Reorganising Production (DP IB Business Management)

Outsourcing & Subcontracting

• Outsourcing is the process where a business delegates specific business activities (IT, customer support, HR etc) to external service providers

  • Businesses choose to outsource these functions to reduce costs, access specialised expertise, or focus on core competencies

• Subcontracting occurs when specific parts of a larger project or contract are assigned to third-parties

  • The business remains responsible for the overall project or contract but certain components or tasks are delegated to other companies/individuals with specialised skills

Diagram: advantages of outsourcing and subcontracting

• Cost savings

  • Businesses can often reduce expenses associated with operations such as hiring and training employees, maintaining infrastructure and managing IT systems

• Access to specialised skills

  • External specialists have resources that the business lacks internally which allows it to benefit from the knowledge and experience of industry specialists as and when required

• Increased flexibility

  • They can provide greater flexibility to scale their operations up or down based on demand fluctuations which is particularly valuable in industries with seasonal or unpredictable demand

• Focus on core competencies

  • Businesses can concentrate their resources and efforts on their core competencies where they can add value

Limitations of outsourcing and subcontracting

• Quality control

  • Using external providers makes it harder to ensure consistent quality and adherence to company standards

• Loss of control

  • Handing direct control over those activities to others outside of the business may be risky. Companies must carefully select reliable partners and establish clear contractual terms to protect their interests

• Data security and confidentiality

  • Sharing sensitive information outside of the business introduces potential risks to data security and confidentiality

• Communication and cultural differences

  • Using global providers may result in language barriers or problems with time zone differences. Cultural differences may present communication challenges

Offshoring

• Offshoring occurs when a business sets up operations in another country to carry out certain business processes so as to:

  • Take advantage of lower labour costs

  • Gain access to specialised skills

  • Expand into new markets

• Common examples of offshoring practices include call centres in foreign countries, software development teams or manufacturing plants established in countries with cheaper labour

Evaluation of Offshoring

Insourcing

• Insourcing is where a business assigns tasks to individuals within the organisation which were previously outsourced

• There are several reasons why businesses may choose to insource certain activities

Diagram: reasons for insourcing

• Cost control

  • Insourcing can be a cost-saving strategy as it eliminates the need to pay external specialists

• Quality control

  • A business retains direct control over the quality of work being produced and may find it easier to establish their own standards

• Flexibility

  • It provides the business with greater flexibility to respond to changing business needs, so can adjust workflows and adapt to new challenges

• Knowledge and skill retention

  • Businesses can develop specialised skills within their own workforce, which can also reduce the risk of intellectual property breaches

Reshoring

• Reshoring occurs when a business brings back its production activities to its home country from abroad

• It involves reversing the previous decision to offshore or outsource those activities to another country

• There are several reasons why a company may choose to reshore its operations

Diagram: reasons to reshore

• Cost considerations

  • The initial cost advantages of offshoring may reduce due to factors such as rising labour or transportation costs in the foreign country

• Quality control

  • By reshoring, companies can have better control over the manufacturing processes and ensure higher quality control standards, which may lead to improved customer satisfaction

• Intellectual property protection

  • By bringing manufacturing back to their home country, they can reduce the risk of intellectual property theft

• Supply chain resilience

  • The COVID-19 pandemic highlighted the vulnerabilities of global supply chains when disruptions in transportation, logistics and international trade led to delays and shortages of critical goods

  • Reshoring reduces dependence on foreign suppliers

• Market proximity

  • Can allow companies to be closer to their target markets, which can lead to faster delivery times, reduced transportation costs and improved responsiveness to customer demands