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Outsourcing has become a very common business practice. It has become a way for some businesses to be able to compete in today's market as they reduce many of their costs in the process. There are, however, many risks associated with outsourcing. These need to be carefully understood and addressed before a manufacturer decides to outsource. There can also be hidden costs and unexpected challenges that can affect the overall quality of the product as well as the actual cost.
When a company decides to outsource they must realize that they are giving up a certain amount of control of their product. There are risks that the technology the company may have developed could be pirated by the outsourcing company.
The foreign company could then use the technology and begin manufacturing the same product. If this is done at a lower price, this product would then become competition for the initial item that was outsourced. So for the original equipment manufacturer, or OEM, the long term cost and damage to their business could far offset any profit they may have had from outsourcing in the beginning. Issues related to patents and intellectual property ownership need to be thoroughly negotiated before any type of outsourcing occurs. This is one of the biggest risks in outsourcing and one which a manufacturer may have little ability to control. Once the knowledge or technology has been shared, it cannot really be retracted. The advantage of the particular innovation has been lost and really may not be able to be regained. And using the legal process to sue may not be successful since it could be difficult to prove the theft or gain financial compensation. Business practices and ethics in another country may not meet the standards that U.S. companies are held to.
Companies have had problems when a contract manufacturer gives an initial quote for the price of the product. A company may give a lower bid to get the business which they cannot realistically sustain. There is the assumption that the manufacturer will still continue with them later even though the costs rise since it would likely be more expensive to start over with a new contractor. There are also a number of steps in the whole supply chain of raw materials, building costs, labor and shipping costs that can have a number of variables. While this is true in any business situation, once there is a contracted manufacturer, who determines and assumes the responsibility for adjusting to these costs. Contracts need to thoroughly outline the responsibilities of the OEM and the contract manufacturer, abbreviated CM, with regard to who is responsible for the variations in production costs that can occur.
Another issue is who assumes the liability if a product is defective or causes harm to a customer. The OEM could possibly be sued for defects caused by inappropriate manufacturing processes in the outsourced factory. It needs to be clarified what amount of the liability is held by the CM, and there must be some type of guarantee that they will reimburse for these potentially very great losses.
Another problem is that labor standards and working conditions may also be substandard in another country. The OEM can then be seen as condoning inhumane treatment of the people who are manufacturing their products. There are several recent examples of this where factories making Apple and Samsung products have been found to be abusive in their practices with regard to their employers. This is a serious ethical issue that companies need to consider. Is it really worth the profit they gain if other people are degraded in the process of manufacturing? The human element needs to still be considered here, and not just with the employees overseas. A manufacturer also needs to realize that many U.S. employees may have lost their jobs through the outsourcing process. There are many issues with having to lay off employees. Also if enough American jobs are lost it can affect our economy so negatively that there will be less ability of US citizens to buy back the products being manufactured. This could be counterproductive to the overall process of outsourcing if the total effect on US economy is so destructive that it impacts the demand for the products being outsourced.
When a company decides to outsource they must realize that they are giving up a certain amount of control of their product. There are risks that the technology the company may have developed could be pirated by the outsourcing company.
The foreign company could then use the technology and begin manufacturing the same product. If this is done at a lower price, this product would then become competition for the initial item that was outsourced. So for the original equipment manufacturer, or OEM, the long term cost and damage to their business could far offset any profit they may have had from outsourcing in the beginning. Issues related to patents and intellectual property ownership need to be thoroughly negotiated before any type of outsourcing occurs. This is one of the biggest risks in outsourcing and one which a manufacturer may have little ability to control. Once the knowledge or technology has been shared, it cannot really be retracted. The advantage of the particular innovation has been lost and really may not be able to be regained. And using the legal process to sue may not be successful since it could be difficult to prove the theft or gain financial compensation. Business practices and ethics in another country may not meet the standards that U.S. companies are held to.
Companies have had problems when a contract manufacturer gives an initial quote for the price of the product. A company may give a lower bid to get the business which they cannot realistically sustain. There is the assumption that the manufacturer will still continue with them later even though the costs rise since it would likely be more expensive to start over with a new contractor. There are also a number of steps in the whole supply chain of raw materials, building costs, labor and shipping costs that can have a number of variables. While this is true in any business situation, once there is a contracted manufacturer, who determines and assumes the responsibility for adjusting to these costs. Contracts need to thoroughly outline the responsibilities of the OEM and the contract manufacturer, abbreviated CM, with regard to who is responsible for the variations in production costs that can occur.
Another issue is who assumes the liability if a product is defective or causes harm to a customer. The OEM could possibly be sued for defects caused by inappropriate manufacturing processes in the outsourced factory. It needs to be clarified what amount of the liability is held by the CM, and there must be some type of guarantee that they will reimburse for these potentially very great losses.
Another problem is that labor standards and working conditions may also be substandard in another country. The OEM can then be seen as condoning inhumane treatment of the people who are manufacturing their products. There are several recent examples of this where factories making Apple and Samsung products have been found to be abusive in their practices with regard to their employers. This is a serious ethical issue that companies need to consider. Is it really worth the profit they gain if other people are degraded in the process of manufacturing? The human element needs to still be considered here, and not just with the employees overseas. A manufacturer also needs to realize that many U.S. employees may have lost their jobs through the outsourcing process. There are many issues with having to lay off employees. Also if enough American jobs are lost it can affect our economy so negatively that there will be less ability of US citizens to buy back the products being manufactured. This could be counterproductive to the overall process of outsourcing if the total effect on US economy is so destructive that it impacts the demand for the products being outsourced.
Posted in: Outsourcing
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