Issues with Outsourcing

There are a lot of issues with outsourcing. You need to take care of all those issues, if you really want to take the full advantage of doing so. You just cannot sit back, saying you have outsourced something to someone, and you need not bother anymore. In fact, when you outsource, you should bother much more, because you are not only outsourcing some parts of your business, but also outsourcing a big chunk of your brand value, which you have made by investing millions of dollars.

The issues of utmost importance that you should be taking care of are:

1) Labor cost in the market where you are outsourcing to. You should keep in mind that this is NOT the most important factor you should be giving the highest priority. It’s just one of the factors.

2) Transportation cost and time involved in transporting the goods from the point of production, in the outsourced market, to the point of your further operations, which can again be anywhere in the world.

3) The inventory that you need to maintain and its associated costs to keep your show running, while your products are getting manufactured in the outsourced market.

4) The cost of hedging risks. In case, say, because of some catastrophes, you fail to procure your goods from the outsourced market; then in that case how you have planned to keep the show running. Sometimes, the cost of hedging is so huge that companies change their entire plans of outsourcing. You just cannot afford to overlook this! If you don’t plan for this, you might be giving your competitors a definite edge, or a big number of your customers, or a big chunk of your own “monopoly.”

5) Manufacturer’s technical capabilities, for making sure that you get your products right in the right way, and practical capabilities, for making sure that the manufacturer can deliver the products in time to the right place. After all, you have a reputation to maintain. Don’t you?

6) You might need to take care of your intellectual properties. By and large, Intellectual Property Rights in low-cost economies are not in good shape. So, chances are that your products might get copied by someone out there, and you lose a future market before even taking a stance. Can you afford losing a market with almost more than half the world’s population? I bet; you just cannot!

7) Above all, you need to seriously consider your procurement on a global basis. The reason is that - say, if you get a 20 percent cost savings in a business that might have a 10 percent or a 15 percent margin - that creates a massive competitive advantage. If you don’t do so, your competitors will surely take advantage of this, giving you a big disadvantage. Can you afford not doing so? I bet; you just cannot.

And, opponents of outsourcing, especially those in the US, must consider the findings of the McKinsey Global Institute that for every dollar the United States sends abroad through outsourcing, it gets about $1.12.