A practice used by different companies to reduce costs by transferring portions of work to outside suppliers rather than completing it internally. Outsourcing is an effective cost-saving strategy when used properly. It is sometimes more affordable to purchase a good from companies with comparative advantages than it is to produce the good internally.
Example of outsourcing
An example of a manufacturing company outsourcing would be Dell buying some of its computer components from another manufacturer in order to save on production costs. Alternatively, businesses may decide to outsource book-keeping duties to independent accounting firms, as it may be cheaper than retaining an in-house accountant. Outsourcing in Manufacturing
According to an article by Kenneth Hamlett, when the term outsourcing in regard to a manufacturing company, we immediately think of moving production out of the United States to another country or offshore outsourcing. However the main idea of this term is cost reduction. Cost reduction in manufacturing companies can be addressed into four categories, Labor Cost, Overhead Cost, Flexibility and Company’s Focus.
In Labour Cost, Hamlett states that Labor remains one of the biggest costs of any manufacturing company. Having employees on the company payroll means paying them a competitive wage and, for most companies, it also means providing some form of employee health benefits. But outsourcing labor costs doesn’t always mean moving the production to another country. Companies can outsource labor simply by using workers from temporary agencies instead of having employees on the payroll. Benefits for the company that outsources its labor include the flexibility of increasing or decreasing staffing needs as required, a lower hourly wage paid to a temporary worker than that of a comparably skilled fulltime employee and less employee healthcare benefits expenses.