Low-cost Economy: Companies Benefits and Drawbacks | Free Essay Example

Low-cost Economy: Companies Benefits and Drawbacks

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Topic: Business & Economics
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Plan

To reduce the cost of manufacturing goods, companies seek strategies for ensuring that the prices of their products are low enough. In this quest, organizations that are established in developed nations outsource not only production but also customer services such as customer care by transferring call centers in nations where living standards are lower. This strategy reduces labor costs. This paper discusses whether this strategic initiative is appropriate.

The first section is an introduction to the issue for the reader to have a hint of what the subject entails. The second section discusses the benefits followed by drawbacks for a business that is planning to shift its production expenses to a low-cost economy. Before concluding the discussion, the paper offers another section on the implications of such a move for a US-based company that is seeking to shift its production processes to the Asian market.

Introduction

In Japan, the dawn of the 1970s era was marked by high investment in mechanization. During this period, many American-based organizations shifted their production operations to Japan. Later, according to Bertscherk and Kaiser (2004), cheaper labor that was discovered in Mexico prompted such organizations to consider moving their production to this country.

In the 1990s, China became the most preferred nation for countries to move their production to while India and Vietnam, together with other Asian nations, rapidly picked up as the ideal low-cost production destinations. These trends imply that many of the US-based companies focused their production outsourcing decisions on labor costs, rather than the total costs.

However, there is a dilemma on whether such trends are appropriate considering that transferring production to low-cost destinations has its share of benefits and drawbacks. Using the case of US-based production organizations, the paper discusses and evaluates this dilemma.

Benefits and drawbacks

Business entities endeavor to reduce their production costs to deliver optimal returns on investments to their owners. Among different options that are available for accomplishing this agenda is the relocation of production to low-cost economies through outsourcing deals or building company-owned production facilities. The ultimate goal is to maximize an organization’s profitability.

Mucha (2003) presents the opinion of many critics who oppose the idea of moving production to low-cost economies. Such people contend that various jobs that were initially held by Americans go forever (Mucha 2003). Although the loss of jobs might imply more government expenditure in welfare activities and/or reduced tax revenue, shifting production to low-cost economies with the objective of gaining competitive advantage by reducing operations cost has its benefits and drawbacks.

Benefits

In the context of the national economy, all nations engage in production outsourcing. For instance, as Mucha (2003, p. 29) confirms, ‘The UK economy is already 26.6% outsourced, defined as the ratio of imports to the gross domestic product’. Although the reduced labor costs are important in forming decisions to move production to low-cost economies, organizations benefit from specialized expertise that is demonstrated by the parties who do the production.

Organizations outsource their production to other organizations when they are sure that the vendor has the required technical expertise and the applicable equipment that can guarantee the production of a superior quality product (Vestring et al. 2013). As such, it becomes easy for an organization to achieve better productivity, combined with a consistent supply of its products in the global market at competitive prices.

Middle-line managers ensure that timely assembly and production processes are run efficiently. This role suggests that noncore activities compete with the core activities that the managers perform. The core activities are important for the consistent growth of an organization. Since production operations that are moved to low-cost economies comprise mainly noncore activities, line managers are freed from some duties so that they can concentrate only on the processes that enhance organizational growth (Crook 2011).

In the process of moving some production aspects to low-cost economies, an organization also transfers part of its risks to another party. Vendors to whom production is moved are specialists in noncore production tasks. Consequently, they can put in place strategies for mitigating some risks better than an organization, which has relocated its production.

The HRM department facilitates the productivity of employees through the reduction of labor turnover. The HRM is also tasked with recruiting, training, and developing employee career paths. In the event of low motivation, organizations experience low productivity levels due to costs such as absenteeism and sub-optimal job performance. After moving some production functions to low–cost economies, these tasks are transferred to another party.

Where outsourcing is deployed as the strategy of moving production to such economies, Mucha (2003, p. 28) posits that the process ‘eludes the need to hire individuals in-house; hence, recruitment and operational costs can be minimized to a great extent.’ Dealing with fewer employees implies less problematic efforts in terms of enhancing their performance to increase the overall organization’s productivity.

Drawbacks

Moving production to low-cost markets via outsourcing involves trading managerial control with cheaply produced products. Signing a contract for the production of a complete product or some parts of a product implies shifting the power to control the processes of production to other parties that do not reside in-house within a company.

Consequently, misalignment of missions may occur. Foreign-based producers may focus on profit maximization by delivering products that are in line with the condition or manner that is specified by a contract through engaging in policies such as child labor and exploitation of employees, which are not supported by the organization that is located in a developed nation (Powell 2012).

Production processes involve the handling and storage of an immense amount of data. Since this data is required in the production procedure, a production vendor in the low-cost economy must have access to it. This situation may expose an organization’s information and systems to risks of the likelihood of such data being held without confidentiality. In some cases, moving production to low-cost markets may create quality problems.

If the products that are made in the low-cost markets meet the standards that are specified in a production contract, an organization cannot question or place demand for better quality levels in response to changes that competitors make to their products without imposing additional payments.

Nevertheless, even where an organization is willing to adopt this process, it is limited in terms of the capability and flexibility of the low economy producer’s manufacturing systems. Through hidden costs and negative publicity where a vendor produces goods via child labor or exploitation, moving production to low-cost markets presents significant disadvantages, which may tarnish the reputation of an organization that was once the choice of many clients (Pfeiffer & Gellar 2003).

Implications

Based on the above expositions on the pros and cons of moving production to low-cost economies, the situation can be evaluated based on its implications in the context of a specific economy such as that of the US. For instance, Kathawala, Zhan, and Shao (2005) assert that there is nothing wrong with opting to move production to a low-cost market.

They assert that US-based organizations should consider cost-cutting strategies such as noncore outsourcing activities in the effort to gain competitive advantage. In the automobile industry, many organizations have had long strategic partnerships with manufacturers of items such as neoprene, metal, and even electrical merchandise, among other commodities.

For instance, towards the end of the 1930s, Kathawala, Zhan, and Shao (2005) reveal how more than 75% of the assembly errands of the Ford Company was achieved through subcontracting arrangements. Through this outsourcing, the organization gained both high-productivity levels and cost-saving advantages.

Many US-incorporated businesses that have moved their production processes to Asia, such as the Nike Company, have tremendously cut their labor costs. Emerging economies have lower living standards. Thus, they have low wages compared to the US. Hence, by moving production to low-cost economies, US-based organizations also gain from the capability of the subcontracted parties delivering products in their (US-based organizations) global market in a more rapid manner.

They also acquire the capacity to remain technologically competitive (Kathawala, Zhan & Shao, 2005). These merits form important an argument in favor of moving production to low-cost markets, rather than basing it on a developed nation. In fact, production involves collaboration between different parties, which make parts of a product, either partially or to completion, for subsequent assemblage so that all commodities are produced in a globalized manufacturing environment.

Operational efficiency is important when it comes to maintaining the capacity of a business to compete aggressively with other organizations. Thus, it is only natural for US-based corporations to ‘do their best to obtain useful sources of materials and services from different channels and to build their sustainable comparative advantages using different approaches’ (McCormack 2011, p.213). Moving production to low-cost markets is one of the ways of enhancing the productivity of an organization.

Thus, it surfaces as an important comparative advantage for organizations that are established in geographical areas that have high living standards that prompt them to pay their workers higher wages and salaries so that their products can become more expensive in the global marketplace (Meisinger 2007). By moving production to a low-cost economy such as Asia, the US-based company can mitigate this challenge. It can also gain access to unique materials that are produced elsewhere across the globe. Besides, the process makes it gain more market opportunities.

While claims that support the moving of production to low-cost markets to enhance competitive advantage are important, challenges such as the reduction of employment opportunities in developed nations cannot be overlooked. For instance, McCormack (2011) says that the US has lost an excess of 42,400 workshops from 2001. Many of these industrial units were dealing with production, which has since then been shifted to low-cost economies in Asia.

While the number of Americans working in the production organizations continues to diminish, the number of Asians who work in such organizations continues to grow by the day. The dominance of Asian nations in the manufacturing of printed circuit boards (close to 85-percent of the global printed circuit boards) exemplifies this scenario (McCormack 2011). More jobs have been created in Asia than within the US. The ramifications of low employment opportunities include higher spending in welfare matters and a reduction of government revenues via taxation.

Conclusion

When developed nations’ production organizations evaluate the production costs that are associated with moving production to low-cost markets, it may become evident that this plan subjects them into economic challenges. A possible counterargument is that production operations that are mainly moved to low-cost economies require low-skilled labor.

Besides, since the move is tiresome, people are left with more attractive and lucrative jobs. However, it is important to note the number of people who live in developed nations below poverty levels. The situation of such people has prompted them to depend on welfare benefits from the government. The low paying jobs, which require low or medium-skilled workers, may be attractive to this group of people.

References

Bertscherk, I & Kaiser S 2004, ‘Productivity Effects of Organisational Change: Microeconometric Evidence’, Management Science, vol. 5, no.2, pp. 91-99.

Crook, T 2011, ‘Does human capital matter? A meta-analysis of the relationship between human capital and firm performance’, Journal of Applied Psychology, vol. 96, no. 3, pp. 443-456.

Kathawala, Y, Zhan, R & Shao, J 2005, ‘Global Outsourcing and Its Impacts on Organisations: Problems and Issues’, International Journal of Outsourcing Operations Management, vol. 1, no. 2, pp. 185-196.

McCormack, R 2011, ‘Accenture: Offshore Outsourcing Has Not Worked’, Manufacturing & Technology News, vol.18, no. 7, pp. 212-231.

Meisinger, S 2007, ‘Creativity and innovation: Key drivers for successes’, Human Resource Management, vol. 52, no. 5, pp. 212-235.

Mucha, S 2003, ‘Calculating the Total Costs of Offshore Outsourcing’, The Economist, vol. 11, no. 3, pp. 28-30.

Pfeiffer, E & Gellar, S 2003, ‘Scared safe: How to use fear to motivate safety involvement’ Occupational Health and Safety, vol. 6, no. 1, pp. 6-10.

Powell, B 2012, ‘The Ethics and Economic Case Against Sweatshop Labour,’ Journal of Business Ethics, vol. 107, no. 4, pp. 449-472.

Vestring, T, Rouse, T, Reinert, U & Varma, S 2013, Making the Move to Low-Cost Countries.