Offshore Outsourcing of the New Balance - Essay Example

1.3 New Balance plans for offshore expansion Hundreds of US companies have moved their businesses overseas, lured by the cheap labor and low production costs. The Far East has an enormous labor force willing to work at low wages, as its output forces prices down. The low cost of production encourages thousands of businesses to relocate there. A study by the U.S. China Economic and Review Commission in 2004 found that in a three-month period, 58 U.S., 55 European, and 33 Asian companies planned to move overseas. The study concludes that in a year, 400,000 jobs moved overseas (4). New Balance itself is considering to move there as well for a variety of reasons. First, to get the advantages of the lower production cost, and second, to increase its ability to compete with its rivals who have already moved there. In addition, moving to Malaysia would help New Balance to meet the continuous increase in demand by adopting an aggressive working schedule and by capturing the holes and the gap in the laws there. 1.4 Why Offshore Outsourcing Only? Outsourcing is the process of subcontracting a third party and transferring the business functions to external business providers (1). Offshoring is a term often used in the United States to specifically refer to outsourcing to another country, most often today to India, Ireland, the Philippines, China, and other countries (3). Why New Balance is considering to outsource its manufacture facility to Malaysia? First, manufacturing sporting goods is not the core competency for New Balance. Selling and disrupting is the core competency for New Balance. So, with outsourcing, New Balance is focusing on its core business, which is selling and making profits. Second, when New Balance outsources its manufacturing facility, this will reduce the relative risks of making or buying, as it can leverage their skills and resources for increased profitability (2). In addition, outsourcing will help previously involved management people to participate in other projects, including higher priority or value-added work, rather wasting time on non-added value work. There are other outsourcing process features that may attract New Balance. Firstly, it is formal and remains for a long period of time. Secondly, New Balance can outsource anywhere that they want. In addition, the outsourcing fees are fixed as opposed to being variable. Moreover, co-employment concerns and liability will be very low. Finally, You New Balance can outsource its production process to as many agents as it wants. (2) On the other hand, New Balance could face several threats if it decides to outsource part of its manufacture facility. First, New Balance could lose control over its business. The simple fact is that when a function is outsourced, New Balance transfers responsibility for day-to-day operations to the supplier who only cares about money. The second concern is reduced flexibility. As outsourcing is normally a long-term engagement, bound by contractual terms, it is not designed for day-to-day changes in the scope of work. In addition, one important point that New Balance has to consider is the quality of the outsourced product. If the supplier sends New Balance poor quality products, this will indeed risk New Balance’s reputation among customers. Security, language skills, and the qualification of the outsource are among the threats that New Balance could face through outsourcing. (2) Proponents of offshoring claim that these cost savings bring about large benefits to the U.S. economy. Sunil Mehta, vice president of the National Association of Software and Service Companies (Nasscom) in India, estimates that U.S. companies will save up to $11 billion in 2004 by outsourcing to India and that India will purchase $3 billion in high-tech imports from the United States (Koch, 2003)(3). 1.6 Cost Benefit There are several cost and financial benefits that New Balance can generate after moving its manufacturing facility over to Malaysia. First, this will lower the overall cost through the access to the offshore lower cost economics. These include low rent, wages, row materials, and operating costs, which can approach 50 percent in some cases, because hourly rates for workers in Asia and other emerging markets are anywhere from 30 to 75 percent lower than they are in the United States (3). As aforementioned, this action will help New Balance to focus more on developing its core business by expanding its levels of operations to increase its overall profitability. In addition, New Balance will transfer part of its variable cost to be fixed. The transfer to fixed cost will make it easier for New Balance to predict future cost and prepare accurate budgets, which will increase the firm’s efficiency. Moreover, lower cost drive to higher margins, higher drive to higher profits, and higher profits mean happier shareholders and executives. In addition, after moving, New Balance will not be held liable for any abuse that takes place against the workers in subcontractor facilities. Moreover, New Balance can get tax benefits that are offered by the Malaysian government to attract foreign and multinational companies to come over to Malaysia. Another benefit includes improved flexibility, 24/7 operating hours, and reduced time in which to complete work (3). According to Behrooz Abdi, a vice president at Motorola, Inc., outsourcing is not just about cost benefits from lower salaries; by outsourcing to a highly skilled, readily available labor force overseas, companies can also improve their ability to compete in their fast-paced domestic and international markets. (3) 2.1 What is this project about? This project is mainly to identify the possible labor abuses that will face New Balance if it moves part of its facility to Malaysia. These abuses may include child labor laws, humiliating wages, long working hours, employment discrimination, unsafe working environments, and many others. 7 Inc., will identify each of the possible labor abuses that may threaten New Balance, the effect of that abuse on the Malaysian community, and the effect on New Balance’s world wide reputation and image. Finally, we have to deliver our conclusion to New Balance, which should be consistent with our community ethical values. 2.2 What is the project not about? This project is not about the effect on the US economy from the job immigration to the far east. It is also not about the environmental threats generated from the opening of new factories in Malaysia, nor about pollution and sustainability threats. 7 Inc. will set the main focus for its project toward labor abuses threats. 2.3 Market and non-market stakeholders The intention of New Balance to move some of its manufacturing into Malaysia as early as 2011 will generate different opinions and reactions among its various stakeholders. The relevant market stakeholders are those that engage in economic transactions with the firm as it provides societies with goods and services. The relevant non-market stakeholders are people and groups who are affected by the firm transactions and do not engage in direct economic transactions with the firm. There are several market stakeholders for New Balance who will be affected by its new moving action. First, there are shareholders who will appreciate the fact that the company is attempting to grow, which will increase their bottom line number that represents its net income. However, stakeholders may also realize the financial ramifications if New Balance does not make this move effectively with respect to labor and environmental issues. Second, employees will probably be concerned with the potential labor problems. The company is potentially changing its strategy and the pride of being made in the USA and UK would be compromised. Finally, customers are likely to take a stance against the move to Malaysia because of the labor and environmental concerns. Likewise, customers may also react positively to the decrease in the price of the products after such a move. New Balance action will have different reactions among the several types of stakeholders that New Balance has. First, the Malaysian communities will not want additional labor exploitation; they have had enough troubles with Nike taking advantage of the local workforce. At the same time, there will be some speculation in the community that the wages could raise if New Balance locates in their area because the company would then compete for labor with Nike and Adidas. In addition, the poor people of the communities that New Balance will interact with will be in favor for such and it will be a relief for them. Moreover, environmental concerns are paramount to the Malaysian communities where the new plant would be located. Vital resources, such as water, could be strained if the plant does come to life. Some of the ways the expanding textile industry affects the environment is by increasing its water deficit, climate change, pollution, and fossil fuel and raw material consumption. Second, the Malaysian government could be in favor if the introduction of New Balance entrées into their markets could means better wages, ethical treatment of employees, and would be in favor of the substantial tax boost coming from a very successful company. References 1. http://en.wikipedia.org/wiki/Outsourcing 2. Journal article by James Brian Quinn, Frederick G. Hillmer; The McKinsey Quarterly, No. 1, 1995 3. Pfannenstein, Laura L. and Tsai, Ray J.(2004) Offshore Outsourcing: Current and Future Effects on American it Industry, Information Systems Management, 21: 4, 72 — 80 4. China, Inc.: How the Rise of the Next Superpower Challenges America and the World Author: Ted C. Fishman Publisher: Simon & Schuster Date of Publication: February 2005 ISBN: 0743257529 No. of Pages: 447 Read More