Offshoring vs Outsourcing Benefits
July 7, 2015
Companies looking to become more cost efficient have a number of different potential methods of making this happen. Production in the United States can be very expensive. Because of potential wage increases, real estate value problems, and other associated costs, companies that do business in the US can often find themselves in the unenviable position of having to raise prices in order to account for rises in production costs. With this in mind, many companies are seeking competitive advantages such as moving to offshoring or outsourcing their production, non-core activities, and customer service call centers to Mexico. Mexico has become a common outsourcing and offshoring destination for companies in bordering states such as California, Arizona, New Mexico and Texas (also known as nearshore outsourcing). With its close to proximity, low risk and costs, one can easily see how economies of scale transfers into competitive advantages. Learn more about your options regarding our services in Mexico to see whether offshoring or outsourcing makes the most sense for your company.
What is offshoring?
Offshoring is a term that refers to a shift in production operations from a company’s domestic home to a foreign country. For example, a company operating in the United States might shift all or some of its production facilities to a different country. It could build new factories in Mexico, for instance, to handle a part of its production processes, human resource processes, or non-core activities. While these are some of the most common offshore services, it is not the only way. A company can also “offshore” by shifting its production capabilities to another company in a foreign country to reduce labor costs. This would be an exactly of both offshoring and outsourcing. The important thing to note about offshoring is that it requires a company to move its production from its domestic home to some international location.
What about outsourcing?
Outsourcing is another option that has grown popular for both manufacturing and services-providing companies. Outsourcing involves the ability of a company to shift part of its operations to a different company. This might mean having a company in another country produce one of the things that goes into a final product. For some companies, outsourcing means having another company handle the human resources or customer service elements of the company’s business. It is technically possible for companies to outsource their operations to another company within the country. This, however, is relatively rare compared to outsourcing overseas.
Benefits of outsourcing over offshoring?
From an economics perspective, it makes sense for a company to outsource its operations when another company could produce the good more efficiently and cheaply while still maintaining the same levels of quality. Most businesses are very good at doing some things and less good at doing other things. With this in mind, it makes sense for those companies to focus their limited resources on their core competencies with their in-house team. It can behoove them to find an outsourcing partner or service provider that is able to more effectively produce those parts or provide those services that the original company struggles with.
This becomes much easier when one thinks about the cost savings of doing business in another country. Many companies choose to outsource their customer service operations because lower wages in other countries can mitigate operational costs. Mexico has become a common destination for outsourcing because of its growing talent pool. The company ultimately has to make a choice about quality over cost. Outsourcing is a good idea when a company will not lose out on quality of a product component or a service through their outsourcing. This is sometimes possible, but it is not always possible for companies looking to cut production costs.
When is offshoring a good idea?
The advantages of offshoring are many for companies in certain positions. If a company is efficient in their own production processes, and when that company has specific business processes that give it a competitive advantage, then it can make sense to offshore its production. Apple, for instance, is a company that seems to have cornered the market on making certain kinds of personal electronic devices. The company integrates its products in such a way that it would not make much sense for the company to outsource production to another company. Simply put, quality is too important, and the risks associated with outsourcing can cause companies to balk at the idea of giving up production control.
In these instances, offshoring manufacturing provides a good alternative. Companies can still control their own production in a way that allows them to keep their competitive advantage. They simply shift their production to a different country. This works best when the costs of production in that second country are significantly lower than the costs of production in a company’s home country. Likewise, nearshoring makes the most sense when a company can find a country that is very close to their home country. A large skilled labor pool, tax incentives and a growing talent pool are a few reasons why so many companies are moving their business processes and production centers to Mexico. They benefit from the proximity that comes with being in Mexico while also taking advantage of the lower costs associated with producing goods there.
One of the keys to offshoring is finding a place where the labor costs are lower than in the home country. Labor costs play a significant role in boosting the overall production costs of those companies that are involved in heavy manufacturing. Beyond that, there are tax concerns that can make it much cheaper to do business in these offshored countries. Companies should recognize, however, that there are up-front costs associated with offshoring. They will have to have some capital in order to build new facilities and train new employees. They may even miss out on some productivity during this transition period. Companies should consider offshoring if they have the capital to put up with a short period of upheaval. If they can do so, then they can reap the long-term rewards that come with much lower production costs.
The benefits of offshoring in countries like Mexico
Today’s companies are making the choice to offshore their operations for a number of different reasons. Easily the most important reasons have to do with financial incentives. When a company chooses to offshore, it can lower its production costs. This allows for two helpful possibilities for that company. The company can either take advantage of higher profit margins, which can help to fuel investment, or they can lower their prices in order to become more competitive in the marketplace. With lower production costs, companies can meet the emerging price needs of consumers. Getting creative with pricing allows for greater flexibility and heightened market share.
Some companies also find that they benefit from some diversity in their production and business processes. By moving production offshore, companies are able to hire people who come from different backgrounds. The company becomes more attuned the needs of an international population, which can help the company if it wants to ship its products around the world. Rather than just being a domestic company focusing on the needs of American customers, companies can benefit from additional contributions of an international workforce.
Ultimately more companies are moving their production to Mexico today to take advantage of the benefits of offshoring as a long-term solution to the ever growing costs. Because of cheaper skilled labor and a tax environment that makes more sense, firms can enjoy significant long-term benefits including cost savings. Mexico is close enough to the United States that operations are not disrupted, and there is enough cultural overlap that American companies do not have to completely re-learn their environment in order to succeed. The choice between outsourcing and offshore is a difficult one. Many companies, though, are finding that by maintaining control of their own production and moving their production centers to Mexico, they can enjoy the advantages of offshoring. Talk to the NAPS team today to learn more about outsourcing and offshoring manufacturing in Mexico.