Who cleans the bakehouse?: At five every morning the vans leave Mill Lane, and the bakehouse looks as if it has snowed: flour on every surface, trays stacked high, dough stuck to the mixers.
Now
- Two part-time cleaners, employed by Lena's Bakery Ltd
- They clean the bakehouse before the next night's baking
- They clean the shops after closing
The offer
- Brightway Cleaning, a cleaning company
- Offers to do all of it
- For one monthly fee
If Lena and Marco say yes, the cleaning still gets done, but by another business's staff, under a contract. That is outsourcing (also called subcontracting): a business takes a job it used to do itself and pays an outside business to do it.
What changes if Lena outsources the cleaning
Who does the work
Brightway's cleaners, not Lena's employees. Lena's two cleaners are no longer needed for this job.
Who manages them
Brightway's supervisor. Lena deals with Brightway, the business, not with the people holding the mops.
What Lena pays
One fee of $2,400 a month under the contract, instead of wages, cleaning materials and the time it takes to train each new cleaner.
What Lena's team does
Bake and sell: the work customers actually come for.
Baking is what the bakery is for (its core activity). Cleaning must be done well, but it is not why people queue at seven (a non-core activity). Businesses mostly outsource non-core work: cleaning, security, payroll, IT, deliveries.
Production can be outsourced too. A business that cannot make enough itself can pay another to make its product to its design: a small firm with an order too big for its own factory, for example.
| Lena's own cleaners | Brightway Cleaning | |
|---|---|---|
| A month's cost | $2,600 wages + $400 materials = $3,000 | $2,400, everything included |
| A year's cost | $36,000 | $28,800: $7,200 less |
| Training | Lena trains each new cleaner in food hygiene | Brightway's staff arrive trained |
| If a cleaner is ill | The bakehouse waits, or a baker cleans | Brightway sends someone else |
Why a business outsources
- Focus on the core. Lena's managers spend their time on bread, not on cleaning rotas.
- Lower, predictable costs. One fixed monthly fee, $600 a month less than doing it in-house.
- Specialist skills. A cleaning company knows cleaning: the right chemicals, machines and methods.
- No hiring or training. Brightway finds, trains and replaces its own staff.
- Flexibility and no big outlay. More work can be bought when it is needed, without buying equipment or hiring people first.
Outsourcing is about who: Outsourcing changes who does the work: another business, under contract. It says nothing about where. Brightway is two streets away.
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Six weeks later: Lena signs with Brightway. For a month everything shines.
Then things slip
- Brightway's cleaners start arriving at a different time each day.
- A food-safety inspector finds flour dust behind the ovens.
- Lena cannot tell the cleaners what to do: they are not hers. She phones Brightway's office and waits for a call back.
That is the price of outsourcing. The work is still done in Lena's bakehouse, under Lena's name, but the people doing it answer to someone else. Every disadvantage below comes from that.
What can go wrong
Less control over quality
Lena can only check the result and complain. If complaints about cleaning were the reason to outsource, outsourcing may not fix them.
Dependence on one supplier
If Brightway lets her down, or raises its price when the contract ends, finding another cleaner takes weeks. Meanwhile a dirty bakehouse cannot bake.
Jobs and goodwill
Lena's two cleaners lose this work. The bakers wonder whether they are next, and people in town hear that Lena's Bakery cut jobs.
Slower communication
A problem used to be a word at the ovens. Now it goes through Brightway's office, and is slower still when the supplier is far away or speaks another language.
A saving that shrinks
Someone must still check the work and manage the contract. That time costs money, and it eats into the $600 a month.
What outsourcing can give
- Time for the core. Managers focus on baking and selling.
- Lower costs. $7,200 a year less for Lena's cleaning.
- Expert work. A specialist does the job with the right skills and equipment.
- Flexibility. No staff to hire, train or cover when someone is ill.
What it can cost
- Control. Quality depends on another business's staff.
- Dependence. A failing supplier stops the work, and prices can rise at renewal.
- People. Jobs lost, worried staff, a reputation as an employer at risk.
- Communication. Every instruction passes through someone else.
A disadvantage needs the case: 'Loss of control' is only a name. 'Lena cannot tell Brightway's cleaners what to do, so the dust the inspector found behind the ovens may come back' shows it happening.
Name the advantage or disadvantage, then show it in the business in front of you.
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Goldcrust's biscuit line: Goldcrust plc bakes its packaged biscuits in a factory at home: 120 workers on one line, each paid about $30,000 a year.
The option abroad: Its own factory in Seren, Marovia (1.6.2, 5.4.1) has room for a second line, and wages in Seren are about $12,000 a year. The board is thinking of moving the biscuits there.
Moving the biscuit line to Seren would be offshoring: a business moves some, or nearly all, of its operations to another country.
Notice what does not change. Goldcrust still owns the factory, employs the workers and manages the line. Nobody else bakes the biscuits. So this is offshoring without outsourcing.
Outsourcing at home
- Another business does the work, in the same country
- Lena pays Brightway, two streets away, to clean Mill Lane
Offshoring
- The business does the work itself, in another country
- Goldcrust moves its biscuit line to its own factory in Seren
Both at once
- Another business does the work, in another country
- Goldcrust pays Ostara Foods, a biscuit maker in Marovia, to bake to its recipe
Two questions, two words: Who does the work? If another business: outsourcing.
Where is it done? If in another country: offshoring. A business that keeps the work in its own factory abroad keeps control of quality; one that hands it to a supplier abroad hands that control over too.
Features of offshoring
- Operations set up in a foreign country: production, customer support, software work or office tasks.
- Cost savings, most often from lower wages: $12,000 a year in Seren against $30,000 at home.
- Access to skilled labour or raw materials that are scarce or dear at home.
- Time-zone and language differences to manage between head office and the site abroad.
- Higher transport costs and longer delivery times to get the goods back to the home market.
- Jobs created in the other country, and often lost at home.
- Room to grow: a large site abroad can scale up output more cheaply than one at home.
Goldcrust's board starts with the numbers. Lower wages are the reason to move, so the first question is how much they save once the extra costs are taken off.
Goldcrust's sum
Wages saved
120 workers × ($30,000 − $12,000) = 120 × $18,000 = $2,160,000 a year.
Extra transport
Most biscuits are sold at home, so lorries must bring them back across the border: $360,000 a year.
Net saving
$2,160,000 − $360,000 = $1,800,000 a year, or $150,000 a month.
Paying back the move
Moving the line costs $3,000,000. $3,000,000 ÷ $150,000 a month = 20 months before the move has paid for itself.
Cheaper wages are not the whole answer: Using the wages alone, the move pays back in under 17 months. Once transport is counted it is 20. Every cost of being further away has to come off the saving.
And some costs have no price tag yet: the quality of the first biscuits from Seren, or what the town at home thinks when 120 jobs go.
What offshoring can give Goldcrust
- Lower costs. $1.8 million a year, so lower prices or a higher profit on every packet.
- Skills and materials the home country lacks or prices high.
- Room to grow. Seren has space; the home factory does not.
- Closeness to new customers, such as Goldcrust's 30 shops in Marovia.
What it can cost
- Quality from a distance. Seren's workers have never made biscuits and need training.
- Transport and time. $360,000 a year, and longer deliveries to the shops at home.
- Language and time zones between head office and the site.
- People at home. 120 jobs lost, an angry union, and damage to Goldcrust's image.
- Risks in the other country: a new government, new taxes, or a change in the exchange rate.
When there is more than one country to choose from, the reasons for a location from 5.4.1 decide it. Goldcrust would compare each place on the same list.
| What to compare | Why it matters for the biscuit line |
|---|---|
| Wages | The whole reason to move: the gap decides the saving |
| Transport links | Good roads and rail keep the $360,000 down and deliveries on time |
| Language | Managers who share a language with the site sort out problems faster |
| Political stability and regulation | A new government can raise taxes or wages after the $3 million is spent |
| Trade unions | Strong unions can mean higher wages, but also fairer and steadier relations |
| Skills | Workers who already know food production need less training |
Judge it for this business: Offshoring suits a product that is cheap to move and sold on price, like packaged biscuits. It suits far less a product that must be fresh, or one sold on being made at home.
So the answer is never 'offshoring is good' or 'offshoring is bad'. It is 'for this business, this product, and on these numbers'.
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How this comes up: Questions on outsourcing and offshoring come in three sizes: short, four marks and ten marks.
Three kinds of question
- Short questions. Define outsourcing; state two features of offshoring; explain one advantage, or one disadvantage, for a named business of outsourcing a job such as its cleaning. That means one point, and that point shown in the case.
- Four marks. One cost and one benefit of outsourcing production to another country.
- The long question. It gives a case and asks you to recommend: which of two countries to offshore to, or whether to keep outsourcing to a supplier abroad.
The ten-mark pattern
- Say what the decision is. Offshoring or outsourcing, in the case's own words.
- The case for, with the case's numbers: the saving, the payback, the growth.
- The case against, with the case's facts: quality, transport, jobs, risks abroad.
- Weigh them. Which matters more for this business and this product, and why.
- Recommend, with the condition it depends on.
- Say what the case does not tell you and why it would change the answer.
Two traps: Mixing up the words. Goldcrust moving work to its own factory in Seren is offshoring, not outsourcing. A feature of offshoring must say abroad.
One side only. A list of savings with no costs, or one option with no alternative, cannot be a recommendation: there is nothing weighed.
Recommend whether Goldcrust should move its biscuit production from its home factory to its factory in Seren, Marovia.
Model answer plan
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