Macroeconomics Advantages And Disadvantages To Outsourcing

Advantages and Disadvantages to Outsourcing
Michael Tuohey
Misericordia University

Abstract Outsourcing is when producers use different companies for certain parts of the production process. The work can be sent to other companies or to different countries. There are many advantages and disadvantages to outsourcing. An example of one of the advantages of outsourcing would be that it makes the prices cheaper in the United States. An example of a problem with or a disadvantage of outsourcing is that it reduces the amount of jobs in the United States. People argue whether or not it is good for the economy and that will be discussed further.

Michael Tuohey
Mr. Thomas Sweetz
BUS 205 Macroeconomics
22 November 2014
Advantages and Disadvantages to Outsourcing Outsourcing is when a business gets a good or service from somewhere other than themselves. They have many ways of doing this. They can use a different company for a part of the production process. A different way of outsourcing would be closing their U.S. factories and moving them to other countries, such as China or India. There are a few different reasons as to why a business would outsource, but the main reason is to save money so the product can be sold for cheaper. This is done in many industries and it has many advantages, but with those advantages come many disadvantages. The first advantage to outsourcing would be the amount of money that it would save the company that decided to outsource something. When the work is sent to another company it is usually because that company most likely makes something more efficiently and it can be bought from them cheaper than if the business were to produce it themselves. If the work is sent overseas there are many things that can save the business money. Work sent overseas is usually sent to countries much less developed that the United States. This means that there are less laws and regulations about production. The most notable difference is what the workers are paid. Chinese workers for example, are paid a fraction of a minimum wage worker in the United States. This is a huge money saver for businesses. Another big difference is in the regulations, most noticeably are environmental regulations. Factories in the United States usually have to spend a lot of money to control the pollution the factory would make, depending on what it is producing. People say that sending jobs overseas is bad because it reduces the number of jobs in the United States, but the money saved creates jobs so it is not as bad as the people who say this think. With these two things alone outsourcing to different countries can save a business a lot of money. The next advantage would be that the business can focus on things like creating newer, better products and selling them. This is much easier when they are not doing certain parts of the production process, because they can have people who normally, would be doing things with the factories, help with new designs and the marketing of these designs. A very good example of a company doing this would be Nike. They sent the production of all their products, which are things like shoes, clothing, and sports equipment, overseas to China. Now that they do not have to look over the production process as well they are putting all their effort into design and marketing. Apple is doing the same thing with their hardware for their electronics (Pearlstein). This is the most popular way to change focus, because it allows them to put much more focus into the design and market without a bad decrease in the quality of the product. Another thing that outsourcing does well is reduce overhead. This is very important to businesses and it is a big reason why so many businesses are sending parts of or even the entire production process elsewhere. Overhead is basically the cost of running the business. Things such as wages, rent, utilities, and anything else that do not become a part of the final product are all parts of overhead. A business’s biggest expense is usually labor wages, when a company does not have to pay for labor, overhead is drastically decreases. It also takes the cost of running a factory away, which is another big expense for businesses that do their own production. The outsourced work will create a new expense for the company, but all of the costs cut out by outsourcing are usually a significant amount more than the new cost from the company doing the production. Without the high overhead the company will have more money to do things such as design new products or market their products. There is also less risk for a company when they outsource their production. When working in a factory there are many dangerous things around you for the most part. When a business employs a lot of people in their factories there are a lot of people that risk getting hurt while working there. When someone gets hurt on the job that is usually something that the business would have to pay for, when that business outsources its production it will lose that risk of someone getting hurt on the job. There are also times when the demand for a product increases so the business will hire new workers. The demand may decrease in the future and the business would have to lay off some of the new workers off. This is a risk of making the business look bad and it may make some people not want to buy their products if they took a lot of jobs away from people like that. By outsourcing the business does not have to hire and fire workers with the fluctuations of the business cycle, taking away another risk to that business which is a good reason to out sources. All of these advantages make it seem like outsourcing is something every company should do. Although some people may think this it is not necessarily true. With all of these advantages come disadvantages. These disadvantages have many people believing that no company should outsource, especially to other countries. Now, these disadvantages will be discussed The first disadvantage, if the outsourcing is going to a different country is the loss of jobs in the United States. and the bad publicity that can give the company. There are a lot of people that work in each factory in the United States. When a factory closes to go to another country all of the people working there will usually lose their job. This can be very bad for an area’s economy. Sometimes this may be a household’s only income. When this happens people cannot afford to buy the necessities like food and housing. If enough people cannot afford to buy things more people will begin to lose their jobs and can ruin a local economy. If this happens it may receive national attention. This national attention can be very bad for a business’s reputation and it can hurt the business’s sales. Although this doesn’t happen very often, when it does it looks very bad for a business and it is horrible for the affected area. There is also a risk of important, confidential information being leaked through when a company is outsourcing certain things. When a business has its payroll outsourced to a business that specifically does other business’s payrolls certain information can be put into the wrong hands. Things like social security numbers and other information people would not want other people to know can be given away. Information about the business that is confidential can also be leaked. This can be bad for employees and the business as a whole. This can also give a business bad publicity depending on what kind of information is leaked. Information like this being leaked is a big disadvantage to outsourcing some areas of business. There may also be hidden costs when outsourcing. Someone who works for $10,000 a year in a different country can cost a business from the United States up to 8 times that amount (Overby). There are many different things that cause the amount to be so much more than the worker is actually getting paid. One of these costs is selecting who you will outsource to. You can pay up to an extra 2% with certain vendors. Another cost is during the period when they are transitioning to the other country. There are many costs involved in setting up in the other country. There also may be unexpected costs in laying off all of the people that you don’t need any more. If you are not expecting these costs they can really hurt your business as you are making the transition to an offshore company.

(“Outsourcing Policy”) In conclusion there are many advantages and disadvantages to a business outsourcing. The many advantages are very good for a business. It helps them to keep the prices of their products low and it can also help them to design new products since they are not in charge of the production of the current product. The disadvantages make it hard to decide whether or not that it would be worth it to outsource. The loss of jobs is not only bad publicity for the company, but it can have a significant effect on the economy. There may also be problems with the company that took the outsourced work, such as hidden costs and lack of control. Whether or not outsourcing is good is your opinion.
Works Cited
"Outsourcing Policy." Economics of Outsourcing. Web. 23 Nov. 2014. <http://community.plu.edu/~econ331/policy/home.html>.
Overby, Stephanie. "The Hidden Costs of Offshore Outsourcing." CIO 1 Sept. 2003. Print.
Pearlstein, Steven. "Outsourcing: What 's the True Impact?" Washington Post 1 July 2012. Print.
"The Advantages and Disadvantages of Outsourcing." Flat World Solutions. Web. 22 Nov. 2014.
Weidenbaum, Murray. "Outsourcing Is a Good Thing - Mostly." USA Today 1 May 2004. Print.

Cited: "Outsourcing Policy." Economics of Outsourcing. Web. 23 Nov. 2014. <http://community.plu.edu/~econ331/policy/home.html>. Overby, Stephanie. "The Hidden Costs of Offshore Outsourcing." CIO 1 Sept. 2003. Print. Pearlstein, Steven. "Outsourcing: What 's the True Impact?" Washington Post 1 July 2012. Print. "The Advantages and Disadvantages of Outsourcing." Flat World Solutions. Web. 22 Nov. 2014. Weidenbaum, Murray. "Outsourcing Is a Good Thing - Mostly." USA Today 1 May 2004. Print.