Make or Buy Decisions

QUESTION

A German electronics company, GLux, is looking for a location to open a factory in Mexico. While looking for spaces and discussing with locals, a major Mexican manufacturer, TechMex, makes GLux a different offer. TechMex can manufacture two product lines for GLux at a good price, which would mean that GLux can outsource its production for the Americas to TechMex and will no longer need to open a factory there.

• What are some of the advantages and disadvantages of this solution? What would you recommend to them?
• Motivate your recommendation with some of the indicators and information discussed in the module, the textbook, and in your research.
• Your assignment should be a paper two to three pages long, not including the required title and reference pages.
• Adhere to the CSU-Global Guide to Writing and APA.
•  Include at least three scholarly sources (you may use the recommended readings) to support your answers. The CSU-Global Library is a good place to find these sources. Remember to use in-text citations as appropriate and to include your sources in your reference page.

ANSWER

Make or Buy Decisions

Introduction

From time to time, businesses seek to expand by seizing opportunities occurring in foreign markets. The decision of setting up new facilities and branches in a foreign country is normally faced with many challenges: taxes, unpredictable market trends, competition from existing companies, steep exchange rates etc. GLux, a German electronics company, intends to set up a manufacturing plant in Mexico, to produce electronics and tap into the entire American market. However, a large, existing, and properly established manufacturer in Mexico, TechMex, offers GLux a solution to their challenges. The manufacturer offers to produce two of GLux’s product lines at an affordable cost and ensure distribution and sale throughout America.

In the business world, this arrangement to have services or projects carried out by a third party firm (on behalf of one’s firm), in a foreign country, is known as offshore outsourcing (Ellram, Tate, Billington, 2008). Outsourcing, just like any other business arrangement, has both advantages and disadvantages. GLux, therefore, needs to analyze the pros and cons of accepting this offer before making the decision whether to accept or reject it.

Advantages of Outsourcing

• Foreign business expertise: opening up a business in a new market receive proper knowledge of the market, its characteristics, trends prevailing, weaknesses, threats, and strengths (Ketler, Walstrom, 1993). TechMex, being a major Mexican manufacturer, has a wide knowledge and experience in the Mexican and larger American market. GLux will benefit from this knowledge if it accepts to outsource the manufacture of its products by TechMex.
• Ease of burden: outsourcing eases a business’ burden of undertaking several tasks that may be hectic. It gives a firm adequate time to focus on its core business activities and focus its energy on future planning. Entering a new market is definitely not an easy task. Outsourcing in the new market will surely ease the process of entry and reduce the burden of business activities, such as distribution in America.
• Costs control: outsourcing reduces business costs by reassigning them to the contracted party (Ketler, Walstrom, 1993). Only the price of services is negotiated by the two firms entering the arrangement. Any unpredictable or unforeseen costs occurring do not affect the parent company. The cost savings acquired may be utilized for expanding the business into other regions.
• Competitive advantage and increased efficiency: TechMex, being a manufacturing company, already has an established supply chain in America. It is also a huge player in that market. Its service delivery will, therefore, be seamless and efficient. GLux, with little knowledge of the American market, would face steep competition and challenges while trying to set up a new distribution and sale network in the market.

Outsourcing, therefore, enables a business cope with changing and new markets, while ensuring efficiency of operations and saving on business costs (Benko, 1993).

Disadvantages of outsourcing

When a business engages in outsourcing, it hands the contracted company all the control of the services to be offered. This poses many risks, which may be looked at as the main disadvantages of outsourcing (Heywood, 2001).

• Unpredictable instability: the contracted firm may face challenges it cannot withstand, leading to its collapse. This will be a major setback to the parent company, GLux.
• Flexibility problems: the outsourcing agreement may not be flexible to allow accommodation of any future changes. For instance, after contracting TechMex, GLux may decide to modify its products or change them in a certain way. The contract already agreed upon by the two firms may not be flexible enough to accommodate that change.
• Security and production confidentiality compromise: the manufacture of a company’s products by a third party firm breaches the confidentiality of the methods used for production, its incomes from the sale of certain products, and may even pose a security threat on the company.
• Unforeseen costs and challenges: outsourcing, even though having the benefit of cost efficiency, may bring up costs involved with transactions with the third party firm overseas. Challenges such as different time zones, different culture and way of business, and language barrier may also occur (Adler, 2003).

Recommendations

GLux should carefully examine which of the above named challenges are most likely going to face them after outsourcing, and weigh them against the benefits accruing from the arrangement, and the cost savings. This will enable them make a well-informed decision. They should also seek to establish contract terms that favour future changes and cater for any unpredictable outcomes of the contractual business.

References

Ellram, L. M., Tate, W. L., & Billington, C. (2008). Offshore outsourcing of professional    services: A transaction cost economics perspective. Journal of Operations      Management, 26(2), 148-163.

Ketler, K., & Walstrom, J. (1993). The outsourcing decision. International journal of information management, 13(6), 449-459.

Benko, C. (1993). Outsourcing evaluation: a profitable process. Information Systems Management, 10(2), 45-50.

Heywood, J. (2001). Outsourcing dilemma: the search for competitiveness, the. FT Press.

Adler, P. S. (2003). Making the HR outsourcing decision. MIT Sloan Management Review, 45(1), 53.