Question

By outsourcing overseas, a company can reduce costs but must also take certain risks. Global supply chains are exposed to more risk today than ever before..

Explain the economic and social costs of deciding to move production overseas.

Answer 1

Moving overseas comes with own sets of pros and cons. Although it brings down cost and makes the company more profitable in the long run, there are several economic and social factors which cannot be ignored and become a headache for top-level management.

The economic cost of moving production overseas:-

1. Impact on foreign currency:- There is always a risk when the host country tries to manipulate the currency to gain an unfair trade advantage.
2. Total Cost Evaluation:- Usually companies see international shipping as the additional cost of moving production overseas, however, there are inter-facility shipping costs involved when products move from ports to regional facilities and distribution centers.
3. Travel/Time Zones:- Let's say the production was shifted to a country in Asia where traveling from home country takes 20 hours. In such cases, company executives involved tend to stay in that country for a minimum of 10 days since longer travel cause tiredness if it is done more frequently.
4. Vendor Selection:- This is the biggest risk which a company takes because it involves time and effort. Such decision should be taken with due diligence and cannot be changed frequently since it has a direct impact on the cost of the product.

The social cost of moving production overseas:-

1. Laying off workers:- Thousands of jobs were lost when the US company decided to move their production facilities to China. This creates a bad reputation for companies in their local communities.
2. Quality Issues/ Customer Complaints:- It is often noticed that the raw material in the host country may be the inferior quality which companies choose to reduce the cost of the product even further. This creates dissatisfaction among customers from home and nearby countries who expect the company to deliver same standards at a reduced price.
3. Local Preference by Govt:- Local companies who are competing in the same industry may cause trouble as the international company may take away their market share with better quality products at a cheap price. Governments in various countries tend to increase the tax for MNCs so that there is balance in demand for both international and local companies.