4. ANÁLISIS E INTERPRETACIÓN DE RESULTADOS
4.3. COMPROBACIÓN DE HIPÓTESIS
Many organisations consider that fixed costs are too high under the vertical integration manufacturing structure. In addition, this structure is inflexible and detracts from competition in the global environment. In order to remedy these disadvantages, changes in manufacturing strategies need to include the outsourcing of components and products overseas, and conducting offshore production and ceasing production. The general structures of manufacturing governance to choose from include vertical integration; strategic alliances and arms-length short-term contracts. Manufacturing vertical integration and outsourcing, as well as a combination of these two, have both benefits and risks.
Available knowledge shows that in choosing the correct level of production to outsource, purchasing companies should aim to carry out only peripheral outsourcing of activities that are not critical to the main strategic competence of company maintenance and growth. Companies in developed countries should mainly focus on outsourcing their non-core, low technology, labour intensive components and products to developing countries including China. The transaction cost economics’ perspective and the resource-based perspective suggest that operations that do not belong to core technique areas and not critical to core competencies of purchasing companies are more likely to be outsourced. However, activities critical to business performance through innovation and rejuvenation policies that are designed to create competitive advantage and future growth need to remain in-house in order to retain high technology, as well as being capital intensive and retaining core production. In addition, if company assets are specific and specific technique support is required for production, the company is less likely to outsource the activity.
Correct selection of suppliers is an important step leading to success in outsourcing. This selection should take into account the multi-objectives of companies including whether activities to be outsourced are core or non-core. It also needs to determine the capabilities of suppliers, the significance of benefits for purchasing companies, the management control levels required and environmental issues around the outsourcing operations.
Offshore production can achieve better control of production and higher cash flow savings than offshore outsourcing projects. Some companies aim to restructure their manufacturing by creating a transformational outsourcing network in order to achieve low costs and effective production. Companies with transformational offshore outsourcing strategies have greater opportunities to achieve long-term competitive advantages compared to those which only focus on cost savings and concentrate on core competencies. Using suppliers’ knowledge, integration and effective management processes, these companies initially start outsourcing to access lower labour costs but then stay on to develop innovations as their central activity, with more value-added components being possible.
Risks and problems associated with outsourcing include the difficulty of identifying reliable suppliers, high transaction costs, problems in quality, delivery and innovation, the incompatibility of business mechanisms, loss of management control, loss of an organisation’s confidential information, leakages of intellectual property, and the loss of overall market performance. Some Western companies have not achieved their outsourcing goals, and either returned to sourcing in their home countries or insourcing within their own companies.
Adequate management control is important. Purchasing firms cannot receive their desired products if there is either no control or the control is below desired levels. Management control systems are used for collecting information to coordinate, plan and control decisions. The other side of control is trust for maintaining long-term relationships. When there is a high level of trust, less control is required and transaction costs can thus be reduced. Overall, in order to facilitate a long-term relationship between purchasers and suppliers, a correct strategic balance between control and trust is necessary.
Solutions to outsourcing problems include the development of more complete specifications and long-term contracts, and the development of strategic, trusting and cooperative relationships. The solutions also include the use of ‘out-tasking’, which consists of either assigning operational tasks to business partners or retaining own management overseas. Other examples include improvement in planning, performance management, trust, and communication. Further solutions include changing suppliers in China, building new relationships in other countries, and returning to insourcing in own countries.
Performance management is usually required to control outsourcing relationships. Ways to reduce risk include developing measurable specifications, using random customer satisfaction surveys, using internal consultants, and benchmarking to develop trust and cooperative relationships.
As outsourcing provides benefits for purchasing companies, this practice has grown considerably over the last twenty years. The benefits include achieving production cost savings, taking advantage of the supplier’s expertise, technologies and
economy of scale, and concentrating on core activities and competencies. Outsourcing as a manufacturing strategy can improve supply chains in several ways including production cost savings, leaner production lines in-house and higher concentration on core activities and competencies. In outsourcing to China, reduction and control of production costs can be maintained through using large capacity suppliers, accessing specialised skills from suppliers, and reducing product recycle time by making and selling goods to local markets in China.
Outsourcing success comes from trust and mutual cooperation, which are critical. Effective communication has a positive effect on the development of trust by clarifying expectations and encouraging positive interactions. The key success factors for outsourcing are having proper management of all legal risks; good contract design and management control systems; managing product innovation, supplier relationships, and a superior workforce in-house. For offshore production, outsourcing contracts need clear specifications so that activities are well defined. These include clear definitions of the roles and responsibilities of both sides, good relationships with suppliers, and effective monitoring of suppliers.
The review of the literature has identified three gaps that have led to the development of the research questions used as the basis for this study. The gaps include research into outsourcing relationships between companies in Australia and China; research into manufacturing outsourcing; and research into company-level outsourcing relationships and the extent of control. These have also led to the research foci on the problems of outsourcing to China, the available solutions, and the business success factors that arise from the conceptual framework in the next chapter.
The literature reviewed is reliable and relevant to this study, providing a background for this study. For example, some articles provide theory of manufacturing strategies that form a basis for this study (for example, Bock, 2008; Buxey, 2000). Some provide examples of transaction cost economics (for example, Aubert et al., 2004). Some provide a framework of management control systems (for example, Langfield-Smith et al., 2000). Peer reviewed journal articles provide
empirical evidence for the research framework and the grounds for research questions.
However, some are general text books (for example, Hayes, Pisano, Upton & Wheelwright, 2005; Hayes. Pisano & Upton, 1996; Hayes & Wheelwright, 1984;) with not many detailed company business data regarding outsourcing, some have data about companies in Australia but not focusing on companies in China (for example, Beaumont & Sohal, 2004; Buxey, 2000; Langfield-Smith & Smith, 2003; Mayhew et al., 1997). Most available articles are examining European or American outsourcing (for example, van der Meer-Kooistra & Vosselman, 2000; Willcocks et al., 1999). Some research focuses on business in China, but not in Australia (for example, Lei, 2007; Li et al., 2007). There is very little research focusing on outsourcing relationships between companies in Australia and China.