Outsource Production or Remain Producing at Home?
Outsource Production or Remain Producing at Home?
Based on and inspired by the widespread outsourcing moves of many companies from their home countries to other more “production friendly, non-very costly” countries all over the world, this paper evaluates the logistics factors and trade regulations affecting decision makers such as the management and/or the organization’s board whether to outsource its manufacturing plant or to retain production in its home country..
There are however natural balancing elements in the process being played by trade and logistics factors. This means that although putting up an organization’s manufacturing branch in China, or in Vietnam, or anywhere else, is cheaper in terms of labor supply, raw materials and overhead costs, as far as manufacturing activity is concerned, distribution of these products to its end users still solicits serious concerns.
The concerned country, say Vietnam, where the organization has chosen for its manufacturing plant to outsource its production activities to, must have proper logistics supply, infrastructure and accessibility. On the other hand, trade regulations in the country, again if Vietnam is chosen, are another important factor to consider. One or two years tax immunity for example, whether local or national or both, looks only good in the short-run, which is for two years at the maximum but not in the long-run profitability of the firm.
One or two years of transferring, although not necessarily physically, the manufacturing plant’s operations from one country to another is not even enough period to get settled and warm up in its new environment, not enough to learn tactics and production strategies that may eventually turn to greater margins. Other possible trade regulations to consider are the customs duties, wharf fees, and the likes in the country of destination for the product, which, in this paper, is assumed to be the paper-based non-adhesive coated Easle.
Mentioning two of the main important factors to consider when a firm decides to outsource its production plant, namely the logistics and trade regulations, this paper evaluates if it is wise for an organization to have its product line, the paper-based non-adhesive coated Easle Pads to outsource its production to Vietnam and have it distributed or delivered back in the United States for its end-users after previously examining that tax regulations and currency fluctuations in Vietnam prove to be favorable for the firm in a forecasted period of at least five years.
II. Understanding Global Trade & Logistics Issues Following is the full bibliographic reference to the article that this paper correlates its case with: Kumar, S. Medina, J. & Nelson, M. T. , 2008. Is the offshore outsourcing landscape for US manufacturers migrating away from China?. Minneapolis, MN: University of St Thomas. The article whose full reference is indicated above concludes that it is advantageous to have the production plant of Company X or Firm X relocated in Vietnam compared to other low-labor cost countries.
Before Firm X finally decides, however, further exploration of two equally important factors need to be in place. These are the examination of the logistics supply and infrastructure in Vietnam as well as trade regulations governing a company such as X Firm that plans to have its production plant for its Easel Pad products be operated in Vietnam. Although there are so many specific trade issues, such as, but not limited to resolution of agricultural issues, investment, competition, trade facilitation, and trade and the environment, these all can be built up to two major areas where governments are involved.
According to Anderson, Erwidodo, Feridhanusetyawan & Strutt, (2003, p. 45), the first is that there has been a growing recognition that competition among producers is an important determinant of the economic welfare of nations, thus governments are adopting more pro-competitive national policies. Secondly, governments recognize that competition increasingly occurs across national borders. As a result of the liberalization of international trade and investment, more markets for goods and services are now international or even truly global.
Thus the policies of one nation may affect competition in these wider markets, and all nations then have a mutual interest in developing pro-competitive policies. (Vautier, Lloyd & Tsai, 2003, p. 221) On the other hand global, logistics issues are also very important deciding factors. Comparing sales by manufacturers of similar products, Hummels ( 1999) estimates that exporters with 1 percent lower shipping costs will enjoy a 5-8 percent higher market share.
Limao and Venables (2001) estimate that differences in infrastructure quality account for 40 percent of the variation in transport costs for coastal countries and up to 60 percent for landlocked countries. Moreover, Fink, Mattoo and Neagu (2002) estimate that liberalizing the provision of port services and regulating the exercise of market power in shipping could reduce shipping costs by nearly a third.
Other factors according to Krumm & Kharas (2004, p. 78) affecting logistics are ports infrastructure, customs clearance, regulatory administration, and e-business use, among others. III. Evaluation and modeling of international logistics patterns and transport movements Over the years the logistics and transportation industry has tremendously evolved as the need for it arose. How much more in the recent years where there is globalization and most of the firms are moving outwards and prefer to outsource production to lower costs and earn more margins? Analyzing logistics, Boyson, Harrington & Corsi (2004, p.
101) indicated that the three models are the following: 1. Models for production and operations management, which focus on forecasting for sales, production, and availability of resources; 2. Models for inbound and outbound logistics, which look at optimizing material storage and transportation; and 3. Models for chain and network optimization where the focal company is placed within the entire supply chain or demand network. Furthermore, no matter what type of vessel or carrier is used, the industry has obviously succeeded.
Among others, some logistics and transportation types include ocean ships, bulk ocean carriers, ocean liner, commercial jet airliners, air cargo containers, and the likes. Aside from these vessels, the industry has learned to use various pathways to have goods reach their destinations in the most effective and efficient manner. Logistics industry that has something to do with movement through water have utilized canals, tunnels, and bridges aside from the all natural seas, oceans, and rivers.
For the common people, giant logistics and transport firms, called third party providers, are also known such as FedEx Business Logistics Services, UPS Worldwide Logistics, Exel Logistics, Caliber Logistics, Menlo Logistics, Schneider Logistics, Emery Worldwide Global Logistics, Ryder Integrated Logistics, GATX Logistics, and Caterpillar Logistics Services. The evolution and innovation is very apparent. Some have more varied and customized services as well including inventory management, warehousing, cross-docking, product assembly and logistics information systems.
(Boyson, Corsi, Dresner, Harrington & Rabinovich, 1999, p. 107) Following is a SWOT-analysis presented in order to have a simple, yet clear grasp, of the factors that the firm should consider when deciding where to operate its production operations: whether it should remain in the home country or to be outsourced in Vietnam. It is a further analysis given that production cost, currency fluctuations, Vat rebates and other form of benefits have been examined already and have proven to be beneficial for Firm X if it has to relocate its production activities in Vietnam for its Easel Pads product line.
Please refer to the works of Kumar, et al, whose full bibliographic reference is presented above. The following SWOT-analysis gives more emphasis to logistics and trade factors. Although it may seem not too specific and some are still conditional, it is a useful tool for deciding the planned relocation of Firm X’s production facilities. This analysis pinpoints only the logistics and trade areas with a few exceptions of relevant factors while not putting into consideration other factors such as marketing, sales support and the likes.
University/College: University of Arkansas System
Type of paper: Thesis/Dissertation Chapter
Date: 20 September 2016
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