Reorganising Production (HL IB Business Management)

• Businesses outsource or subcontract by hiring other organisations or resources to perform certain tasks, functions or projects on its behalf
• The main differences between outsourcing and subcontracting are
  • Outsourcing tends to be permanent
  • Subcontracting tends to last the duration of a project or activity

Outsourcing

• Outsourcing occurs when a business hires an external organisation to complete specific business activities such as information technology (IT) services, customer support, human resources or logistics (distribution)
  • Eg Barclays Bank outsource their recruitment of staff to Alexander Mann recruitment company
  • Eg Marks and Spencer outsource many of the IT services to Tata Consultancy
     
• The key reasons for a business choosing to outsource include:
  • Reduce costs
  • Access specialised services
  • Improve efficiency
  • Allows a business to focus on its core competencies
     

An Evaluation of Outsourcing

Advantages	Disadvantages
An external specialist company may be able to provide the service at a reduced cost Businesses can take advantage of the specialist skills provided by another company that may be more efficient Businesses can focus on products/services that give it a competitive edge	Poor communication between the businesses may cause disruption and brand damage The services provided may rise in cost faster than expected over time, raising overall costs

Subcontracting

• Subcontracting occurs where specific parts of a larger project or contract are assigned to third-parties
• The business remains responsible for the overall project or contract but certain components or tasks are delegated to other companies or individuals with specialised skills or resources.
• Eg A small coffee shop chain may subcontract the design of its website
• Eg A housing development company may subcontract electricians to wire the new houses
   

• The key reasons for a business choosing to subcontract include: 
• Manage capacity
• Make use of external expertise
• Meet specific project requirements
   

An Evaluation of Subcontracting

Advantages	Disadvantages
Businesses have access to expertise that may not be available in-house Allows businesses to access extra capacity for short periods of time to manage seasonal demand Businesses can focus on products/services that give it a competitive edge	May be expensive, especially for a small business May be reliant on external resources to complete projects which could cause delays Subcontractors may have a different culture and may lack the motivation of in-house staff

• Offshoring occurs when a business sets up operations in another country to carry out certain business processes so as to:
  • Take advantage of lower labour costs
  • Gain access to specialised skills
  • Expand into new markets
     
• Common examples of offshoring practices include call centres in foreign countries, software development teams or manufacturing plants established in countries with cheaper labour
   

An Evaluation of Offshoring

Advantages

Disadvantages

Labour costs are often lower in offshore locations which reduces costs (salaries, benefits etc) Allows businesses to tap into skilled labour that may not be readily available domestically By offshoring operations to different time zones, businesses can take advantage of 24/7 operations and provide better customer support By establishing a presence in a foreign country, businesses can gain local market insights, develop relationships with customers and spot new growth opportunities

Offshoring can present challenges in terms of communication and language differences which may result in delays Maintaining quality control can be more challenging when operations are moved offshore Offshoring involves sharing sensitive information and intellectual property with external parties which may raise concerns about data security or confidentiality Offshoring can result in domestic job losses as operations are shifted to lower-cost locations

• Insourcing is where a business assigns tasks to individuals within the organisation which were previously outsourced
   

Diagram with Reasons why Businesses Insource Certain Activities

Reasons to take back control through insourcing

• Cost control
  • Can be a cost-saving strategy as it eliminates the need to pay external specialists
     
• Quality control
  • A business retains direct control over the quality of work being produced and may find it easier to establish their own standards
    
    
• Flexibility
  • Provides the business with greater flexibility to respond to changing business needs and so can adjust workflows and adapt to new challenges
     
• Knowledge and skill retention
  • Businesses can develop specialised skills within their own workforce which can also reduce the risk of intellectual property breaches

• Reshoring occurs when a business brings back its production activities to its home country from abroad
• It involves reversing the previous decision to offshore or outsource those activities to another country
   

Diagram Stating Reasons for Reshoring

Businesses often reshore operations due to cost or quality considerations
 

• Cost considerations
  • The initial cost advantages of offshoring may reduce due to factors such as rising labour or transportation costs in the foreign country
    
    
• Quality control
  • By reshoring companies can have better control over the manufacturing processes and ensure higher quality control standards which may lead to improved customer satisfaction
     
• Intellectual property protection
  • By bringing manufacturing back to their home country, they can reduce the risk of intellectual property theft
     
• Supply chain resilience
  • The COVID-19 pandemic highlighted the vulnerabilities of global supply chains when disruptions in transportation, logistics and international trade led to delays and shortages of critical goods. Reshoring reduces dependence on foreign suppliers
    
    
• Market proximity
  • Can allow companies to be closer to their target markets which can lead to faster delivery times, reduced transportation costs and improved responsiveness to customer demands