The relationship between outsourcing and technology - Essay Example

Over the last decades, there have been huge technological changes with hundreds of thousands of innovations being introduced and implemented in our lives. It is unquestionable that this changing environment has had great impacts in the way companies conduct their business worldwide. Outsourcing of production, a very popular business practice in the US, is also under the influence. Firstly, it seems that the increasing pace of new technology has brought about important opportunities for the growth of production outsourcing of American companies in recent times. Shortening technology life cycle has made companies afraid of investing in obsolete technology, thus stimulating those to increase outsourcing instead of purchasing new machines and producing inputs in-house (Ann Barter et al, 2010).

By outsourcing, companies can take advantage of latest technology from suppliers without incurring large amount of sunk costs. Furthermore, it is noteworthy that higher probability of technological change could be indicated by a larger number of patents issued (Jaffe and Trajtenberg, 2002). According to this theory, US has always been a leading market of rapid technological changes with the largest share of patents granted by US Patent and Trademark Office to OECD countries (55-57%) stabilizing from late 1980s (OECD, 2004). Such a highly rapid technological changing environment has induced a large number of US companies to increase their outsourcing activities. A report executed by the Wall Street Journal in 2011 revealed that over the last decade, U.S. multinationals have cut their workforces by 2.9 million people and alternatively outsourcing more than 2.4 million jobs overseas (Zaid Jilani,2011).

In relation to the changing of technological environment, Elisabetta Magnani (2006) found out evidences to back up the conclusion that technological diffusion resulting from R&D spill-over effects is also one of the determinants for the growth of outsourcing activities in the US. US is always characterized as a R&D center of the world and there exists a number of technological clusters such as Silicon Valley (Battelle and R&D Magazine, 2011), which helps to diffuse technology knowledge extensively, making internal and specific skills become general ones overtime.

This opens the possibility of outsourcing because companies can rely on specialized workers in outside firms even for complicatedly designed products. These external suppliers, by achieving economies of scale, can provide inputs for their customers with a cheaper price. A very interesting correlation was also pointed out in this research is that when technological diffusion increases 10%, outsourcing will accordingly rise 2.6% to 4.1% depending on the specification (Elisabetta Magnani, 2006).

Nevertheless, technology diffusion could also be regarded as a drawback for the outsourcing of production under the threat of losing know-how. Shifting in-house production to external producers increases the likelihood that US companies will progressively lose their knowledge and skills of being experts in their areas. Outsourcing also means that information sharing to suppliers becomes inevitable; making the concern of technology leakage becomes a hindrance to outsourcing decision of many enterprises with high technology level (Mariagiovanna Baccara, 2004).

Another aspect of technological change which also brings great potential development to outsourcing activities is the great progress in ICT as well as logistics and transportation industry. Advances in the use of multi-modal transportation, improved highway system, port facilities and containerization standards have markedly reduced the shipping time and costs, and simultaneously increased the security and reliability of shipments (Peter Dicken 2011, p.85).

It is also difficult to ignore the breakthrough advances in ICT such as computers, mobile devices, email or video conferencing which have made possible the instant communication between partners all around the world. There are also many other modern technologies which tremendously help corporations control their flow of goods more effectively. For example a tool called Electronic Data Interchange (EDI) which facilitates the exchange of business information and the automatic tracking of orders is now used widely in many industries.

These technologies have enabled many textile, automotive or electronics producers in USA to manufacture “global products”, with various components purchased from different parts of the world at the most attractive combination of cost and quality, yet stilled managed to arrive timely with the right quantity. For instance, apparel industry in US has established outsourcing practices for years; they order thousands of garments and accessories from factories in Asia and Central America every year (John Williams, 2005). Regarding electronics industry, a small example of Apple’s Iphone mobile with its various components such as flash chips, video processors or touch sensitive modules are actually outsourced to 30 companies on 3 continents (Texyt Staff, 2007).

However, it is of critical importance that enterprises do not underestimate threats that these changing technologies could bring to their outsourcing operation. Rely heavily on supply from off-shore providers for goods in the peak period of traffic congestion or in the time of telecommunication network errors could lead to delivery delays and products unavailability, thus possibly disrupt the supply chain and eventually ruin businesses.

For instances, significant delays in ports of Long Beach, Oakland or Seattle recently have played havoc with the lead times and inventory levels of many apparel companies in US, when they have to wait weeks for their products to get through (John Williams, 2005). These problems, once again, make companies to think harder before deciding whether to outsource their production, particularly to distant locations.

Currently, there is a trend of anti-outsourcing emerging in the US, due to the criticism of high unemployment rate as well as the government supporting policy of bringing jobs back to USA. However, outsourcing is believed as an inevitable trend in globalization and is forecast to resume when the US economy recovers from the recession (A.T. Kearney, 2011). 2) Discuss the impact of the current economic global crisis upon the operations of outsourcing by ONE multinational company.