Macroeconomics Advantages And Disadvantages To Outsourcing

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Outsourcing is the act of acquiring goods or services from external sources instead of producing them in-house. This can be done through various methods, such as collaborating with other companies for specific production stages or relocating U.S. factories to countries like China or India. The main aim of outsourcing is to lower costs and enable businesses to provide products at a more affordable price. However, despite its widespread use and numerous advantages, outsourcing also comes with several disadvantages.

Outsourcing offers several advantages, with the first being cost savings for the company. By outsourcing tasks to another company, the business can benefit from more efficient processes and cheaper production costs. If the work is offshored, there are additional ways in which money can be saved. Offshoring typically involves countries with lower development levels than the United States, resulting in fewer production regulations and laws.

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One major contrast exists in the payment of workers. Chinese workers, for instance, receive a significantly lower compensation compared to minimum wage workers in the United States. This offers significant cost savings for businesses. Another significant difference lies in regulations, particularly environmental regulations. American factories typically incur substantial expenses in addressing pollution generated by their production processes, depending on the nature of their products. Although critics argue that outsourcing jobs harms employment opportunities within the United States, the resulting cost savings actually create jobs, making it less detrimental than perceived by these critics.

Outsourcing to foreign countries offers two main advantages: cost reduction and the opportunity to concentrate on product innovation and sales. By assigning specific stages of production to factories abroad, companies can achieve significant financial savings. This enables them to allocate resources towards developing improved products while also involving individuals who would traditionally be engaged in factory-related duties in the creation of new designs and marketing campaigns. Nikkei serves as an excellent illustration of this strategy, as it relocated the manufacturing of its diverse range of products including shoes, clothing, and sports equipment to China.

The popularity of businesses shifting their focus from production to design and marketing has increased. Apple, for example, has adopted this approach with their electronic hardware (Pearlstine). This allows companies to prioritize design and marketing while maintaining product quality. Outsourcing is a valuable strategy for reducing overhead costs, which is crucial for businesses. As a result, many companies opt to outsource certain parts or the entire production process.

Overhead expenses in a business, including wages, rent, utilities, and other non-product costs, are referred to as overhead. Labor wages are usually the largest expense for any business. However, removing labor costs greatly reduces overhead and eliminates the need to cover factory operating costs – another significant expense for businesses handling their own production. While outsourcing introduces new costs for companies, it generally leads to greater savings by eliminating current expenses.

By reducing costly overhead costs, companies can allocate more funds towards product design and marketing. Outsourcing production also helps mitigate risks associated with factory operations, where potential hazards pose a threat to workers. Having a large workforce in factories increases the likelihood of workplace injuries, for which the company is responsible for compensating injured employees. Nevertheless, by outsourcing production, the company eliminates the possibility of accidents occurring at its own facilities.

Businesses may need to increase their workforce when demand for their products rises, but if this demand decreases later on, they might have to lay off some of the newly hired employees. This situation can harm the business’s reputation and discourage potential customers who see many job eliminations happening. Outsourcing presents a different solution by allowing businesses to avoid hiring and firing workers in response to changes in the business cycle. Consequently, outsourcing eliminates one more risk for businesses and gives them a strong incentive to consider it as an option.

All of these advantages make it seem like outsourcing should be embraced by every company. However, this is not always true. In addition to these benefits, there are also several drawbacks that have convinced many people that no company should outsource, especially to other countries. Now let’s talk about these disadvantages.

One disadvantage is the reduction in job opportunities within the United States and the negative reputation it can create for the company when outsourcing happens in a foreign country. Numerous individuals are employed in each factory located in the United States.

When a factory moves to another country, it often results in the local workforce being laid off, which has negative impacts on the local economy. In certain instances, the factory’s revenue is crucial for households as it represents their sole source of income. Consequently, individuals may struggle to afford basic necessities like food and housing. If a large segment of the population faces financial hardships, this can lead to further job losses and worsen the harm inflicted on the local economy. Furthermore, if this situation gains national attention, it can adversely affect a company’s reputation and sales.

Although infrequent, outsourcing specific tasks within a company can result in detrimental effects on its reputation and cause distress in the affected area. Furthermore, there is a potential hazard of compromising confidential information. For example, if an organization delegates its payroll responsibilities to an external specialized firm that manages payrolls for multiple businesses, sensitive data such as social security numbers may be mishandled and disclosed to unauthorized individuals. Additionally, there is also a possibility of revealing confidential information pertaining to the company itself.

Outsourcing can have negative consequences for employees, the overall business, and potentially lead to detrimental publicity depending on the leaked information. The disclosure of such information is a significant drawback to outsourcing. Moreover, hidden expenses may arise from outsourcing. For instance, an employee earning $10,000 annually in another country can cost a US-based business up to eight times that amount (Overly). Various factors contribute to this substantial difference between the worker’s salary and the company’s overall expense.

The cost of outsourcing comprises selecting a vendor, which could lead to an extra expense of up to 2%. Additionally, there are expenses during the transition period to the offshore location, including various costs in establishing operations in a different country. There may also be unforeseen costs associated with laying off unnecessary personnel. Neglecting to anticipate these expenses can greatly impact a business transitioning to an offshore company (“Outsourcing Policy”). Ultimately, there are both pros and cons for businesses when it comes to outsourcing.

The benefits of outsourcing are advantageous for a company as it allows them to maintain low product prices and foster innovation in developing new products by alleviating the production burden. Nevertheless, the drawbacks make it difficult to assess the value of outsourcing. The loss of jobs not only harms the company’s reputation but also significantly impacts the economy. Additionally, complications may arise with the chosen outsourcing firm, including unforeseen expenses and a lack of control.

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Macroeconomics Advantages And Disadvantages To Outsourcing. (2018, Feb 01). Retrieved from

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