Globalization After COVID-19: In-house Manufacturing or Outsourcing?




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Anthony Jackson
Professor, Korea (South)

Globalization After COVID-19: In-house Manufacturing or Outsourcing?

The drums are beating for manufacturing to return to their respective countries or move out of China without giving a definitive location because of the latest pandemic. Japan has expressed that they will devote more than 2.2 billion for incentives for companies to move their manufacturing out of China and of course the United States are in a trade battle with China and have advocated ever since 2017 to bring American manufacturing back to the United States.

This latest crisis has shed a new light on these globalization and similar topics and all the talk for moving manufacturing out of China, maybe a knee-jerk reaction. World consumers have an insatiable appetite for the latest tech gadgets and consumer goods at cheap prices. And companies who moved their manufacturing operations to China are still enjoying higher profits for their shareholders while employing cheap labor. Because of these two observations it is unlikely that manufacturing operations will be moving out of China anytime soon.

Moving out of China would be very costly and disruptive especially for American industrial and technology giants who depend on the Chinese manufacturing base as being critical to their supply chain. China at the present makes about 25% of manufactured goods around the world in part because of the complexity in finding enough personnel in other countries manufacturing plant floors.

With the shortage of medical and personal protective equipment (PPE) to handle the current pandemic worldwide (the majority made in China) what is the answer?

This worldwide crisis has forced most countries to start making their own medical and PPE equipment or signing executive orders which requires companies to ramp up production on certain products needed during a crisis. But it doesn't have to be this way because one solution would be to keep certain manufacturing of products that would be needed in critical times in-house instead of outsourcing it.

Below are the main advantages of keeping manufacturing in-house versus outsourcing:

PROVIDES FLEXIBILITY
Keeping manufacturing in-house gives you an abundance of resilience to change the product. If you find out an outsourced product requires a last minute change, it would take a lot of time and difficulty to execute it. Furthermore, in-house manufacturing allows your research department to inform manufacturing of the change and send them the updated drawings of the product, while ensuring speed that you can adapt to the changing market without any loss of time and manpower.

ENHANCED QUALITY
You can better manage the quality of the product with in-house production because quality is a major issue with outsourcing. Keeping production in-house your team can maintain careful track of your product following more stringent standards of quality and as a result your product has better quality control.

DECREASED MANAGEMENT COST
Creating your product in-house can prevent a lot of management expenses connected with outsourcing. If the outsourcing is in a foreign land you will need managers who can speak the language there but if the product is made in-house you can be devoid of this layer of management given that you have direct control of production. As consequence, it costs your company a reduced amount in overhead to build the product.

POWER OVER PRODUCTION
When you produce in-house, you possess complete control over productivity. Using resource planning, you can prepare for production spikes by having an adequate amount of labor and equipment to meet demand. When you have complete control of production it is a good deal easier to meet demand.

LOGISTICS
In-house manufacturing can conserve time and money logistically. Transporting goods can cost as much as producing them but if your products exported their cost will increase in the form of tariffs. Nevertheless, if your company is closer toyour market than the foreign outsourcer you save money because the transport cost are not as much.

PUBLIC IMAGE
In this day and age of "Buy American", or whatever country you live in, that can go a long way because foreign outsourcing carries a negative image of loss jobs, inferior products, child labor, and in turn these negative images can hurt sales and the bottom line profits.

So what is the end game for the world economy? Because we can be certain that there will be another crisis maybe or maybe not on the same magnitude as this one. But, according to the Center for Strategic and International Studies (2019). "As the global population moves toward 9.7 billion and expands into new frontiers, and agriculture becomes more intensive, urban areas become denser, and the earth hotter the threat of new emerging infectious diseases will rise sharply. The long term cost of strategic protection and prevention we'll be a small fraction of the astronomic costs often associated with crisis of this magnitude.

Concurring with the Center for Strategic and International Studies Elliott (2020) posited that in the future governments are going to be very cautious of the virus returning and consumers as well as businesses will need time to recover from the impact of the virus and the shutting of businesses. However the deepest impact will be to industries like oil and gas because more people will be working from home and retailers will feel the impact because high unemployment and money not flowing through the economy and how governments will pay for all the spending from stimulus bills that were designed for businesses and people impacted by the shutdown.

But whatever happens in the future globally we need to be prepared for it making sure our supply chains can handle the load and that we have the production capacity to produce what we need as well as the financial reserves to outlast the crisis.

References
Burton, Terence, T. (2013). "The Ten Hidden Costs Of Outsourcing", Supply Chain Quarterly.
Elliott, L. (2020). "Blindsided: How Coronavirus felled the global economy in 100 days", The Guardian.
"Ending the Cycle of Crisis and Complacency in the US Global Health Security", Health Security
Strain, Mary (2019), "The Advantages And Disadvantages of Outsourcing Production", The Chron
Zhou, Michael, (2019), "5 Reasons In-house Manufacturing Is Better Than Outsourcing", Small Business Daily

   

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