What Is Offshoring? - Definition, Advantages & Disadvantages

What Is Offshoring? - Definition, Advantages & Disadvantages
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  • 0:04 Offshoring v. Outsourcing
  • 1:02 Advantages of Offshoring
  • 2:33 Disadvantages of Offshoring
  • 4:54 Lesson Summary
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Lesson Transcript
Instructor: Deborah Schell

Deborah teaches college Accounting and has a master's degree in Educational Technology.

Companies move part or all of their production to other countries for a number of reasons. In this lesson, you will learn more about offshoring and its advantages and disadvantages.

Offshoring vs. Outsourcing

Let's meet Mr. Cotton, who owns a company that manufactures children's clothing. He's been operating in his own country for over ten years, but a new competitor has shown up and is offering clothes of comparable quality for much less. As a result, he's losing some of his customers. Mr. Cotton is wondering if it's time for him to consider manufacturing his items in a different country. Let's see if we can help Mr. Cotton with this decision.

Offshoring is the practice of obtaining products or services from another country or relocating production to another country. Offshoring is what Mr. Cotton's considering for his business. You shouldn't confuse offshoring with outsourcing, which involves locating people who specialize in a particular process and contracting them to complete the work.

For example, Mr. Cotton may outsource the company's accounting to a firm that specializes in it, but the company will still be in the same country as Mr. Cotton. Only offshoring involves sending jobs out of the country.

Advantages of Offshoring

There's many advantages to offshoring, like cost savings and the opportunity to acquire skills or equipment not found in your company's home country. Let's explore some of these advantages in more detail.

Cost Savings

The main reason that companies choose to offshore is to save money. Moving production to a country with a lower hourly wage and few employee benefits, like health care, will definitely save a company money. If a company moves part or all of production to another country that's got a large population of workers, then the company won't have difficulty in finding employees. Since Mr. Cotton's competition is offering a comparable product for a lower price, then offshoring to a country that has lower labor costs may help him reduce the cost of his own clothing so he can win back some of his customers and attract new ones.

Opportunity to Acquire Specialized Skills or Equipment

In some cases, the skills needed to perform a job are not readily available in a particular country and a company needs to go to another country to find employees who can do the job. In other situations, a specialized piece of equipment might only be available in another country. A company would be able to get up and running more quickly in the country that has the specialized equipment or employees as it would take additional time to acquire equipment and train employees locally. Mr. Cotton may determine that there are few employees with the specialized embroidery skills he needs to manufacture his clothing locally. Moving production to a country where these skills are plentiful will save him training time.

Disadvantages of Offshoring

While there are many advantages to moving production to another country, Mr. Cotton should also be aware of the disadvantages, like losing some control over his manufacturing process, cultural and language barriers, and loss of company reputation. Let's investigate these disadvantages.

Loss of Control

If Mr. Cotton decides to manufacture his clothing elsewhere, he'd provide specifications for how the employees should manufacture it to ensure it meets his quality standards. Unfortunately, the clothing's quality could still suffer if employees use outdated machinery in the manufacturing process or if the company is using inferior materials. A decrease in the quality of Mr. Cotton's product could result in lost sales or more returns as customers seek refunds for products they don't like. Mr. Cotton could implement a quality control process to check the quality of a sample of items produced at the factory, but it wouldn't be cost-effective for him to check all of the manufactured items.

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