Offshoring has been considered as a solution to reduce the operational costs of doing business and setting company’s footprints in the global markets by many business executives. This was premised on the reason that establishing manufacturing plants in third world countries and emerging economies would help the companies to significantly cut down on costs of production. This is based on the facts that these countries present the advantage of low regulatory expenses, cheap labor costs and low prices of raw materials. According John Ferreira and Len Prokopets in their article Does Offshoring Makes Sense? for instance explains how many American companies established their manufacturing plants particularly in the emerging economic giant, which is China. However, it has downed on many executives that offshoring is no longer as effective as it used to be in the past. This paper seeks to look at some of the supply chains challenges and problems that have led to a paradigm shift as far as offshore investment is considered, (J. Ferreira and L. Prokopets, 2009).
About the issue of Demystifying offshoring, John Ferreira and Len Prokopets also explains that American companies are opting to venture into home operations or near offshoring at best. They are considering allocating investment into North and South American countries such as Canada and Mexico. They are also considering starting their operations in states such as Alabama and Arkansas, where costs of labor and raw materials are relatively low.
It has been realized that after all the cost advantages incurred by many manufacturers venturing into offshoring could have all along be less than double digit. This is because they have not been factoring the true costs involved in the entire supply chain. This has been true particularly for those corporations that must serve huge domestic markets in their home country, taking an example of the United States of America.
According to the article, (Does Offshoring Make any Sense 2007), John Ferreira and Len Prokopets emphasis more about the Supply Chain. Supply chain refers to the entire process starting from acquiring raw materials until the time the finished products reach the final consumer. As far as offshoring is concerned, a company establishes a manufacturing plant in another country so that it can employ raw materials and labor from that country mainly because they are cheap as compared to prices in the home country. The finished products are shipped from the country of operation to home country and other markets all over the world, (Gordon, 2010).
American companies in the end of the last century had established major production plants in China. By then the true costs of production in China were very low and this made offshore companies realize high profitability. However, over the years the situation has changed significantly. This is because the Chinese currency has appreciated against the American dollar, making exports to other countries expensive. Moreover, there has also been increased production costs emanating from increased wages and significant rise in freight charges owing to the problem of piracy and terrorism as insurance companies are enlarging their premiums to protect their profit margins.
Effects of longer supply chains.
It is worth noting that today the key to success of a business is customer satisfaction. Customers are satisfied if they are supplied with cost effective products at their convenient time. Offshoring does not meet this duo consumer’s expectation in a manner that is twofold. First of all, due to increased labor costs, raised global price indices and freight costs, the implication is that the true costs of production will definitely soar. Thus, it will ultimately be passed on to consumers through higher prices of goods as the manufacturers have to protect their profits margins. Secondly, when the production plants are far away it is not possible to apply the just-in-time business principle, which requires companies to supply the products to customers at their hour of need. It is also difficult to keep on differentiating products to meet the varying tastes and preference of the consumers. This is because it takes long time to ship the products from the production plants to the markets that may be far away.
The realization that the offshore concept is not making significant business and economic sense has made many business executives to go back to the drawing board. The implications that this change has is the potential to establish near offshore investment or home operations. John Ferreira and Len Prokopets also points out that some American companies plan to establish operations in countries in North and South America such as Canada and Mexico. They also have to calculate the cost effectiveness of establishing production in some states, as this will enable faster delivery of goods to customers and customization of products. Moreover, it will lead to competitive pricing of the products because additional costs such as shipping, customs duties and other taxes in offshore countries are largely reduced or eliminated altogether.
Businesses have to make very strong links with the domestic suppliers so that they improve on market share and penetration to compensate for the lost market in the countries where they had offshore operations. Vendors are critical because they source market for the producers, they advertise and promote the products and they also provide the manufacturer with detailed feedback on the customer reaction and thus the business is able to react quickly. This can be very difficult when the offshore operations are concerned because of long distances involved and many suppliers that may exist in the supply chain.
Operations in home or near countries ensure that an organization is at a better position to monitor its supply chain. The importance of this is that it is in control of the chain and is able to detect problems that may arise on time. Thus, business prevents instances of customers’ dissatisfaction. It is also able to manage its product promotion and advertising activities to make sure that the market is well informed about its goods and services. Domestic operations shorten the supply chain which has additional benefits of price reduction through the decrease of operational costs, (Harper, 2010).
In the above analyzed article, (Does offshoring still make sense?) By John Ferreira and Len Prokopets, it is very apparent that a paradigm shift is inevitable because considering cost and benefit analysis it is sensible to say that a company would rather invest in its own country or near countries than establish its manufacturing plants offshore and then make less than two digit earnings. This is tantamount to importing job from its parent country to the country where its production plants are based. Given such factors as piracy, increased world price indices and depreciation of dollar against many currencies especially in the emerging economies where the American firms have done plenty of offshoring it makes a lot of economic sense to establish manufacturing concerns either at home or near home. It is also worth noting that many senior chief executives have done critical analysis of offshoring and assisted by the various surveys conducted on offshoring they have been able to demystify offshoring and realized its true worth, (Pros and Cons of Offshore Investing, 2010).