Offshoring - Essay Example

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Extract of sample "Offshoring"

MAY 2015
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Outsourcing is practiced almost by every company mainly because it is cost-effective. Often, there arise misunderstandings on the precise achievement a firm attains by outsourcing its services. Using Walmart as case study, this paper investigates the impact of labor on productivity.
Methods: In a bid to ensure the data collected is accurate, a quantitative approach has been employed. Once collected, the data is analyzed by running a regression using the Statistical Package for the Social Science (SPSS).
Findings: the research has found 93% R-Square value that essentially implies that close to 93% of the variation in the value of the dependent is well explained by the variation in the independent variation. Also, the results showed a 0.000137 p-value for the off-shoring coefficient, so the p-value is lower than 0.05. In essence, this is interpreted to mean that a change in the percentage of material off shoring indeed has an effect on labor and productivity.
This research paper has been made in order to complement to pass of bachelor degree in business administration program. I would like to start by thanking God for helping me to finish my thesis, also I would like to say thanks to whoever have helped me directly or indirectly with my thesis and studying and that includes a very special thank for my supervisor (PhD. ShlairAbdulkhaleq) and Dean (PhD Fatih Çura). Also I would like to thank my parents whom supported me from the start, and of course I would like to say thanks to my husband for everything .In the end, I would like to tell you that I’m really happy from the bottom of my heart that I was able to do this thesis and it’s just a step towards the success that I’m dreaming of, and I hope that it will help the upcoming student in their studies and they can benefit from the information below.
Thank you.
List of content
2.1 State of the Problem
3.1 Objectives of the Research
4.1 Importance of the Research
5.1 Limitations
6.1 Organization of the Research
1.1 Data

Appendix 1
Modern businesses are driven by innovation. Outsourcing is one of the methods of innovation undertaken by different business enterprises. Outsourcing enables to open new horizons that in turn lead to increased productivity.
However, any new idea brings along its own set of conditions and parameters with it. Outsourcing is no exception in this regard and it has certain prerequisites and parameters that need to be assessed in order to extract maximum utility and productivity from it.
An important comparison analysis is that of outsourcing and its direct and indirect impact upon the productivity rates. The gauge of productivity must come about in the form of determination and estimation of labor satisfaction, per capita income increase, and increases in the foreign trade and exports.
The practice of outsourcing is not just limited to particular field and discipline of business practices; rather the services as well as the manufacturing sector of business ventures directly benefit from it and engage in it actively.
One of the key aspects of consideration associated with outsourcing is that of domestic labor unemployment concerns. This often remains a top concern with regard to the internal labor union policies and government priorities. Productivity is often at the center of outsourcing with some firms engaging in this practice to ensure employees remain highly productive. However, the impact outsourcing has on a business is hardly a topic widely agreed.
In this paper, Walmart has been used as a case study for the topic. The first chapter of this paper analyses the literature review followed by methodology in the second chapter. The third chapter highlights the data as well as analysis of the same. The final part is actually a conclusion where a summary of the paper is given.
This is assessed and addressed in the form of expats being employed at different levels in the sister organizations.
Each of these variables can be analyzed through the research and literature review, which will allow understanding the ground dynamics and situation, which are suited to its general working.
This paper looks into the areas and regions where outsourcing has been enacted and has led to increased productivity. Offshore processes bring along new ideas and new horizons to expand and dissect into. The global markets are seeing a fast trend of outsourced processes. Outsourcing is finding an increased trend in usage in the developing economies and given the prospects and promise it is bound to attract more attention in coming days with more delivery and productivity in return.
Thesis statement:
This paper will attempt to answer the following parts:
Analyze relationship between two variables that measure offshore processes and productivity.
The possible downsides of offshore processes.
The possible co relationship between the two.
Studying the data collected from the different business markets of United States of America.
Questions of the research
1- Is there any relationship between offshoring and productivity?
2- How is the impact of the relationship between offshoring and productivity?
Objective of the research
1-To ascertain that there is a relationship between offshore and productivity.
2-To analyze the relationship between offshore and productivity and to if it’s a positive or negative relationship. Further, assessment of the overall magnitude of offshore processes will also be determined.
Timeframe is limited.Access to data about more variables.that are explaining labor productivity other than the percentage of offshoring .
Lacking of econometrics skills that would allow to extending the economic model to a multiple regression model that includes more explanatory variables.
Outsourcing is a cost reducing practice employed by business by transferring some work portions to outside suppliers rather than completing it internally. In outsourcing, two companies, the producing and the selling company, form a partnership to produce and sell to a specified locations, thus it involves handing over part of the business to a second and third parties. Outsourcing has continuously gained increased utilization for its effectiveness and profitability. Many businesses have gone for this approach as compared to the traditional method of going to establish and run a business in a local area. Consequently, many scholars have done a lot in the determination of the applicability of this approach in business. Researchers have shown this method of operating business to be economic,efficient and a profitablemethod of operating business. The review shows the researches done on how outsourcing is an economical,effective and profitable. Also, the analysis focuses on the risks associated with outsourcing as an approach to doing business.
2.1Products and market choices in outsourcing
Outsourcing approach is rapidly expanding in terms of market and the products offered. Drauz, (2014) studied the common types of commodities commonly using outsourcing. He carried out an exploratory study among six largest outsourcers companies in South America. He found the use of outsourcing in dealing with the full range of products offered on the market. In a different study, Handley (2009), finds outsourcing to be more prevalent in dealing with assembling and IT types of products than in any other range of products. He further found increased willingness of companies to represents others as outsourced partnerships. In a similar study, Gottschalk &Solli-Sæther, (2006) found the percentage of expenditure of firms on the outsource parties is on increase. Heeks&Arun, (2010) found many international companies dealing with automobiles spend about 40 to 60 percent on third parties, the majority being the outsourcers.
In concern with the increasing trend in outsourcing, Handley & Benton (2009) conducted a survey to determine why outsourcing was a preferred mode of business. They found most business to prefer this method for being cost effective. According to the findings, firms fear to incur the switching costs to alternate providers. Therefore, they choose to incorporate other businesses as an outsourcer and run the business. Besides, Handley (2009) finds outsourcing as a way of preventing loss of loyal customers as the outsourcers will be selling in the name of the former company. Additionally, Heeks&Arun, (2010) ⁠ founds outsourcing to improve the client-provider relationships based on the resources and capabilities that eventually develop on the customer-producer attachment, producer loyalty and trust. Therefore, outsourcing favors long-term relationships in the business making them more economically viable.
Besides, studies on the effectiveness of outsourcing in getting the product to the market show this approach is useful. ⁠Handley, Heeks&Insinga (2000) ⁠found the effectiveness of outsourcing is a reason for the rapid growth of outsourcing as a strategy in marketing and delivery of products to customers. When comparing it with other traditional approaches, Belcourt, (2006) found outsourcing as a best alternative and cost effective approach to the sale of products compared to any other traditional form of conducting business⁠. Besides, he discovered that the seller and partners are near the customers; hence, outsourcing facilitates easy selling to a larger market share⁠. Therefore, outsourcing is a cost effective method that is efficient and reliable way of delivering products and services to the customer (Insinga&Werle, 2000)
2.2 Determinants of success in outsourcing
Drauz, (2014) ⁠ identifies three components that will determine the success of outsourcing. The first in the line is an experience. In this Drauz, (2014) finds the organizations with expertise in the local market set up do better in outsourcing when they form a mature outsourcing relationship. Similarly, Bei, Chen, &Shanshan (2008) found it necessary for the new business entering the outsourcing to seek guidance from the established better doing business in the market. Besides, Drauz, (2014) ⁠ identifies the essential matters as a determinant in the success of the outsourcing. In this, he finds that buyers are more likely to buy when they have a correct information obout the products as opposed to a simple explanation. Insinga&Werle (2000) agree with this explaining that, the guides in the outsourcing process should identify and employ the better-qualified employees in buying and selling of the products. Drauz (2014) found the third component to be understanding between the buyers and providers to be essential in the determination of the effectiveness of the outsourcing process. Similarly, Bei, Chen, &Shanshan (2008) ⁠ finds outsourcers appreciate openness collaboration and trust, which are crucial to the success of the outsourcing complexes. Even if most of the buyer organization highly relies on the traditional notion of managing, better outcomes have bindings to the mature interactions.
2.3 Risks associated with outsourcing
However, outsourcing has its limitations as a method of getting the product to the market. In a study, Zhu et al., (2001) found customer satisfaction is low where third party delays in delivering the product to market. In this, they identified many factors in the outsourcer that can cause the delays in deliverly of the product to the market they also found that the outsourcing company may not have control over some of the factors. In a different study, Drauz, (2014) ⁠ identifies these factors to be customs delays, labors disputes and political unrests. In this, the lead-time and variability of the product to the market increases the levels of stock with the chain of supply stability deteriorating with the rise in cost buffers.
Moreover, in a different study Insinga (2000) found the outsourcing to cause differentiation in the product or service quality, consequently affecting customer satisfaction. Therefore, Zhu et al., (2001), recommends to the companies to select carefully, qualify and manage their partners in outsourcing to prevent the deterioration of the quality. Bei, Chen, &Shanshan (2008) found this to need enough periods of transition or a combination with parallel production with cross training to achieve the required quality. Whereas it is well to save cost by avoiding this effectiveness outsourcing approach, it is well for a company that deals with automobiles to evaluate the impact it will have on the customers.  
Drauz, (2014) ⁠ identifies that in the transitional phase, the outsourcing may also fail if achievement of the budgets and schedules fail due to inadequate resources. Therefore, the automobile should be run in the large scale to attain its full effectiveness. Outsourcing replaces some of the production and service functions of the car-producing firm in Korea the company may fail to meet its customer and shareholders’ commitments (Zhu et al., 2001).
2.4 The relationship of offshoring on labor productivity
Amiti& Wei (2005) showed in their study that the U.S market alone gained a net value of around ten percent improvement in markets between the spans of eight years spanning between 1992 to 2000. This came about in the form of improved labor costs and other reductions in the various costs that are incurred otherwise (Amiti& Wei 2005).
In order to assess the productive viewpoint benefits of offshoring, the facts and stats collected by Bureau of Labor Statistics are highly important in this regard. They take into account various aspects providing for a holistic understanding of the situation at hand and its potential positive impacts upon productivity (Amiti& Wei 2005). While the focus of study and literature review here is that on United States market, the facts and data collected from various other markets such as China and Mexico have also shown positive trends from markets on account of such practices (Susan, 2010)
Susan have studied number of algorithms and sample tests were conducted to assess the hypothesis and evaluate the overall survey findings. Various other techniques used in this regard included factors such as Arrellano-Bond Generalized Method of Moments technique which incorporates same principle of determining the market trends against the offshore practices. (Houseman, Kurz, & Lengermann, 2010).
The critical aspect to the overall offshore process is that of providing opportunities outside the country; however this in turn leads to increased productivity in the net outcome ratios. This is clearly evident in the case of United States of America. Susan et.alhave undertaken investigative study based on a survey and finding from a period of 1997 to 2007 to evaluate the net impact and overall dynamics associated (Susan, 2010).
Wal-Mart is one prime example in this regard. It is an American based multinational that has expanded its network across the globe. Its practices and service delivery in China has resulted in higher growth rates, yet reduced local induction. The C.P.I Consumer Price Index in this regard is affected on account of new market such as China that has one of the lowest labor rates in this regard in the overall global commercial market (Susan, 2010).
The downside of this practice in United States of America came about in the form of loss of jobs over the given period of time. This came about at a rate of over three million plus jobs that would otherwise be provided to the local labor (Susan, 2010).
BLS investigated the working of approximately hundred firms and through the determination of various variables established that the net rise in productivity as a whole amounted to over four percent as a result of offshore practices (Houseman, Kurz, & Lengermann, 2010).
Freund (2013) in their study about the same aspect of global businesses practices reported the same positive outcomes extracted from the offshore practices as a whole. The generic spike in the percentage of awareness, familiarity and subsequent accommodation comes about at a rate of 6 percent noticed over a span of nearly a decade (Freund 2013).
The overall findings and survey took into account an important variable, which comes in the form of element of endogenous. The GMM estimator helps overcoming this element of uncertainty and resolving the percentage value fixation with regard to net productivity attainable from the practice of offshore business ventures. (Freund, 2013).
Susan (2010) in their study have tried to assess the trend of wages and its impact upon the labor attraction from offshores and overall offshore practices. Despite the fact that American markets are not among the list of low wage countries, yet it has managed to maintain its say and influence in the global market. This is supported by number of facts. The first is that of increase in the manufacturing rates. This increase helped overcoming the general global marketing trends and overall rebounds that were faced by the global market. The data and facts established were base on the investigate and research based studies conducted through the process of Annual Industry based Accounts process. (Susan, 2010)
The given trends may lead to reduction in the net domestic employments, yet it has an overall beneficial impact upon the economy of the country. Additional concern in this regard may come about in the form of trade deficit with exports gaining an edge over the imports; however, the net G.D.P tends to gain from these practices (Amiti & Wei, 2005).
Amiti& Wei (2005) have aimed at calculating the mathematical aspect of overall equation through the use of various variables engaged in the process of offshore activities. They have also given the sample of offshore practices and its dynamics pertinent to the United Kingdom market. Robust regression based testing methods are also engaged in this regard (Amiti & Wei, 2005).
An important aspect to the overall offshore practices, which is highlighted, by Amiti and Wei are that of the agent of technology (2005) The presence of state of the art technology also influences the net process of offshore activities. With more easy availability of technology, a considerable proportion can reduce the possible reduction in loss of jobs from local market. This can come about in the form of virtual electronic operations or an automation-supported process, which makes it easier to operate from remote sites (Amiti & Wei, 2005).
A quantitative approach is used in this study to analyze the effect of the increase in the percentage of material offshoring on the level of labor productivity. A single-variable, log-level, ordinary least square regression model is constructed where the dependent variable will be the level of labor productivity in the United States during the period 1992-2000 and the independent variable is the material offshoring as a percentage of the manufacturing sector during the same period of time. As the material offshoring is measured as a percentage of the manufacturing sector, the data on productivity was converted by taking the natural logarithm of the level of output per hour in the manufacturing sector. The data are analyzed upon running the regression on the above mentioned datasets using the Statistical Package for the Social Science (SPSS).
1.1 Data
The data in the below table (Table 1: Data on Productivity & Offshoring in the USA) used in this study are time series data derived from two different sources. The dataset used to measure productivity in the manufacturing sector in the United States is derived from the Bureau of Labor Statistics – International Comparisons of Manufacturing Productivity and Unit Labor Cost Trends Data Table published in December 6, 2012 where output per hour in manufacturing sector is used to measure productivity.
The dataset used to proxy offshoring is taken from Amiti and Wei (2005) where they constructed a measure for material offshoring as a percentage of the manufacturing industries in the United States. Thus, they provided a time-series dataset for this measurement that covers the period 1992-2000. Table 1: Data on Productivity & Offshoring in the USA
Appendix 1: Regression Results
Table 1: Data on Productivity & Offshoring in the USA
Output per hour in Manufacturing
Y = Ln(Output per hour in Manufacturing)
X = Material Offshoring %
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Significance F
Standard Error
t Stat
Lower 95%
Upper 95%
Predicted 4.23140632598902
Data Analysis & Results:
The regression results reported 93% R-Square value, which states that almost 93 percent of the variation in the value of the dependent variable is explained by the variation in the independent variable.
The results also reported a 0.000137 p-value for the offshoring coefficient, so the p-value is lower than 0.05. Thus, the null hypothesis that the coefficient equals to zero, which is the hypothesis that the change in the percentage of material offshoring has no effect on labor productivity, is rejected at a two-sided 95% significance level. Thus, the alternative hypothesis, which states that the change in the level of material offshoring as a percentage of the manufacturing sector changes the level of the labor productivity, is accepted at the same significance level.
The best linear unbiased estimator (BLUE) for the coefficient that measures the effect of the change in the percentage of material offshoring on the labor productivity is reported as 0.0826. Thus, the increase in the percentage of material offshoring will positively affect labor productivity in the manufacturing sector as everything else held constant. So the ceteris paribus effect of 1 percent increase in material offshoring will be an 8 percent increase in the output per hour in the manufacturing considering that the natural logarithm form of the variable that measures productivity is used in the regression model.
Outsourcing practices are aimed at bringing about increased productivity and utilization in the business practices. With the development in the global trends such practices are finding more ground and reception. They enable improved output performances, reduced labor costs and better working mechanism directed towards the end users. Outsourcing finds its usage and productivity in an array field of business disciplines and it is not just limited to manufacturing or services industry alone. Outsourcing also brings along competitiveness with itself as a prerequisite owing to the international exposure and competition as a whole.
The time series variable determination are few of the mathematical tools through which outsourcing may be gauged for effective output. Essential variables in this regard are stated as experience, good relationship between the customer and manufacturers. A parallel constraint in this regard can be the third party risk which needs to be handled in an appropriate manner. The methodology of data collection was derived from the literature review. To reduce margin of error, the quantitative method was adopted. Using the aforementioned steps, the results were as described above.
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