Beyond Off shoring Assess Your Company’s Global

8/6/2019 Beyond Off shoring Assess Your Company’s Global

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Beyond Off shoring

Assess Your Company¶s Global



S hifting or relocating a business program fromone country to another(for business )this can

be entail moving product manufacture, servicecenter or operations to a different country. Off

shoring is often used to reduce the cost of

business, The company always seeking tomove part of operations to countries withmore favorable economic condition .



companies can reduce their costs and reducetheir prices (they can settle down and stay

strongly in competitive market in long time )increase demand for their products

attract new customers by entering to newmarkets and find new target market

cause of competitive advantage real price will

appear .



I t is very important to analyze the condition of company and study situation of new country

for any decision during off shoring .

There is a significant wage difference between

the original and offshore countries;The job can be telecommunication work The work can be transmitted over the internet

The work is easy to set up (fundamental asset)



N ow days by growing technology the

companies can use the off-shoring strategy toHandel their programs where there is both

political stability and lower labor costs or taxsavings and also handle immigration problems

for their experts who are living in another country with low salary but have enough

ability to support the company.



Break-even = Fixed cost(Price-variable Cost)



The stakeholders desire to invest their money where there is capabilityto provide the best return but low in risk

Fix ed costs : such as salaries or rents being paid per month



The Important Factors

reduce labor costs,save on operational cost such as payroll,

Trim administrative costs,utilities to improve productivity,an expanding, economical labor in other

countries



1.H ow to reduce the cost . 2 . Make low cost product .

3.Increase demand

.

4. Take new customers / Markets .

How toreduce the

cost

Make lowcost

product

Increasedemand

Take new customer /Market



Implement New IdeaPerformance improvement .

Less development proactive strategy / capture proactive .

1980 North America, Europe & Japan hired worker .

1980 North America,Europe & Japan hired

worker

Lessdevelopment

proactivestrategy /capture

proactive .

Performanceimprovement



H ow global are you?

To realize and explore the full potential of globalization:

Firstly you should know where your industryfalls along the globalization spectrum



How global your industry is

:

F or measuring this ,we need to calculate the ratio of theannual value of global trade to the annual value of industrysales .Annual value of global trade:

I ncludes final goods and product componentsF or example on the globalization spectrum the apparel ,

consumer electronics automotive, and steel,consumer electronics companies have been under competitive pressure toinnovate quickly and cut costs aggressivelyA globally disaggregated, specialized, low-cost value chain



For example , the PC on U.S. worker's desk

The consumer electronics industry was ripe forglobalization .It uses small, lightweight , high-value componentsthat are cheap and relatively easy to ship .The majority of industries are not ready for highlevels of globalizationThe apparel industry has a relatively high trade-

to-sales ratio (77%)-and is therefore fairly global-for two reasons:



Two effect ive reasons made the apparelindustry as a successful industry for

global iz at ion

First :The labor accounts for the bulk of the

industry's production costs, which made itattractive for manufacturers to move parts of their production processes to low-wagelocations .

Second :The cloth was lightweight, whichmade it cost-effective for companies totransport finished goods to consumers, no

matter the distance .



In the automotive industry , which has a trade-to sales

ratio of 4 2%, globalization has been slow because

component parts arenot standardized . And also face

some regulatory and organizational barriers to

globalization .



G lobalization of the steel industry : hampered by the capital

intensity of steel mills, high tariffs and government mandated

cleanup costs, the industry's relatively low share of labor costs

compared with its total costs, and the expense of transporting

the finished products.

Service Industry : payroll processing, IT, and transaction

processing: The trade-to sales ratio is a mere 1%.



The global ratio of many customer-serviceindustries such as banking and retail are verylow ,(due to close proximity tow here consumption is) .

the service industries in the hands of multinational companies such as Wal-Martand Carrefour, which export their home-

country retail business models to new markets



R atios over 100 % indicate

industries that are highly global



How global can you be?

P otent ial of your company forglobal iz at ion



Course of Globalization

Three factors that determine the course of globalization .

ProductionRegulatoryOrganizational



PR ODUCTION

Factors that determine an industry's potentialfor disaggregating its value chain:

R elocat ion sens it ivityH ow attractive it is for a firm to relocate all or part of its production processes?

Locat ion spec if ic advantage



R elocation Sensitivity

S ource: McKinsey Global institute (McKinsey & Company)HARVARD BU S INESS REVIEW



Location Specific Advantage

Labor intens ityGreater incentive to move production to lower-wage countries .

Example: Apparel industriesS kill requ irement

ASIMCO company faced a big problem because of the lack of management skill in China .

N atural resources intens ityIKEA should locate their production process in countries withplentiful resources(wood) with lower price .

Econom ic of scale and scopeCost of production becoming less because of lower labor cost in thehost country .



Location Specific Advantage



R egulatory Barriers

H ost countr ies regulat ion can inh ib it global iz at ion inseveral w ays:

Tar iffs .

Import and e x port quotas .R egulat ion w h ich force compan ies to enter into

jo int ventures w ith local compan ies .Ban fore ign investment outr ight or fa il to invest inregulatory and legal infrastructures



Trade Barriers

S ource: McKinsey Global institute (McKinsey & Company)



Organizational Barriers

Internal management structureOffshoring in many US companies has been slowed bymidlevel managers reluctance to give up some responsibilities

for the migrated positionsIncent ive systems

For this companies must realign management incentives withglobal , not local performance

U n ion iz at ion



Organizational Barriers

S ource: McKinsey Interview (McKinsey & Company)



Globalization

Factors that encourage industries for tradinggloballyD evelopment of General Agreements on Tar iffs and Trade(GATT)Allowed the manufactures for rapid growth in global tradeD ecl ine in cargo cost

Encouraged many companies with bulky production to shiptheir products globallyGPS Technology

Companies monitor their road freight to achieve betterlogistic control



Globalization

Internat ional commun icat ion cost reduct ion

Escalat ing compet it ionThis will force companies to globalize



Globalization

H ence businesses that can fine ways around

the obstacles ,and improve their businessthrough globalization will be successful andthose companies that can not , will lose in thiscompetition in long term .



EXPANDING YOUR MAR KET

S ource: HARVARD BU S INESS REVIEW



TO DATE, few businesses have recognized thefull scope of performance improvements that

globalization makes possible, much less developed

proactive strategies to capture them .

Critical part of globalization :

B usiness model around Low transportation cost .(IKEA)- focus on which of the barriers of globalization can be change .

S tandardization:

-S tandards can penetrate an industry in two ways

Voluntarily adopt ( competitive electronic industry)Government can impose(tariff ,export and import regulation)

S ource: V S NL press release (McKinsey & Company)

HARVARD BU S INESS REVIEW



H ow Do You Get to Global?

S tage 0ne : Market Entry

To gain a access , companies Need to establishproduction presence:

Nature of some service sector (food retailer & banking)requires local presence .

P olicy barriers limiting trade in manufacturing .(auto)




S ource: Annual report (McKinsey & Company)



S tage two : Product S pecialization

Companies transfer the full production process of aparticular product to a single low-cost location andexport the goods to various consumer markets .

D ifferentlocat ion

D ifferentproduct

D ifferent tradein f in ished good

Low wage rateFew work rightsFixed currency to a backset of economyCheap loan ,landFew environment regulation

S ource: Interview : McKinsey analysis (McKinsey & Company)HARVARD BU S INESS REVIEW



S tage tree: Value Chain Disaggregation

Individual components of a single productmight be manufactured in severaldifferent locations and assembled into

final products elsewhere .(consumer electronics ,apparel)




S tage four: Value Chain Reengineering

Companies don¶t just replicate their production process aboard ,theyincrease the cost saving by

reengineering their process to suit alocal market condition

IT and AU TO MOT IVE companies



R educing Automation throughout the manufacturingprocess in INDIA:

S ource: McKinsey Automotive practice (McKinsey & Company)HARVARD BU S INESS REVIEW



S tage five: Creation of New Markets

S tages three and four together havethe potential to reduce costs by morethan 50% in many industries

As a result :companies have the opportunity tosubstantially lower their sticker pricesin both old and new markets and toexpand demand .




What's It Worth to You?Determining the potential cost savings you could capture from global industry

restructuring and identifying the new market opportunities this restructuring cancreate .

most obvious, cost-saving opportunity is in labor .

reduce costs by reengineering productionprocesses to substitute low-cost labor for high-cost

capital. reduce costs by utilizing

capital equipment more intensively ± runningaround-clock production shifts .

hire local engineers in low-wageenvironments to design and build cheaper

capital equipment or manage other fixed costs of doingbusiness .




Compan ies can save as much as 70% of the ir total product ion costs through a comb inat ion of offshor ing, task redes ign and tra in ing, and process improvements.

S ource: HARVARD BU S INESS REVIEW



WHAT ARE THE RISKS?



R isks included:

o Economic risko R isk of credit

o Inflationo Marketingo Customo

Taxo Cultureo Languageo Tariff



Among other factors, the risk associated with itsbusiness case for the move, its assets .

R educing the risks:

o Including intellectual property

o Knowledge and skill levels of those involvedo Such a comprehensive approach can yield surpriseso Cataloging the risks of a particular offshoring effort

and then using a simple visualization tool (exhibit)

R isks came from the organization s ownemployees . A high rate of turnover threatenedthe transfer of knowledge to the new location



Ensure successful restructuring along global

linesS ound strategy and consistent executionNew ways of viewing your business andmanaging your people



U se Glo b al A ssets Effectively andEfficiently

T he right mix of capital and labor will be verydifferent in developing countries than in developedcountries

Company can get the mix by doing three things:o Increasing labor resources to better useexpensive capital

o Improving shift utilizationo Developing cheaper capital equipment where

appropriate

Doing just one of these things will not beenough



Tailor Your B est Practices to Local Conditions

Successful global companies must leverage the bestpractices

Learn globally in ways that fit conditions in the hostcountry

For example:In Mexico, Wal-Mart uses the same trademark³Everyday low price´ strategy in the U S focusing onlow, non-promotional prices and comparing its prices

but the retailer has done extensive local market research As result , Wal-Mart prices the ³most notable products´below those of its key competitors, bear in mind that onesize does not fit all



A im for Higher Quality

By moving production to lower wage countriesCompanies can u pgrade worker¶s and manager¶sskill and save money can i nterviewer more job

candidates for each job and conduct extensivetraining

Low labor costs, offshore operations increase theratio of supervisors to line workers

Improving quality while still saving moneyDo not settle for the same level of quality, aim for more

Beyond Off shoring Assess Your Company’s Global

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