Imagine that you work for a custombicycle company that has t

Imagine that you work for a custom-bicycle company that has thus far only manufactured in the United States. You’re under pressure to reduce costs. What options would you explore? Would you consider sourcing some of the components from countries with lower material costs? Would you consider outsourcing some of the manufacturing? Would you set up a subsidiary in a country with lower labor and material costs to handle the manufacturing? Explain the advantages or disadvantages of these options.

Solution

Advantages & disadvantages of the mentioned choices are explained as follows.

(1) Sourcing components from lower cost countries.

This has the biggest advantage of immediate effect on cost of production in terms of lower material costs without having to incur any investments. Instead of domestic purchase of components, this choice entails overseas purchase of the components, but my company doesn\'t need to incur any investments in order to secure such purchase. Import licences have to be obtained, but these are minimalist compared to the formalities required in other two options.

The biggest disadvantage is that my company cannot track the quality of such materials procured. Production will take place in a foreign country in absence of quality inspection from my company. So I cannot be sure of the quality of the material such purchased.

(2) Outsourcing manufacturing (partially)

This is a cost advantage similar to the first case. In all likelihood, overall cost of production will decrease since entire product will be manufactured at a lower cost. The higher the proportion of the product manufactured at lower cost country, the lower the overall cost of production.

But the disadvantage is that quality control cannot be overseen. Secondly, quality conformance is an additional issue. If the quality of products made in-house and those outsourced do not match identical standards, market reputation of my company\'s brand will be damaged.

(3) Setting up a subsidiary

This will have production cost advantage, but requires huge initial investment. Though quality standards can be maintained by this alternative, this measure is justified only if the cost savings justify the initial investment.

Keeping in view the above, at present I would only outsource the non-critical components from a lower-cost country.