Transferring Production Overseas

Introduction

Production is where most of the costs of a business are generated in the form of labour, machinery and in raw materials. Therefore if a successful business wishes to increase profits or price more competitively, then they will aim to reduce most of the costs of the business in the production of the product.

The cost of living in Britain is very high compared to many places in the world, which is what I think is a main factor to why many manufacturers setup overseas.

The cost of the land is very high, the minimum wage is a lot higher than most other countries e.g. Mexico, and taxes are also relatively high. All these factors put together can increase the cost of production by a lot.

The manufacturing overseas

There can be many advantages to manufacturing overseas. Especially when the manufacturing is in an LEDC (Less Economically Developed Country), as their currencies tends to be very weak compared to the pound, so exchanging Sterling for a currency of a an LEDC will usually be very profitable in terms that the company would be able to buy land and a factory for a lot less than they would in Britain.

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Therefore, if the company sell their manufacturing facilities in Britain and buy overseas they will undoubtedly have money left over, which can be invested in other areas of the business. Government policies can also be different in foreign countries, which enable cuts in costs. For example, in India, the restrictions on pollution levels and safety procedures is a lot more slack, so companies don't have to invest in as much safety equipment, which again will save money.

Moving production overseas

However, there are disadvantages to moving production overseas. For instance, there can be lack of control in many cases where HQ is situated in a different country, which can lead to over empowered managers making wrong decisions and not following procedures in the traditional culture of the business. Communication problems can also arise, not only if the country speaks a different language, but also trying to make changes to the production without face-to-face communication can be slow or erroneous. Motivation within the foreign workforce can also be poor, especially if the wages are low, which can lead to a lack in quality and productivity which could lead on to a worsening reputation and a fall in demand. Also, if management from HQ does decide to visit the production-line then transport costs will increase, as more managers have to book flights and hotels.

There can also be a question of ethics to deal with, especially if the companies are paying extremely low wages to foreign employees who don't have enough as it is, then there can be bad publicity which again can lead to a loss in demand. Distribution can also become a cost if the company were selling within the UK, then the materials may have to be shipped over, and then once the product is complete it may have to be shipped back, which can lead to an increase in unit costs. However, if the company decide to cancel their materials from their well-established suppliers and decide to buy them over in the new country then he suppliers may not sell good quality materials or be as reliable, which could be a problem if the company is working to lean production or JIT.

For a company to see whether moving to another country will be more profitable they will have to weigh up all the factors that I have explained, to come to a reasonable decision.

Conclusion

Overall, I would say that moving production overseas is desirable, as long as the company keeps good communication between the manufacturing and HQ and they keep to the company's culture. However, this type of production may only be desirable to a footloose company, who is not reaching to sell to a high class of customer, as quality can often be hard to maintain. The best case scenario to move manufacturing abroad would be if the company could move to a Developed country, as the skill level of employees will probably be better than that of an LEDC and quality could be maintained.

A Company is an always-changing market may not be as well to move abroad, as if changes have to be made to production then the company would want production to be close to HQ so that briefing of managers within the production area of the business could be face-to-face and efficient as to minimize misunderstandings and errors.

It really all depends on the type of business, the level of quality wanted and the objectives of a company, to whether it would be desirable to move manufacturing abroad or not.