Business Case: Outsourcing for Labor Cost Savings - Essay Example

? Business Case: Outsourcing for Labor Cost Savings BY YOU YOUR SCHOOL INFO HERE HERE Executive Summary It is proposed that the business is able to save costs and improve productivity by outsourcing one-third of the production labor team. Selecting India as an outsourcing target, a very low wage country, will save considerable costs on labor within the complex production system at the business. Gains will include cash savings, increased output, faster time to market, and a better brand image in key markets. 2. Purpose of Business Case The business is currently witnessing loss of cash flow and other available capital due to the high expenditures on payroll. As a production facility, inter-dependencies between operations, finance and accounting, research and development, and even shipping and receiving are currently over-staffed and require significant labor support. This is something the business can no longer afford during a period of economic recession and where profitability is being impacted. The purpose of the business case is to provide knowledge of the tremendous cost savings that business can achieve by outsourcing production to other facilities. The goal of this project is to streamline in-house production by allowing outsourced sub-assembly to occur, with this facility using partially assembled finished product to be completed in the final production run here at the organization. It is estimated this will result in cost reduction of approximately $2 million annually which can be better applied to more modernized technology and other competitive assets. 3. Project Description 3.1 Business Need In 2004, the Bureau of Labor Statistics indicated that the average hourly wage for American employees was $13.92. Of this pay, which is comparable to the wages being paid at this facility, $3.83 is allocated to extended employee benefits (Rummery, 2004). Currently, this business maintains 150 production employees that work through the production cycle from raw materials until the finished product moves through quality assurance for final shipment approval. By downsizing production and eliminating 50 employees, outsourced materials will enter the production cycle one-third assembled by a third party production organization. This will represent a labor payment reduction of approximately $111,000 monthly. Currently, the business must maintain a high volume of raw materials needed for production, which puts significant expense on the business. In addition, the holding costs for these materials (e.g. lighting, taxation, inventory labor support, and depreciation) continue to strain the corporate budget. It is estimated that nearly one-third of all raw materials can now be procured by the third party production facility, reducing costs of inventory by approximately $800,000 yearly. It is recognized that companies with lean supply methods outperform other companies (Hazeltine, 2008). The business needs to establish a more effective marketing image on the business-to-business market and the consumer market and this business case foreshadows significant brand development through this outsourcing project. 3.2 Goals and Scope Foreign outsourced partners provide significant low-wage opportunities in countries where labor costs are much lower. It is the goal of this project to identify partners in India where the average labor rate is only $2.00 per hour, of this only half of the expense will be absorbed by this organization. Now, it is expected that transportation costs for shipment of sub-assembled products will rise, however this will be offset by changing the production supply chain to a leaner system. The most promising outcome of this outsourcing project is the improvements to productivity. Under most mathematical models of productivity, it is measured by unit outputs divided by the volume of resources consumed (Jain & Dega, 2009). Vast reductions of resources needed for assembly in the business’ complicated production system will also improve output speed to market of final product. Organizations need to be flexible to rapidly meet fluctuating consumer demands and outsourcing assists in this by building partnered supply chains and faster response time to changing market conditions (Kremic, Tukel & Rom, 2006). It is believed that outsourcing the 50 production workers will improve our competitive position by being first to market with finished products faster than ever before which will lead to higher sales revenue and positive brand reputation. 3.3 Risks of Outsourcing The only risk worthy of consideration is that labor standards in India will improve, thus raising the living wage. International governments are pushing the World Trade Organization to pressure foreign business leadership to improve wages and labor conditions in India and other countries (Ahearn & Fergusson, 2010). Thus, this business case must establish a form of evaluation and control systems as part of environmental scanning to maintain overview of India’s labor laws to ensure this is a long-term viable plan. 4. Alternatives and Analysis India is not the only country that would be an opportunity for outsourcing as there are many developing nations with low wage labor and also effective production facilities. As part of long-term strategic focus, the business will begin making consultations with South Korea, the Philippines, and Indonesia for future outsourcing or in the event that India raises the employment wage laws during this outsourcing effort. 5. High Level Business Impact The ability to reallocate capital saved on labor cost reductions can be applied to build a more effective information technology infrastructure or improve enterprise resource planning software used in scheduling, production planning and purchasing. High employee benefits paid to these 50 outsourced workers can be used for low-level bonus structures as well to improve motivation and provide more incentives. The high level business impact in this case is an improved and dedicated organizational culture and also competitive software implementation in a variety of different divisions which are needed for competitive advantage. 6. Assumptions and Constraints In order to facilitate this outsourcing project, executive leadership will need to be more interactive in developing international strategies and relationship development with foreign business leadership. Costs of travel will likely impose a one-time cost burden, but the results of negotiations for sub-assembly will be worth the investment with a leaner organization able to remove redundancies in the production system. The business, as well, may receive some social backlash against principles of stakeholder views of corporate social responsibility, thus the company must develop an effective public relations plan to combat this risk proactively. References Ahearn, Raymond J. & Fergusson, Ian F. (2010). World Trade Organization (WTO): Issues in the Debate on Continued U.S. Participation, Congressional Research Service, Retrieved October 2, 2012 from http://www.nationalaglawcenter.org/assets/crs/R41291.pdf Hazeltine, David. (2008). The Value of Outsourcing Production, New England Direct Marketing Association, Retrieved October 1, 2012 from http://www.supportingadvancement.com/revenue/revenue_general/hazeltine_ outsourcing.pdf Jain, A. & Daga, T. (2009). Productivity Measurement, Praxis Business School, Retrieved October 1, 2012 from http://www.scribd.com/doc/21057558/Productivity-Measurement Kremic, Tibor, Tukel, Oya I. & Rom, Walter O. (2006). Outsourcing Decision Support: A Survey of Benefits, Risks, and Decision Factors, Supply Chain Management, 11(6), pp. 467-482. Rummery, Sarah. (2004). What has Outsourcing done to the Economy?, Stephen F. Austin State University, Retrieved October 1, 2012 from http://www.tracer2.com/admin/uploadedPublications/1236_AskExpert_Outsourcing.pdf Read More