On Outsourcing.

International supply chain management functions and the trend of outsourcing in business models letting firms gain access to sustainable market operations and competitive advantages in the modern international world business landscape.

When one thinks of making a business the usual train of thought the idea takes route upon starts near what basic materials or supplies the product needs to be produced and ends up near the dimensions relating to consumers. Certainly this process has had major changes in the way models are created and firms operate as compared to its most primitive counterpart. When we observe how major industries operated in England long ago, during the industrial revolution, we can easily find an unmeasured rate of production focused operating model undisturbed by the modern complexities of an interconnected consumer market and syndicalism, then if we dig a bit deeper we can also appreciate that while output was maximized, a serious lack on efficiency focus is also present. Of course this is not a major breakthrough, even in older times we can find instances of renowned thinkers like Adam Smith beating the bush around the idea of max efficiency as a form to maximise output without relying on the investment of more resources, in other words we can see how since way back firms, or their predecessors, look for a maximisation of resources to production in order to be able to reach the maximal capacity of revenue available given the investment of finances and energy. While we can find similarities when looking a bit backwards in time, we also beg the question: What is the difference between those times and ours? Or better put, how has the panorama and paradigm of business management evolved when observing the modern landscape?

While its true one may argue that globalization is a constant historical trends that shifts the way society relates across the globe, there is no denying that nowadays we are living an unprecedented age of interconnectedness that not only alters the individual sphere by events happening far away, but also transforms various spheres of global interactions all the way from economics and politics to our social daily lives through the exchange of information and culture across large areas. This trend is mainly due to the interconnected society that came to rise thanks to major advancements in technology seen in the last few decades, more than certainly we have been witness in these past few decades to an unprecedented rate of technological development and global interconnectedness with an emphasis on those dimensions relating to transport and communications. This factors can be taken into account as main authors regarding a shift not only in governmental regulation and policies but also in logistics, transport and communication, therefore by consequence, affecting the way major firms consolidate their organizational operations in an interconnected global panorama which by the access to a massively fast exchange of information, finances, direction, people and services have created a volatile environment for firms to operate affecting all stages of a determined product from point of origin to point of consumption. In order to be able to compete in this quick shifting new reality, firms are obliged to transform themselves constantly and pivot themselves faster than ever.

Picture the sentence “from point of origin to point of consumption” as a bilateral line, next picture smaller intersections that cut this line, each intersection represents a step of the way starting on a far end with suppliers and going all the way to consumers passing through different checkpoints that represent manufacturers, wholesalers and retail. Each of this checkpoints act as a link of a chain, and this bilateral line represents the chain itself, when applied to a big scale point of view this is known as the international supply chain and it’s management has become one of the “musts” to be able to compete on the modern landscape of product, information and capital trade. Outsourcing, which in a nutshell is the use of outside or third party firms hired to perform functions generally performed within the company, began making its way to become a major piece of any business model more than three decades ago, quickly evolving into one of the major trends inside businesses and grew to become an unstoppable industry nowadays.

Outsourcing:

In order to be able to compete in the actual environment of international scale markets, outsourcing has proven to be a valuable tool in order to maximize output, how so? In a world where globalization provides for a big impact on volatility, when it comes to supply and demand, due to far away events affecting the consumers life and market, combined with the heavy risk firms face having their products reverse engineered, companies now tend to have shortened life cycles. In order to counteract the effects of this modern competitive environment, firms have opted to limit themselves around a certain strong suit and source the rest.?

“One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands.” - Adam Smith. (1776). An inquiry into the nature and causes of the wealth of nations. Oxford university press.

Just as Adam Smith brilliantly put it in 1776, separating the job into distinct hands improves the output in terms of efficiency. In modern times firms do exactly the same but on a massively larger scale by the use of outsourcing. Firms focus only on what is best done by them and outsource the rest to other firms that specifically focus on determined steps of the supply chain.

One of the standard supply chain cycles takes into account raw material producing firms, logistic firms, suppliers, distributors, manufacturers, retail firms and consumers, all as different actors interconnected in one big scheme in order to trade a product, taking consumers both as a starting and ending point. Different actors along the cycle focus on different supply forms to keep this chain active, being consumers the ultimate suppliers of demand. Firms opt to outsource to other more specialised firms the different steps of the chain.

There’s no doubt that in order to compete in the actual market scenario firms need to make alliances and cooperative tools, one of the advantages of this is the capacity to attain resources which were previously lacking including not only material resources but information and capital resources, even when overworked, outsourcing provides a flexible method to access service resources or extra working force. This partnerships helps not only when it comes to labor and resources but also let’s firms decrease costs that don’t involve their main activity, although in some rare instances costs may rise due to outsourcing, even then the advantage in terms of speed and responsiveness outsourcing provides can significantly improve the numbers when focusing on a revenue oriented perspective while mitigating risks not only by sharing the ones that may procure when in market but also internal risks or operational risks as the operation can keep on moving even if a certain link in the chain stands temporarily inactive. Supply chain management, a key system to understand when taking into account the heavy weight of time, has a factor in today’s global markets.

Time to market:

When managing a firm in a modern day environment it is of key importance to reduce time to market being that factor a major player in the modern panorama. The spikes of technological advancement seen throughout the last decades has made for an environment where an idea can be both put into production at an extreme never before seen rate as well as reversed engineered with diminished effort. This has in turn opened the path to two important aspects to be considered.

The first one is well known by the term “empowered consumer”. What does this refer to? Due to the dramatic increase in information accessibility, the modern day consumer is more educated about the ideas and production going around in faraway places. One of the criteria that when observed puts this into the spotlight is the statistical evidence on how, thanks to technology, “in progress” countries, like China or India, can be highly competitive in the international market as to contrast on how exclusive this was before in favor of well developed countries, an example of this can be seen in the consumer’s use of platforms like “Ali Baba” or “MercadoLibre”.?

“Competition is the final price determinant and competitive prices may result in profits which force you to accept a rate of return less than you hoped for, or for that matter to accept temporary losses." - Alfred P. Sloan. (1963). My Years with General Motors.

Empowered consumer:

The empowered consumer has the facility to relate to many markets in search for more consistency, selection, services and especially convenience thanks to the large gamma of offers and access to information about the detailed specs of both firms and products. Consumer loyalty has become a thing of the past as consumers seek instant gratification with less risk and cheaper prices, so these big firms have had to morph in search of being as fast responsive as they can while being able to produce efficiently enough to let retailers still turn a profit. With customer retention such a difficult mechanism nowadays, firms have had to become customer oriented rather than sales oriented because statistically it has become an almost given fact that profit is able to increase drastically quickier when centered around consumer retention rather than sales or cost focused. This has made for an increase in both the quantity and complexity of supply chains due to the almost obsessive way modern businesses are fixed on fast responsiveness and cost efficiency balance, therefore the management of said supply chain has become a pressing point to be centered upon.

Emerging ICT innovation and numerous, frequently underlying prospects for information gathering are commonly linked to the empowered consumer concept's growing prominence. This change is thought to be the cause of organizations having to deal with hazy communication relationships. Diverse sources are used by overlapping target audiences and more knowledgeable stakeholder groups to gather information, compare it to other information, and evaluate it according to each group's unique perception. It is suggested that a variety of factors, including bias, education, experience, social setting, and life experience, influence the outcome of such a procedure. Understanding that consumers cannot be shaped and manipulated like they might in the pre-Internet era is one challenge for businesses. The communication model by Grunig et al. can provide compelling reasons for this and is one of the prerequisites for comprehending future organizational difficulties as well as new opportunities.

The second key issue relates to the high risk firms, especially tech oriented ones, are exposed to when it comes to their products being susceptible to reverse engineering, even before they are able to be finished, therefore threatened into being beaten to market. The way firms react to this increasing threat is by focusing on what they call their “core competencies'', what does this term refer to??

Core competencies:

A core competency is a unique ingredient that belongs to any firm and can only be provided by such, it is also an ingredient known to the consumers that provides them benefit and can be only supplied by a specific firm due to its hard to imitate components and the wide leverage it has to many products and markets. Strategies right now focus on developing a firm's core competency while outsourcing everything else to a third party, tunnel visioning their core competencies creates the opportunity for firms to exploit them and create value measured in product performance due to added value through traits and characteristics consumers are willing to pay for. This measurement is related to the above explained idea of customer retention. A company is said to have a competitive advantage when it is implementing a value-creating strategy that is not being adopted simultaneously by any present or potential competitors.

“Never ever compete on prices, instead compete on services and innovation.” - Jack Ma. (2009).

The hardest things for a company to attain are its core skills. They represent the company's core principles at their highest level. This is because the potential for resources to develop into competences varies greatly among them. Additionally, only a tiny fraction of competences can advance to the level of core competence. This truth can impact a company in both positive and negative ways. On the down side, it means that developing fundamental competence is extremely difficult. Positively, it suggests that once a company develops a core competency, it is very challenging for the rivals to duplicate and imitate it. As a result, there are positive and negative aspects of the construct.

Firms find the increasing need of focusing not only on quality and prices but see time as a main factor in order to be able to compete inside the actual market scenario shifting the cost oriented outdated paradigm into a more revenue centered taking into account as heavier factors their cost of opportunity and an extremely fast responsiveness to the changes in consumers.

"I delegated what I didn't like, the tax, finance and human resources issues. And I got involved in what I liked, the distribution and the product. Now I'm having a great time at work. Before, I used to come on Saturdays and Sundays and make the collections. Now I don't design, I haven't been involved in collections for a few years. The important thing is to set goals in life and put all your soul into achieving them. The company is doing very well because everyone has clear roles". - Amancio Ortega. (2011).

Drivers of Outsourcing:?

Outsourcing, especially customer managing outsourcing, focuses on cost reduction being the main reason why companies tend to outsource but a dramatic increase in the realization that outsourcing turns fixed costs into variable costs has made firms focus that this model releases capital for investments while preventing large expenditures. Over the past years outsourcing has developed a complex infrastructure of IT and telecommunications which can be sustained at very cheap prices and fast speed of information exchange thanks to the new advancements in technology. Outsourcing makes businesses much more competitive thanks to the ability it has to provide companies with the resolution of certain functions usually held within freeing the company to exploit their core competencies at a reduced cost with flexibility regarding geographical location and internal issues.?

Outsourcing provides not only one but many advantages for companies using it, to state point clearly some of the advantages briefly are the increase outsourcing provides to efficiency and effectiveness letting business focus on their core competencies and by consequence improving their final output in terms of both while also being able to tunnel vision their way into the improvement of product quality. Cost reduction also comes along with outsourcing given that the cost of doing the latter is dramatically cheaper than that of keeping a workforce constantly on payroll or as explained above, converting fixed costs into variable ones, it is also the case that manpower available through outsourcing is cheaper than those fixed ones therefore it reduces the amount of investment a company needs in order to fulfill their costs of operations which in turn become more flexible or adjustable. Another key factor is the collaboration tools developed by outsourcing, practice that has helped the knowledge expansion between organizations. As a bonus effect, Outsourcing stimulates entrepreneurship and trade throughout the region where outsourcing takes place in turn helping their economics to evolve.

Outsourcing has become key in the organization of the modern business panorama, a trend that has since the 1980s influenced executive management heavily. This Industry has certainly played a big role in the shaping of the environment we can observe nowadays, but at the same time this trend does come with certain disadvantages.

Barriers of Outsourcing:

Offshoring and outsourcing are increasingly being tagged in capital letters "They looked like decent ideas at the time" by more businesses. It is widely claimed that this 1980s-era pattern may finally be coming to an end. The fundamental reason is that the savings originally obtained through offshore (shifting work overseas) and outsourcing (hiring domestic or foreign contractors) are no longer as great as they once were. Once upon a time, US, European, and global firms eager to cut costs made China and India their top priorities. Both were prized for having inexpensive labor pools with high levels of expertise. There are still skilled workers, but there is fierce competition for their services. Additionally, these workers have raised their expectations as they start to recognize their worth. Modern statistics observe that wage growth in China and India has averaged 10–20 percent annually over the past ten years. Senior Chinese managers are increasingly paid at or above levels found in North America and Europe. This tendency has made for an increase in the costs of outsourcing which used to be the main driver that impulsed this trend to develop in the first place.

Some businesses have "reshored" some of their production due to rising wages and the expense of shipping items to their local markets. That includes General Electrics for example, which shifted washing machines and other appliance production from China to a facility in Kentucky recently.

In addition to greater expenditures abroad, several aspects support that it is not necessarily a competitive advantage to reshore manufacturing efforts. A case in point is Apple's relationship with China-based Foxconn and how this Outsource relationship damaged Apple’s image most likely permanently. It was advantageous that Foxconn had such a large capacity for mass-producing the iPhone and other Apple goods, however, a number of widely reported stories, the majority of which focused on Foxconn's appalling treatment of its employees, shocked many Americans, embarrassed Apple executives, and hurt the company's reputation. After this incident Tim Cook, the CEO, requested an investigation followed by an announcement stating that Apple would shift some Mac computer production from China to the US. While Cook stated that the major objective was to generate national employment, this statement may also be interpreted as a concession to those who have criticized the Apple-Foxconn partnership.?

A great example of outsourcing gone wrong is when observing how Boeing lost control over their processes thanks to outsourcing. The fleet of 787 Dreamliners, operated by the aerospace titan, must remain grounded while a cure is sought for the problem with the batteries. It is claimed that the round of outsourcing's hands-off approach Boeing operated with, in which the business contracted with approximately 50 top suppliers and essentially "outsourced" responsibility, is the likely culprit. Outsourcing is nothing new to Boeing. The business outsourced the 777 and 737's engines, batteries, and landing gear for previous aircraft. The business handed over control of subcontractors to the contractors themselves and granted too much liberty to their big suppliers.? As a result, there were too many people working on too many different things without any centralized quality control, quality unavoidably fell, as did Boeing's reputation.

The opposite practice can be observed in South Korean business executives, according to The Economist, they rarely outsource production and think that USA and European corporations are wrong to export as much manufacturing as they do since it gives other companies a lot of insight into their processes. The criticism stems from the vulnerability many products, especially those in technology, have to being reverse engineered. Ironically, the loss of intellectual property ultimately strengthens competitiveness, which is another element that firms should take into account when evaluating whether it's time to return production home from abroad.?

A Final Recap:

Over thirty years ago, outsourcing started making its way into every business model. In a nutshell, outsourcing is the use of outside or third party firms hired to perform functions typically performed within the company. It quickly developed into one of the major trends within businesses and grew to become an unstoppable industry.? The expense of shipping items to the firm's local market, rising wages, and worries about the transfer of intellectual property have caused many businesses to reconsider their outsourcing approach. The expenses of their expertise climb as nations like China and India become global leaders in manufacturing, decreasing their advantage over US competitors. However, previously reliable brands like Boeing have become the ideal "reshoring" (outsourcing) case study due to complex and more dangerous supply chains depending on novice vendors. Finally, businesses are realising that their intellectual property is their most valuable asset, they unintentionally exposed themselves to a new threat by moving their supply chain to nations that disregard state patent and copyright rules, this threat has the possibility of turning their vendors into rivals.

Cayetano Sotomayor, Lima Peru, 2023.