4. Legal Tips to Help avoid MSP Pitfalls. Referenced on September 24, 2006, from Computerworld, www.computerworld.com/managementtopics/outsourcing.
5. Finance and Accounting Outsourcing: Does Outsourcing Reduce Risk? (2004). Bierce & Kenerson, P.C. Fox, Stephen. ―HIPAA and Foreign Outsourcing.‖ (2004). Pepper Hamilton LLP. Gareis, Robert. (2004).
6. Business Process Outsourcing under Sarbanes Oxley: Challenges and Complexities,‖ Baker and McKenzie. Gliedman, John. (2005).
7. Computer Counsel: Six Issues Facing Outsourcing,‖ Computerworld. Vol 11, 23-24. Hayes, David. (1997).
8. Performing an Intellectual Property Audit of Copyrights.‖ Fenwick and West LLP. Hoffman, Thomas. (2004).
9. Outsourcing Sparks concerns over IT Controls to Meet Sarbanes-Oxley.‖ Computerworld, Vol 11, 23-24. Kimpel, Scott. (2003).
10. Legal Issues Associated with Cross-Border Outsourcing Arrangements‖ Bankers Digest, Vol 5, 11-13.
11. Legal Issues: Offshore Outsourcing. (2005). Referenced on November 13, 2006, from Offshore Outsourcing, www.offshoreoutsourcing.org/legal.
12. ―Legal Issues – Offshore Software Outsourcing,‖ (2003). Referenced on October 20, 2006, from Indiasoftware.com, www.indiasoftware.com/legal-issue. Melby, Barbara. (2005). ―Technology Outsourcing: Retaining Control in an Outsourced Environment,‖ Morgan Lewis and Bockius, LLP. Mensick, Michael. ―Outsourcing Essentials – Innovations in Outsourcing,‖ (2004). Referenced on October 16, 2006, from Outsourcing.com, www.outsourcing.com/content.

Outsourcing Versus In-house Production in Generators Industry

Abstract

Many manufacturing firms entrust partners to provide manufacturing services on their behalf. However, it is not clear whether and when firms can capture the potential value advantages of outsourcing business services. The purpose of this project is to investigate the suitable manufacturing approach for Generators that is not in the main core business of the firm.

The question regarding whether to produce in-house or to purchase from an external supplier is nowadays very common, it is highlighted as a central and strategic decision for manufacturing firms. Furthermore, the importance of creating a competitive and consistent make-or-buy strategy that is adapted to the context of the firm as well as to today’s dynamic business environment cannot be underestimated. Today the company where I’m employed lacks a standardized and holistic process to support this decision-making. Consequently, this study aims to, in line with the company’s business strategy, develop a decision model to facilitate the company’s make-or-buy decision.

To be able to fulfill the purpose, a thorough cost study examination for a selected generator will be conducted Furthermore, a survey questionnaire filled by production managers from different factories will be developed. As a result of this, an initial list of parameters potentially affecting the make-or-buy decision will be generated. Consequently, the decision model will be developed and presented.

Introduction

Over the past decades, especially in the second industrial revolution after world war 2, firms and companies started disintegrating their production, becoming more and more specialized along with the trend of globalization. Nowadays, outsourcing is increasing in more companies due to open borders between countries, open markets and high competitiveness, in addition to fast and easy communication. Due to these challenges, firms are looking on decreasing their costs while maintaining the quality level of their products or services.

In the literature review, we will describe from previous articles the pros and cons of outsourcing and in-house productions for different products and how they weigh the suitable model for each firm and product.

This will be analyzed in the methodology through quotations received from different suppliers and from surveys filled by factory managers in the same domain. The analysis will be made for full outsourcing, partial outsourcing and complete in-house production. A comparative analysis will be then conducted to compare the received quotations, followed by statistical analysis for the filled surveys. The latter will allow us to determine the suitable production model for the generators.

The problem statement, research questions, and research objectives

Nowadays, most of manufacturing companies are facing challenges in selling their products in markets due to the high competition and worldwide open markets.

Industrial companies tend to create innovative ideas in production to reduce their production costs while maintaining the quality of the product. Therefore, companies are looking to transform production methods and techniques by outsourcing it to sub-contractors or by producing it in-house. In the project study, we will look at the pros and cons of both models and find which one is more profitable for the companies to use depending on the industry sector.

The importance of changing the production model in the industry is lowering the costs of production to increase the selling and reach more consumers. In our case study, we will be discussing the electrical generator industry and studying the best model of production. We consider an outsourcing model in which the supplier makes the effort decision, and an in-house production model in which the manufacturer decides the effort level, then we compare these two models with each other. The following research questions need to be addressed:

• Which production model is better for the generator industry?
• Which model has a better-quality control and testing?
• Which model is the cheapest?

The objective of this study is to provide the best way for generator production taking into consideration the following factors; cost, quality, delivery time, and expertise.

A preliminary literature review shows that most of the past studies are primarily focused on the production model in general; only a few of them were tackling specific types. In our research, we will focus on the generator’s production and assembly and what to outsource precisely.

The research will be based on quotations for raw materials, availability and delivery time from suppliers, taking into consideration the assembly charges and the internal costs for in-house production. Whereas for outsourcing, we will ask different manufacturers to quote finished products.

Literature review

Every way of production has its pros and cons, the success is in evaluating the best approach for each industry and its circumstances. Globalization imposed outsourcing as the main factor for production activities, it is a type of “make-buy” decision.

(Hamada, 2010) discusses product differentiation with cost uncertainty between Outsourcing and In-house production, he stresses on choosing to outsource if the degree of cost efficiency exceeds certain thresholds. In addition to production activities, outsourcing can include human resource management and research development. Moreover, technological efficiency is the main reason for choosing to outsource over in-house production. When the outsourcer possesses advanced technology, the manufacturer will share more profit with the outsourcer even if it cannot monopolize profit. The author says that outsourcing is a key aspect of modern industrial production. Therefore, he presented a model that allows each manufacturer to choose its organizational form of production when faced with cost uncertainty and competition with a rival manufacturer in a differentiated goods market. The calculations show that if the degree of cost uncertainty of outsourcing is identical to that of in-house production, then outsourcing is never chosen. In addition, partial outsourcing has been analyzed as well and can be used in organizations. The authors demonstrated that the product selection should be purely scientific and based on calculations for the management to decide on whether to outsource or not, it should distinguish between technological and competitive advantages. The decision to outsource is affected only by a technological factors such as cost efficiency.

(Teng & Hsu, 2017) supports Hamada by discussing the trade-off between in-house production and outsourcing in a two-echelon supply chain to optimize the total profit per unit time of the system. The authors start by describing the benefits of outsourcing and created a development model to choose the optimal solution. It was illustrated by numerical examples and sensitivity analysis. The figures and results show that outsourcing plays a critical role in improving a firm’s overall competitiveness due to limited resources. Therefore, the firm must distribute its resources on its core tasks and reduce its total operating cost to generate a greater value. The results obtained from sensitivity analysis will provide managerial insights to administrative personnel in decision-making.

(Lu, et al., 2011), discusses outsourcing in correlation with product quality and contract enforcement. The article emphasizes the importance of product quality and how to maintain it during the outsourcing process, supporting it with theoretical and empirical analysis. The study was based on surveys from 2400 firms across China, the survey consisted of two parts; the first part was a questionnaire directed to the senior management seeking information, whereas the second questionnaire was directed to the accountant and personnel managers. The choice to outsource was the trend of globalization and the increase in competition to reduce the costs; which led to quality issues. The results showed that outsourcing compromises product quality, but the negative impact of outsourcing on product quality is mitigated by the effectiveness of contract enforcement. (Jingxian Chen, 2015) emphasize as well on the importance of the quality investment strategy in outsourcing, they derive the rather simple analytical equilibrium results and analyze the effects of sharing the coefficient on the quality improvement and the member’s profits as well as the whole supply chain profit.

(Haidar, et al., 2016); presents a comparative analysis of in-house and outsourced development in the Software Industry, the paper discusses the variety of positive and negative aspects of outsourcing from a political, economic, and organizational view. It also demonstrates when and where outsourcing is useful for an organization and where it is not. According to the authors, the main reasons to outsource are quality improvements, core focusing, increase speed to usage, fostering innovation, conserving capital, cost reduction, and saving of valuable time. The disadvantages of outsourcing are mainly cultural and lingual differences. Outsourcing plays a vital role in completing the task in time and transferring the risks. However, the authors acknowledge the risks associated with data privacy and goodwill, loss of potential employees, and loss of potential customers.

(Griffis, et al., 2013); discusses the best projects to undertake in the public sector, illustrating the overhead of direct and indirect expenses for in-house employees to reflect them within the costs of the outsourced services. A number of factors other than cost become key drivers for outsourcing design, the decision should be based on policy, staffing capacity, schedule constraints, lack of special expertise, need for innovation, better management of risks, improving quality, and on cost-effectiveness. A comparative methodology used in the study by the authors on real data collected from the NYS showed the total costs occurred for projects when done in-house or outsourced. It was noticed that the employees in the public sector usually get generous benefits packages compared to the private state due to a large amount of paid time off, and the inefficiency of public employees.

(Dogerlioglu, 2012); state that not only the quality and cost considerations drive the organizations to outsource their production. Organizations review their business model, size and industry characteristics, culture, and external environment for a successful outsourcing project. The author lists the following main factors that influence the success of outsourcing; flexibility, delivery, employees’ career support, employees job satisfaction, and communication problems.

Figure 1: Research model

The studied model was based on these five factors (fig.1):

• flexibility is the ability to respond and adapt to changing conditions. Firms running in harsh competitive environments focus on their strong aspects and try to find support from other firms to strengthen their weaknesses to keep their competitive edge. The increase in the flexibility level allows the firms to respond quickly to market demands. The important components of flexibility are robustness, modifiability, the potential for new capability, and ease of exit.
• During the delivery process, firms have to pay attention to the quality and timing of delivery since the main challenges of many outsourcing projects are the project deadline and the quality, noting the monetary penalties that apply when exceeding the promised delivery time. This term will mainly be added in the project contract.
• Employee satisfaction development is his career path and its expected from every company. Usually, outsourcing firms invest in their workers to meet the expectations of their customers. Moreover, the employees improve their skills and capabilities willingly since it is also an investment for their own careers. To conclude that companies outsource their tasks, they expect professional service from high-skilled workers.
• Job satisfaction is an important factor in firms and can be caused by outsourcing contracts. The loyalty of the employees decreases when project involvement is low. It causes a loss of confidence in management, decreased morale, lack of direction, risk avoidance, and loss of control.
• Communication plays a major role in organizations since every firm has a unique corporate culture consisting of shared values, attitudes, and behavioral patterns.

When two different cultures start to cooperate, there may be some difficulties until they agree on shared meanings, especially in multinational projects, different languages may strengthen barriers of communication.

The research model was based on collected data through surveys to compare outsourcing firms and internal departments. The enclosed departments in this study were logistics, finance and accounting, human resources, and information technology. The results show that the advantages of outsourcing are true only for some areas of activity. The competitive advantage is valid only for logistics outsourcing between the listed departments.

(Taheri, 2013) states that in the last two decades, outsourcing dramatically increased due to globalization. He emphasizes the importance of outsourcing abroad to less developed countries where the labor cost is cheaper, this act needs a strategic decision from the firm to move its production completely to another country. (Dolgui & Proth, 2013) evaluated to what extent production should be performed internally and what could be entrusted as an external supplier, always arise when a firm face an implementation of the new product. In addition, they explain that outsourcing is defined as an act of obtaining semi-finished products, finished products or services from an outside company if these activities were traditionally performed internally. In other words, transferring the existing activities to an external third party. Add to this terminology, the transfer of any activity includes the transference of the control of this activity as well. Moreover, (Kumar, et al., 2010) stress on the importance of regular re-evaluation of the present make-or-buy strategy in order to make it fit the current situation of the firm.

(Ashe-Edmunds, 2017); advises that usually small businesses start to weigh the benefits of transforming their manufacturing from outsourcing to in-house when their sales level becomes high enough. The owners will start thinking of increasing their profit by cutting the middleman. However, other factors need to be considered before jumping to this step.

He emphasizes on the quality control enhancement when in-house production is applicable, considering that in outsourcing there will be no quality control on every production step unless a site engineer from the client side is reserved for this task. Moreover, ceasing the profit gained by the outsourcer can save considerable money, Hence, when making the product, not only the profit charges are eliminated, there are as well the delivery expenses and credit fees that the outsourcer charges. The disadvantage of transferring the production in-house is that the factory needs to produce enough units to generate enough profit to cover the manufacturing facility, equipment, workers, insurance, property taxes, utilities, and other production costs. In all businesses, suppliers often make products for more than one company, allowing them to spread the overhead costs among multiple customers and to increase the volume of raw materials purchased from the source to get better prices based on larger quantities. The location of in-house production needs to be carefully studied since government rules and regulations in some areas can exempt the manufacturer from inventory taxes, even more, they can offer tax credits for manufacturers that create new jobs. Another disadvantage point for outsourcing is sometimes, the customer thinks that the goods are produced in-house, therefore the supplier cannot ship them directly to the customer from the outsourcer factory, this may cause conflicts and trust impacts between the supplier and the customer. Therefore, an indirect cost will be added to deliver the goods from the outsourcer factory to the supplier or to a warehouse before shipping them to the customer. Nevertheless, outsourcing production can shrink the labor cost when manufacturing is outside the country in a less developed area, but this might irritate patriotic consumers and give the competitors a marketing tool.

As Premji once said: “The important thing about outsourcing or global sourcing is that it becomes a very powerful tool to leverage talent, improve productivity and reduce work cycles” (Premji, 2010), on the other side Selznick said: “The success of a production depends on the attention paid to details” (Selznick, 2010). Consequently, some studies support Premji in his overview of outsourcing and its benefits. Whereas, others illustrate a comparative study between in-house and outsourced manufacturing based on mathematical equations. The outsourcing could be related to materials production or services provided, in addition to human resources. The authors agree that in-house production provides better quality control, but this can be managed in some outsourcing cases. It’s very important to overtake a regular re-evaluation of the present make-or-buy strategy in order to make fit the current situation of the firm.

According to the studied articles, a comparative study demonstrates the advantages of manufacturing, be it in-house or outsourced.

Advantages of in-house production:

• Higher quality control
• Product knowledge conducting an enhanced after-sales support
• Design privacy and confidentiality

Advantages of outsourcing production:

• Inexpensive labor when outsourcing is in less developed countries
• Advanced technology
• Production capacity
• Production Reliability
• Skilled labor when needed
• Less investment cost, reduce assets.
• Foster Innovation
• Lower costs when the economy of scale is considered
• Allow the manufacturer to focus on other tasks

A lot of discussions have been focused on the steep rise in offshoring. The more general notion of outsourcing manufacturing resources is not new. Contract manufacturers have long been performing manufacturing for companies that have chosen to no longer perform some or all of their manufacturing in-house. An example is Samsung cell phones, it is very known that some of its main components such as the screen is outsourced. The growth in the use of contract manufacturers has occurred for some rational reasons.

• Technology has made the management of remote operations easier.
• Strong and competitive supplier bases have been created in many industries.
• Increased product variety and technological volatility have made it more difficult for a single entity to master all of the technology required to produce its product.

All the same in many sectors, there are some restrictions that oblige the manufacturers to produce in-house such as military items, even software, and web applications. In addition, there are also plenty of benefits with keeping the manufacturing process in-house. The flexibility is an added value for in-house, if the customer would like to change in the design, the communication between the different departments can be very smooth and easy to do. In-house manufacturing allows a business to react to the market quickly and change its products suitably. Even more, the company can test prototype products in-house, discuss issues with engineering and design departments in-house and then change what need to be changed. Instead of having to ship prototypes across the world, it can all be done quickly and easily within the business. This speeds up the whole process and cuts out what can often be weeks in between prototype creation and testing. Another point can be added which is customization. If a customer wants a customized product, this can be easily done in-house, in a fast and easy way. Whereas if it is to be outsourced, it has to go through a range of channels and processes and there is a higher likelihood of an error. (Doradus, 2012)

What these authors, among others, agree upon is the importance of creating a competitive and consistent make-or-buy strategy that is possible to adapt to today’s dynamic business environment.

We can conclude that in-house and outsourced practices have been in use for the last few decades with all their advantages, disadvantages, and risks associated with them. Every industry and situation plays a vital role, i.e. when projects are highly complex, the production cost is too high, in-house technology is not sufficient, and a lack of expertise exists; outsourcing is the perfect choice to acquire. However, for a successful decision concerning outsourcing, the firm needs to accomplish some foundational tasks:

• The choice of outsourcing should be consistent with the overall strategic goals of the firm.
• The firm’s core competencies need to be identified.
• Determining the appropriate suppliers by identifying the market.
• Assign a specific team for outsourcing implementation.

Moreover, according to the discussed literature, we can say that outsourcing has disadvantages that need to be taken into consideration such as:

• Product qualities that cannot be guaranteed unless contract enforcement is used with close follow-up.
• Privacy and confidentiality risk can lead to stealing product design and selling it directly to the vendors.
• Maintenance issue when any trouble appeared in the product after delivery
• All these points must be taken in consideration before proceeding in an outsourcing choice.

Methodology

In the research methodology, we will be working on qualitative data more than quantitative. The nature of data will be descriptive and classified into categories.

For the qualitative data, the One Generator rating will be selected with standard specifications to determine its cost when manufactured in-house or outsourced. Therefore, the secondary data will be reckoned.

• When manufactured in-house, a lot of elements will be taken into consideration starting by the raw materials costs Ex-works factory, shipping charges including customs and clearance fees, employees’ overheads with their health insurance, and pension fees.
• When outsourced to a contractor, two models will be studied, the first model will be complete outsourcing, the outsourcer will source the raw materials and assemble them together to deliver us a complete generator. Whereas in the second model, it consists of partial outsourcing, in which the client supplies the raw materials and the outsourcer will only be responsible for the assembly, in addition to the testing and quality control.

This will be followed by comparative analysis to determine which approach is less expensive. However, this result will not be final and cannot be adopted since it doesn’t include the impacts of each manufacturing. Therefore, quantitative data is essential to analyze the advantages and disadvantages of in-house and outsourced manufacturing. This will be calculated using surveys to collect the required data from the manufacturers and the outsourcers. The survey questionnaire will be constructed based on the literature and will be built on primary data. This will express the point of view of factory managers, the questionnaire will be self-administered and will be shared by email with the concerned people for filling.

The questionnaire will be composed of the following topics:

• Margin status
• Delivery time
• New product introduction
• Inventory liability
• Product Quality
• Product life cycle
• Design Privacy
• Potential customers

The secondary data for the study will be sourced from official quotations received from several contractors for the outsourced manufacturing, and from factories and suppliers in addition to internal documents for the in-house production.

The primary data for the study will be the opinions of production managers of firms. These will be obtained through questionnaires and surveys covering the above.

Conclusion

In reference to the competition in markets is due to globalization and open markets, manufacturers are facing a lot of challenges in selling their products, therefore partial or complete outsourcing may be the best option.

The focus in the literature was on the benefits and drawbacks of in-house and outsourcing choices. The selection between them depends on the product or service acquired. This project will help us to determine the best approach for generator production when this product is not a core business to the company.

A framework will be developed, which provides strategic guidance in choosing between outsourcing and in-house approaches. This ensures taking into consideration a wider range of key variables underpinning value-adding selection, not only concentrating on financial factors but as well on other equally important variables that add value.

The main factors that can affect the product and will be analyzed in the project are the product cost, quality which will be monitored during the manufacturing, testing after manufacturing, packing, the lead time needed to deliver the product in addition to the inventory for the on-shelf products and forecasting, life cycle of the product, design privacy and the possibility of losing potential customers.

This study will help us in the company to understand and select the suitable option for generator production.