Introduction
When companies in developed countries decide whether to outsource their manufacturing process to another developing state to reduce production costs, they should consider various factors to avoid revenue loss. For example, in the provided scenario, the product manager of the Xtreme snowboards is faced with the problem of a drop in sales of this product. According to Ahmed (2018), such strategic relationships as outsourcing have become essential to the modern business world, improving efficiency, profitability, operating costs, and customer service. However, this relationship requires close monitoring to prevent issues such as low quality of products, insufficient effort, and violation of contracts. Therefore, the production manager will need to first obtain specific financial and managerial accounting information before proposing this solution to the company leaders.
Outsourcing Decision Making
Before recommending outsourcing, it is crucial to consider some quantitative and qualitative factors. Specifically, cost analysis, which is a quantitative component, should be conducted to demonstrate that production would become significantly cheaper in the case of outsourcing (Ahmed, 2018). Furthermore, it is necessary to assess the overall performance, which is a qualitative evaluation, of that overseas manufacturer to show that their skills and methods align with that of our company. It should be done to ensure that the binding component of the Xtreme snowboard will have high quality.
Certain financial information should be collected to ensure that the final decisions are made in the company’s best interests. In this case, two types of accounting data are needed, budget management and performance (Ahmed, 2018). First of all, it is essential to prepare a report about the current production costs in our corporation and the firm that will become the outsource manufacturer. Moreover, adequate calculations should be done to demonstrate the benefits for both parties because this contractual relationship should be advantageous and appealing for all participants of this prospective agreement.
The accounting information vital for the proposed project is both financial and managerial in nature. In fact, the production manager must compare manufacturing costs within the country and overseas. It will be critical to demonstrate that the reduction in production costs will reduce the snowboard prices, resulting in higher popularity among customers. Managerial data is needed because the firm should consider if the outsourcing facilities require additional equipment, staff training, and shipment assistance.
The obtained accounting information will be utilized to evaluate and propose the final decision to the company leadership. The cost of the binding material will be used to calculate and demonstrate the price reduction of the final product. If consumers see that the snowboard of one of the leading brands becomes cheaper, they may consider purchasing it more often, allowing the return of high sales for our firm. Furthermore, managerial data will be used to decide how much investment this partnership needs to make it more effective. Substantial financial input will not be demanded if this overseas manufacturer possesses enough production equipment, materials, and workers. However, if the analysis shows that this contractor does not have sufficient resources, operating machines may be bought, and more staff should be recruited. Lastly, other options should be reviewed if the evaluation reveals that a return on investment or even a breakeven point will be achieved only after a relatively long period. In that situation, other outsourcing sites may be considered for this project.
Although the benefit of outsourcing may be evident, some dangers are associated with this decision. The first potential risk is that our company may not completely control the manufacturing process because the production site will be located overseas (Bak, 2022). Secondly, the problem may arise between the two firms due to the differences in cultural values (Bak, 2022). Thirdly, the quality of the product made by a different manufacturer may not satisfy the customers (Bak, 2022). Next, the level of skills and knowledge necessary for producing Xtreme snowboards may not be satisfactory in the offshore firm (Bak, 2022). The fifth risk is that our company has no control over another country’s economic, political, or environmental situation. If their economy crashes, the civil war begins, or a natural disaster destroys the manufacturing building, halting the production process, our corporation will not be able to change that situation.
Fortunately, most of the abovementioned issues may be solved if the right approach is selected. The first and third issues can be mitigated by remote control with the help of such modern technologies as video monitoring, conference calls, and communication platforms. The second risk can be addressed by ensuring that both parties agree on a common communication language. The fourth problem may be resolved through education and training. Unfortunately, the last risk is hard to fix and should be considered a force majeure circumstance.
Conclusion
In summary, outsourcing Xtreme snowboard production may benefit the company if all the managerial accounting nuances are assessed. It should increase sales since the product price will drop after adjusting for the reduced manufacturing costs. However, this strategy has its own risks that should be adequately addressed to minimize financial loss for the firm. Specifically, trustful communication between the partners should be built through continuous remote interaction using one language convenient for both sides, involving additional training if necessary.
References
Ahmed, M. N. (2018). Outsourcing relationship management: Accounting in the decision mix. Journal of Business Strategy, 39(5), 41-49. Web.
Bak, T. (2022). Top 7 risks of outsourcing and best practices to avoid them. Soft Kraft. Web.