What Are Outsourcing and Offshoring?
December 19, 2016
Outsourcing and offshoring are often used synonymously, however the terms in fact have two very different meanings and implications. Outsourcing is when a company negotiates a contract with a third party to perform a specific function. When outsourcing a process or operation, it is vital to find a company or person that specializes in the task at hand. However, offshoring is when a company sends in-house jobs to be performed in another country. An example of offshoring is for a United States based company to produce their goods in Mexico. Both of offshoring and outsourcing ultimately save companies money but they reduce costs in very different ways.
Understanding Outsourcing
Outsourcing has become increasingly popular with companies as a way to reduce overhead costs and increase profit margins. Outsourcing occurs when a company entrusts a part of their business process to an outside vendor. Outsourcing possesses a myriad of benefits, some of which are:
- Outsourcing can save costs by accomplishing the same task for less money. However, just because the task is being accomplished for less money does not mean that the quality will decline. One of the most attractive aspects of outsourcing is the reduction in cost while still receiving high quality services.
- Outsourcing can increase efficiency by entrusting business processes to third-party vendors that specialize in that specific area.
- Outsourcing allows companies to focus on the core areas of their business and improve their brand by freeing up time, energy and resources.
Understanding Offshoring
Offshoring is when production operations are performed in another country. Offshoring is often criticized for transferring jobs to another country but it can be extremely beneficial for companies and can ultimately improve the economies in both countries. Offshoring has the potential to significantly benefit businesses. Some of these benefits are:
- Companies often offshore manufacturing or services to countries where the hourly labor rate is significantly lower. In Mexico, for example, the hourly labor rate is only a fraction of the minimum wage in the United States. For a company to offshore manufacturing to Mexico, they will accumulate a significant cost savings from just labor alone.
- In addition to saving money on manufacturing costs, companies offshoring manufacturing also creates more skilled employment opportunities in administrative and operational roles within the United States.
- Offshoring reduces risk for companies, thereby allowing them to better support clients when they need it.
- Offshoring allows companies to maintain complete control over the operation and production of the business. While outsourcing relies on an outside vendor to complete tasks, offshoring relies only on those within the same company. For some, offshoring allows for a more cohesive, directionally focused business than outsourcing does.
- Offshoring creates new revenues by fostering a demand in destination countries for products, particularly high tech items.
The Benefits of Offshoring in Mexico
Offshoring manufacturing to Mexico is a choice that more and more companies are making. There are a number of huge advantages companies experience by offshoring production operations to Mexico. One of the main benefits of offshoring in Mexico is the significant cost savings. Mexico has a skilled labor force that can complete higher quality work for a fraction of the cost, which aids United States based companies in drastically reducing overhead costs. Another benefit to companies offshoring in Mexico is the geographic proximity to the United States. Because of how close the United States and Mexico are, shipping costs are significantly lower than if manufacturing was offshored overseas, such as to China.
This reduction in shipping and freight costs provides businesses with even higher cost savings, while still producing high quality products for consumers. In addition to these benefits, companies offshoring manufacturing to Mexico can also result in an increase in skilled employment opportunities for United States workers. While manufacturing is taking place in Mexico, a skilled workforce is needed in the United States to perform administrative and operational functions to keep business processes running at an optimal level. Many businesses find running operations in the United States and manufacturing and production in Mexico to be beneficial to both countries.
For many companies, a combination of both outsourcing and offshoring can lead to the perfect balance. North American Production Sharing, Inc. (NAPS) specializes in outsourced administration and compliance management services that help companies that are offshoring successfully run manufacturing operations and maquiladoras in Mexico. Contact NAPS today to learn more about offshoring vs. outsourcing.