Offshoring is a complex issue with no easy answers. It is important to have a clear understanding of the risks and rewards involved before making a decision about whether or not to offshore." - Peter Drucker / Management Consultant
Definition
The organization's business processes (materials and/or services) are provided from abroad in order to save on labor and/or manufacturing costs.
History
With the intensification of maritime trade thanks to the development of containerization after the Second World War, it first started in the 1960s when American companies turned to Asia in order to reduce production costs.
With the rapid development of the Internet and communication technologies, the concept of offshore has increased its spread since the 1990s.
Offhoring, which started with production, later manifested itself in the field of labor (especially in the textile industry).
Opportunities
Cost Savings: Moving production and business processes to lower-cost regions provides a serious cost advantage. Especially in purchasing processes, this savings means more affordable prices and competitive products.
Specialization and Efficiency: Each country has different areas of expertise. Offshoring makes it possible to benefit from these areas of expertise. Thus, business processes can become more efficient and of higher quality.
Market Access: It enables companies to access new markets more easily in international production and purchasing processes. This often allows for increased sales volume and expansion of market share.
Operational Flexibility: The capacity to operate in different geographies gives companies more flexibility. In this way, it can be quickly adapted to demand changes and market dynamics.
Resource Diversity: Resources and materials from different geographies increase the diversity of products and services. This has a particularly positive impact on innovation and product development processes.
Risks
Quality Control: Offshoring may require extra effort to meet quality standards. While local production can be more easily controlled, offshoring may create difficulties in this regard.
Communication Problems:Different time zones, cultural differences and language barriers can make communication difficult. Incorrect or inadequate communication can negatively impact business processes.
Delivery and Logistics Issues:When production is outside the country, logistics and delivery processes become more complex. Natural disasters or political crises can negatively impact the supply chain. (For example: Coup, Tsunami, War, etc.)
Intellectual Property Risk: Moving production or service processes to another country may make it difficult to protect intellectual property. Extra precautions may be required to protect patents or trade secrets. (For example: The current state of China's automotive industry)
Social and Political Risks: Offshoring may have negative effects on the local job market and consumer perception. Loss of local jobs or poor quality products may lead to social backlash.
High Initial Costs: Offshoring may require high costs in the initial phase. These costs may not be recovered until business processes stabilize. (For example: Automotive companies that had to leave Russia)
Good Practices and Examples
Nokia: Nokia established factories in Asian countries in order to control production costs. In this way, it increased its competitiveness.
Apple: Apple largely moved its production to China. Thanks to this move, it reduced product costs and gained a more effective position in global markets.
Amazon: The world giant E-Commerce platform has significantly reduced labor costs by moving customer services to countries such as the Philippines.
Inditex: Thanks to offshoring, it was able to offer cost-effective products in the fashion industry.
Differences between Offshoring and Outshoring
Conclusion
Offshoring stands out as a strategy that increases the competitiveness of companies and provides cost savings, if the above-mentioned Opportunities and Risks are examined correctly.