Offshoring & Outsourcing: Reasons and logistical implications

One of the biggest challenges for companies is finding a balance between the quality of their products and the cost of producing them, so in a globalized world like the current one, a vital question is launched: offshoring or outsourcing? The answer could be “it depends on the needs of the company” With the facilities for international trade that exist today and the specialization of the companies in particular activities many companies have decided to offshore and outsource as their most viable choice, so today we are going to analyze the reasons and logistical implications of this strategy.

Offshoring vs Outsourcing, what do they mean?

When we talk about offshoring maybe we can fall into confusion because outsourcing is sometimes related as a kind of offshoring, but there are many differences between both concepts. Whilst outsourcing means that an external supplier of services or intermediate products is working for a company in the same country, offshoring is understood within the international sector. When a company decides to carry out the offshoring it must decide in which way it wants to lead its operations. The company can choose between dealing with an external supplier in the foreign country for producing intermediate goods or services, or the establishment of a subsidiary in the foreign country in order to produce these intermediate goods or services.

Advantages and logistical implications

The choice of offshoring or outsourcing strategy involves different challenges, but especially, some crucial advantages for the right development of the company.

On the one hand, offshoring offers a lot of advantages for international companies:

• Human resources: the availability and the quality of the foreign workers is one of the main factors by which a company decides the offshoring.
• Costs: in developing countries, the companies can achieve low costs in telecommunications, rentals, transport… but the main cost reduction is produced by access to raw materials that are common in these countries and quite weird in the origin country and the low wages that most of the inhabitants of these countries have.
• Business environment: in some countries, there are clusters that can benefit the competitivity of the industry.
• Infrastructures: roads, airports, ports, telecommunications, and logistical facilities will lead a company to offshore its production to these countries.

On the other hand, other companies, usually medium companies, prefer to outsource some of their productive phases and operations which are quite important for the business, but they are not the core activities of the company, and the logistical outsourcing is one of their favorite options. Specialized enterprises are able to offer different services such as storage, inventory and stock control, receiving goods from foreign countries and labeling, packaging and shipping products. This provision of services offers the following advantages:

• Reduce direct costs: the company doesn’t need to spend money in huge warehouses, machinery, expensive software…
• Saving investments in R&D: they can save money from their investments in R&D and use it for investments in the core activities.
• Reduce staff costs: the company can reduce the amount of money that spend on wages for logistic workers.
• Improvement of the performance of the company: while the logistic company offers its specialized services, the company can be completely focused on their main activities and improve its performance.

However, it is not gold everything that shines and there are some critical voices which claim against the outsourcing, so I invite you to watch this interesting video and create your own opinion about this strategy: