Given the challenges and benefits of sourcing globally evaluate the potential for a shift to near-shoring products.

Introduction

As a result of globalisation, over the past few decades, increased global competition has left organisations with no alternative but to consider international purchasing strategies that aim among other things to reduce prices and optimize on quality (Schmeisser2013). As shown in graph below, services are also increasingly being sourced globally.  In line with this view, purchase management in most organisations have shifted their focus on internationalization to support global sourcing as among the most important globalisation processes. In recent years, there is a trend among companies to engage in near-shoring of products, implying that sourcing of products is done from countries within the same region. Due to the similarities in economy, language, and time zones, near-shoring products is increasingly becoming a consideration for most managers (Del Prete et al. 2017). Taking this into account, this report will evaluate the potential shift to near-shoring. In doing so, this report will first discuss the benefits of offshore sourcing as compared to near-shoring. Secondly, this report will address the cost elements to be considered to comprehend total landed costs as well as how they change. Thirdly, this report will discuss issues of supply chain and risk management due to global sourcing trends. Lastly, this report will evaluate whether Eastern Europe and North Africa will overtake Asia as a source of low cost in the long term.

Outsourced services 2000-2017

Source: www.statistica.com

Benefits of Offshore Sourcing as Compared to Near-shoring     

Offshoring takes into account relocating the processes and operations of an organization to another country in another region. On the other hand, near-shoring is similar to offshoring, only that the operations of an organization are relocated to a country within the same region. With regards to offshoring, certain benefits are accrued by the organization engaging in this sourcing strategy. The main benefit of offshoring as discussed by España (2015) involves low production costs as wages in such countries are significantly lower and thus, reduces the overall cost of production. In view of this fact, most companies, especially US-based, have shifted their operations to China and India as they have an abundance of cheap labour and necessary skills for production of goods and services (Tate 2014). For instance, through my own experience, while conducting a study of why there is an influx of American companies in the Philippines, I discovered that workers in the said country are paid as lower as a quarter of what American workers earn in the same job description.  Low production costs may also be achieved in near-shoring. However, the reduction in production costs is way less compared to offshoring. This is because in near-shoring, the selected country is within the same region, and thus there are similarities in the economy and work policies (España2015).

Also, there is the benefit of greater availability due to offshoring. According to Schmeisser (2013), different time zones enable an organization to keep in touch with the clients at all the time. Consequently, a higher level of customer experience is achieved a major step towards attaining competitive advantage. On the other hand, time zones are almost the same for companies that have near-shored their products. The benefit achieved here is that no night shift workers are required to keep in touch with the officials in the headquarters. In addition, offshoring enables an organization to have a wide pool of talent to choose from. This implies that the company is a position to select the best-talented employees. As such, there is increased productivity. On the other hand, the talent pool from near-shoring is lesser and thus, productivity may be lower compared to offshoring.

Cost Elements to be considered to Understand Total Landed Costs

Following the rising trends in global sourcing, it is essential for organisations to understand total landed costs of products in order to make the right decisions regarding the sourcing locations as well as vendors. One of the critical cost elements to be considered entails lead times. When the lead times are longer, other costs such as inventory costs may be incurred and thus, increase in production costs. Gylling et al. (2015) explain that lead times change depending on the orders made, such that more orders lengthen the lead time while fewer orders shorten the lead time. Another important cost element to consider relates to transportation and logistics including line haul, insurance, and packaging among other elements. Such factors can significantly increase the cost of production depending on the country. Over the years, transportation has been dominated by trucks (Oshri et al. 2009), but the impact of technology is changing various aspects such as the use of drones. Additionally, transportation can change due to conditions such as weather and regulations by governments. Moreover, the purchasing price of raw materials should be considered in order to understand total landed costs. With regards to this element, organisations must take into consideration the variation in exchange rates. When they vary negatively, they increase the cost of buying raw materials. Over time, the exchange rate can change depending on the economy, but it can also be affected by government policies. For instance, China usually devalues her currency to discourage importation of goods and services (Gry&Karacaovali2017).

Supply Chain and Risk Management Issues

Oshri, et al. (2009) argues that the uncertainty in changing consumer demands, business environment, competitors’ actions, and other market dynamics have accelerated risk exposure in the supply chain. Consequently, most organisations are not only aware of the possible risks but also have included risk management strategies in their business plan. Risks related to a business’ environment has increased as organisations engage in global sourcing activities. For instance, after the Brexit vote in the UK, business investments fell by 1% within the first three months, while the pound was trading at 15 percent lower compared to US dollar (BBC 2017). Furthermore, cultural risks have increased following the rising trends in global sourcing. For instance, in China, the issue of power distance should be considered by companies relocating to the country. Through my own experience, on a tour to China, I learnt that the country is centralized as opposed to decentralization. Leaders’ decisions must be respected without further questioning. Also, there is the issue of supply and demand risks, which according to Schmeisser (2013), are caused by abrupt and unpredictable changes in customer demand as well as the flow of the product.

Low-Cost Source: Asia vs Eastern Europe and North Africa

Asian countries, especially the Philippines, India, and China, have been a source of low cost for most European countries. There are readily available highly skilled individuals which attract companies from the European region. Owing to the challenges of offshoring in the Asian region, European countries are now considering shifting to nearing-shoring from Eastern Europe and North Africa (Smimou2015). Egypt is the leading North African country with over $1.9 billion of BPO industry export revenues as of 2017 (Del Prete et al. 2017). There are various reasons as to the rise of this trend. Firstly, the Asian region is no longer cheap; production costs in this region is gradually rising within new labour laws pushing this trend. For instance, in 2017, India extended the maternity leave to 26 weeks from 12 weeks (Jha2018). From another viewpoint, Eastern Europe and North Africa are increasingly becoming hubs for investment.  Eastern Europe countries such as Turkey, Bulgaria, and Poland have been ranked by the World Bank (2017) as among the highest ranked countries in ease of doing business. Additionally, there is a growing labour market in North Africa and Eastern Europe, prompting countries such as the UK which is experiencing a stagnated labour growth, to choosing countries in Eastern Europe. In the light of increasing cyber security issues, there is a consideration for companies to operate within regions with concrete data privacy policies (Kedziora et al. 2017), such as the Data Protection Act in the case of EU countries. Though the Asian region is still leading as a source of low cost, changes in Eastern Europe and North Africa coupled with the need for near-shoring will make these regions as the preferred destination for low cost among top European countries.

Conclusion

Conclusively, this report has focused on sourcing globally, with the main aim of evaluating a potential shift from offshoring to near-shoring. In the discussion, this report has found out that there are specific benefits arising from offshoring and near-shoring. Therefore, the organization should make a number of considerations before deciding whether to offshore or near-shore products. With regards to cost elements, this report have established that lead time, transportation and logistics, and purchasing price are among the most important aspects to consider in order to understand total landed costs. Due to increasing global sourcing trends, environmental and cultural risks have increased significantly. As discussed in this report, economic and political factors are the top contributors to environmental risks. Lastly, this report has evaluated that North Africa and Eastern Europe will, in the near future, overtake Asia as a preferred destination for low cost among top European countries.

References

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Del Prete, D., Giovannetti, G. and Marvasi, E., (2017). Global value chains: New evidence for North Africa. International Economics.

España, J., (2015). Offshoring Costs: A Comprehensive Model. Journal of Business and Behavioral Sciences27(2), p.81.

Forbes 16th Aug, (2017). China wage levels equal to or surpass parts of Europe, retrieved [17th May, 2018] from, https://www.forbes.com/sites/kenrapoza/2017/08/16/china-wage-levels-equal-to-or-surpass-parts-of-europe/#712f3b1f3e7f

Greaney, T.M. and Karacaovali, B., (2017). Trade, growth and economic inequality in the Asia-Pacific region. Journal of Asian Economics48, pp.1-5.

Gylling, M., Heikkilä, J., Jussila, K. and Saarinen, M., (2015). Making decisions on offshore outsourcing and backshoring: A case study in the bicycle industry. International Journal of Production Economics162, pp.92-100.

Jha, R., (2018). Women’s Issues in India. In Facets of India’s Economy and Her Society Volume II (pp. 209-232). Palgrave Macmillan, London.

Kedziora, D., Karri, T., Kraslawski, A. and Halasa, M., (2017). Nearshore service transfers in the EU: Legal and economic issues. Economics & Sociology10(1), p.290.

Oshri, I., Kotlarsky, J., Rottman, J.W. and Willcocks, L.L., (2009). Global sourcing: recent trends and issues. Information Technology & People22(3), pp.192-200.

Schmeisser, B., (2013). A systematic review of literature on offshoring of value chain activities. Journal of International Management19(4), pp.390-406.

Smimou, K., (2015). Regional equity market conditions and cross-border mergers and acquisitions (M & A) Evidence from the BRIC, Eastern Europe, and Africa. International Journal of Emerging Markets10(3), pp.535-559.

Tate, W.L., (2014). Offshoring and reshoring: US insights and research challenges. Journal of Purchasing and Supply Management20(1), pp.66-68.

World Bank, (2017). Doing business in Europe and Central Asia, retrieved [17th May, 2018] from http://www.worldbank.org/en/region/eca/brief/doing-business

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