What is Offshoring?
December 15, 2019
Today, in a world where supply chains are complex and span the globe overseas, many of the fine details become muddied or generalized by those unfamiliar with the industry. For example, laymen often confuse outsourcing vs offshoring by using them as interchangeable phrases. The problem with this mindset lies in the fact that both terms are, in fact, distinctly different concepts.
Are you wondering “what is offshoring?” Below, we’ll lay out the differences between outsourced work and offshore service, so you have a more thorough understanding as to why offshoring can be beneficial for your business in its particular market.
What is Outsourcing?
In its essence, outsourcing is simply transferring a businesses’ internal operations to a third party. The business performs a cost-benefit analysis and determines that it would be more cost-effective to pay another business to handle an aspect of the process, as opposed to relying solely on an in-house team. According to Investopedia, outsourcing is:
The business practice of hiring a party outside a company to perform services and create goods that traditionally were performed in-house by the company’s own employees and staff. Outsourcing is a practice usually undertaken by companies as a cost-cutting measure. As such, it can affect a wide range of jobs, ranging from customer support to manufacturing to the back office.
The fundamental concept underlying the notion of outsourcing, and global trade for that matter, is specialization. This economic model posits that it’s beneficial for a business to limit its focus of production to increase efficiency and thus increase profits. Typically, the offshore outsourcing advantages include:
- Access to a larger talent pool of skilled workers
- No need to hire more employees internally
- Decreased labor costs
In truth, the last half-century of foreign trade has centered upon this ideal, seeing as practically every company has engaged in specialization and outsourcing in one capacity or another. For many companies, manufacturing in Mexico has become a particularly popular trend given its location. That said, there are some downsides and risks to outsourcing. Per Forbes:
Although a company can expect to see a reduced cost profile, it does lose its capabilities as the original service provider. Once you move your production facilities to a supplier, you also outsource all the knowledge and human capital to make those goods. Such capabilities in the manufacturing sector may have taken decades to create. Once lost, they are hard to return.
Those opposed to outsourcing contend that it results in both job and property loss, seeing as workers and factories that were once valued pieces of a massive cog are made inconsequential.
What is Offshoring?
The offshoring definition differs from outsourcing in that it’s tied to geographic location and activity. Basically, in the Western hemisphere, many products are expensive because the cost to produce them, particularly those related to labor, are high. By contrast, developing countries such as Mexico offer an abundant supply of cheap labor pools, which dramatically increases the economy of scale for corporations. So, a company will shift aspects of its manufacturing processes overseas in order to take advantage of cost savings.
The trick in offshoring lies in determining what aspects or processes a business can and should offshore. According to Harvard Business Review:
Executives can distinguish, at the outset, between business processes they should and shouldn’t offshore by figuring out how each process helps them to create value for customers and to capture some of that value in the market. The relative importance of a process along those two dimensions indicates the risks and rewards, pros and cons associated with moving its execution outside the organization or country.
When done right, benefits of offshoring, include:
- Decrease labor costs – For most businesses and corporations, particularly product-based businesses, labor costs take up the brunt of their expenses. When you offshore, you significantly reduce labor costs, which frees up funds for targeted reinvestment. This allows you to devote increased capital and further specialize in the aspects of production that you do best.
- Lowered risk – By having different teams in different regions, you decrease your overall risk levels. A sudden issue in one of many locations will have a lesser impact on supply chains than an issue in a central location that completely derails the entire chain (until it can be fixed).
- Access to a massive talent pool – Offshoring meccas such as Mexico are enticing destinations since they have talented, specialized and motivated worker pools for manufacturers to select from. This massive group of highly-skilled workers is as capable if not more so than American manufacturing workers, but cost a fraction of the hourly wage.
- Increased fulfillment – Having a workforce that is ready to go around the clock, or even in a different time zone, gives you an advantage in that you have a better chance of meeting fulfillment demands, especially express requests.
- More control – You don’t want to give up control of either your productions or operations to a third-party. When you offshore, you have a staff that works for you. You give the orders, and they oblige.
Today, in a global economy, if you want a way to cut costs and optimize your supply chain, then offshoring must be an essential component of any realistic business strategy. Simply put, some countries can produce goods of equal quality at far lower costs, and this is the direct result of offshoring. So, if you’re looking for ways to augment your manufacturing processes, you’re wasting your time if offshoring isn’t a key step in your overall strategy. To find out how offshoring make your business more efficient, reach out to the experts at NAPS. With over 28 years of experience working with over 150 companies, NAPS is the preferred partner to setting up operations in Mexico.