Learning Objectives

Outsourcing is the process to which products/services are provided and contracted by an external provider.

Below are some benefits of outsourcing production or services locally:

Cost efficiencies - Outsourcing producers could have significantly larger production facilities or more specialised equipment to lower the unit cost of production
Mass production - Outsourcing can produce large output demanded by businesses. Producing large outputs reduce the unit costs of production.
Greater focus on core business areas - eliminating focus on manufacturing aspects of their business, businesses can dedicate more resources to increasing client relationships, marketing and research and development.
Eliminates required investment in infrastructure and technology - in addition, businesses do not need to constantly upgrade equipment and can get access to the latest manufacturing equipment
Access to skilled workers - eliminates the need for businesses to recruit and train employees

In addition to the above benefits of local outsourcing, global outsourcing also offers additional benefits including:

Lower company tax rates - businesses may be able to save money by producing elsewhere to take advantage of lower company tax rates such as Ireland at 12.5%, Germany at 15%, Cambodia at 20% while Australia's company tax rate is 30% (27.5% for small business).
Lower regulation and red tape - other countries can have significant less barriers to production. For example, outsourcing can avoid strict environmental, planning and employee regulation.
Lower wage costs - Australia has relatively high minimum wages. Outsourcing can take advantage of lower wage costs in developing countries.

In-House production is where a product/service is manufactured or provided under the control of the business.

Below are some advantages for a business to consider when thinking about producing in-house rather than outsourcing:

Greater quality control - the business is able to examine the quality of the manufacture of goods or providing of services
Easier customisation - the business is able to easily modify production to suit special orders or request by customers. Outsourcers may have difficulty understanding the client requirements of special orders.
Greater volume production control - the business can easily adjust its volume of production in accordance to demand. If there is low demand for a product, the business can easily decrease production whereas outsourcing could be contracted to a fixed volume.
May be cost effective at small volumes
No transportation delays - businesses have to wait for outsourced production to arrive at the business which is especially long for global outsourcers
Lower shipping and distribution costs

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