Cold coffee at 9.40: Lena's breakfast boxes have taken off. Orders are now about 600 a week, and drivers from a delivery app still take every one, at $4 a box.
The complaints have grown too. A box arrives at 9.40 with the coffee cold. A driver carrying orders for three other businesses leaves one on the wrong doorstep. Customers blame Lena's, not the app.
So Lena and Marco stop using the app and take on two delivery drivers of their own.
Paying another business to do part of your work is outsourcing. Taking that work back, so that your own employees do it, is insourcing: a business has its own staff carry out work that an outside business used to do for it.
Nothing moves country. The boxes are still delivered in the same town. What changes is who does the work.
| Delivery app | Lena's own drivers | |
|---|---|---|
| How it is paid | $4 for each box delivered | Two drivers at $600 a week each, plus $500 a week for a leased van and fuel |
| A normal week, 600 boxes | 600 × $4 = $2,400 | $1,700, so $700 a week less |
| A quiet week, 400 boxes | 400 × $4 = $1,600 | Still $1,700, so $100 a week more |
| The Saturday before Christmas | The app sends as many drivers as it needs | Two drivers cannot reach 400 doors by 9 am |
What insourcing gains
- Control of quality: Lena's drivers carry only Lena's boxes, on Lena's routes, by 9 am
- Contact with customers: the driver at the door is the bakery's own face
- A lower cost when the work is steady: $1,700 a week instead of $2,400
- Know-how stays inside: the routes and the customer list are not shared with an app
What insourcing costs
- Fixed costs: the two drivers are paid in a quiet week too
- Less flexibility: two drivers cannot cover a Saturday that needs 400 boxes by 9 am
- Time and money to recruit, train and manage two more people
- The outside firm's skill and size are lost: the app has hundreds of drivers, Lena's has two
When insourcing pays: Insourcing pays when the work is steady, when quality matters to the customer, and when the business can do the job at least as well as the outside firm.
At 600 boxes a week all three hold for Lena's. If orders fell below 425 a week, the app would be the cheaper choice again.
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Croissants on a lorry: Goldcrust plc makes the frozen croissants for its 400 home bakeries in its factory in Seren, Marovia. Every week 200,000 of them cross the border by lorry.
Marovian wages have risen by a fifth and the tax holiday is over. The lorries take two days, longer when they are held at the border, and one tray in twenty arrives crushed or thawed.
Goldcrust's board asks whether the croissants should be made in the home country again.
Moving production to another country is offshoring. Bringing it back is reshoring: a business returns work that it had moved abroad to its home country.
The croissants would still be made by Goldcrust's own staff, in Goldcrust's own factory. What changes is the country.
Why a business reshores
Control of the supply chain
A factory a few hours from the bakeries, not two days and a border away. Goldcrust decides when the croissants leave, and nothing waits at customs.
Quality it can check
Managers from head office can walk the line every week. The tray in twenty that now arrives crushed or thawed need not be thrown away.
Faster, cheaper delivery
No lorry across the border, so the $0.06 of transport on every croissant disappears, and a new pastry can reach the shops in days rather than weeks.
Jobs and a name at home
Fifty new jobs in the home country, and a bag that can say the croissants were baked here, which some customers prefer.
One set of rules
One tax system, one currency and no border, so a new tariff or a change of government in Marovia can no longer raise the cost overnight.
Why coming home is hard: A new croissant line at home costs about $6 million. Home wages are higher than Marovia's, even after the rise, so the saving on each croissant is small.
The skills may have gone: the people who know the line are in Seren. New staff must be found and trained, and the line takes months to build. And the 60 people on the Seren croissant line lose their jobs.
So reshoring buys control, quality and speed, and pays for them with a large one-off cost, higher wages and time. The same is true, on a smaller scale, of Lena's two drivers.
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Every job in production answers two questions. Who does it: the business's own staff, or another business? And where: in the home country, or abroad?
The four ways of reorganizing production are the four ways of changing one of those answers.
| Done in the home country | Done abroad | |
|---|---|---|
| By the business's own staff | Lena's bakes its bread at Mill Lane | Goldcrust bakes croissants in its own Seren factory |
| By another business | An app's drivers deliver Lena's breakfast boxes | A firm in Marovia makes Goldcrust's paper bags |
The four moves
Outsourcing
From the business's own staff to another business. The work can stay in the same town, as Lena's deliveries did.
Offshoring
From the home country to another country. The business can do the work itself, in its own factory abroad, as Goldcrust does in Seren, or pay a firm there.
Insourcing
From another business back to the business's own staff. Lena's taking its deliveries back from the app.
Reshoring
From abroad back to the home country. Goldcrust bringing its croissants home from Seren.
The words come in pairs. Outsourcing and insourcing are about who does the work; offshoring and reshoring are about where. A business can outsource without leaving the country, and it can offshore without outsourcing, by building its own factory abroad.
Two moves at once: Some moves change both answers. A business that paid a factory abroad to make its product, and then builds its own factory at home, is reshoring and insourcing at the same time.
That is the biggest move of all: a new building, new machines and new skilled staff, all at once. When a case describes it, name both moves.
Goldcrust's board meeting: The finance director has the figures. In Seren a croissant costs $0.26 to make and $0.06 to bring home: $0.32. On a new line at home it would cost $0.30.
That saves $0.02 on each of 200,000 croissants a week: $4,000 a week, about $208,000 a year. The new line costs $6 million.
On cost alone, the saving would take almost 29 years to pay for the line. If Goldcrust reshores, it will be for reasons the cost per croissant does not show: quality, speed and control.
That is how these choices usually go. The figures start the decision; they rarely finish it. The same questions decide whether a business should keep outsourcing or insource, and whether, when demand grows, it should expand its factory at home or offshore some production closer to its new customers.
Six questions for any choice
What does each unit cost, delivered?
Making it plus getting it to the customer: $0.32 from Seren against $0.30 at home.
What must be spent first?
A new line, a new factory, a van: $6 million for Goldcrust, a van lease for Lena's.
Who can check the quality?
Own staff close by can be checked every day. A supplier abroad, in another language and another time zone, cannot.
How steady is the work?
Steady work suits own staff and fixed costs. Work that jumps, like the Saturday before Christmas, suits a supplier paid for each job.
Are the skills there?
Coming home needs skilled people at home. If they have gone, hiring and training takes months.
Who else is affected?
Workers who gain or lose jobs, customers who like 'made here', a government offering grants, shareholders watching the cost.
Keep the croissants in Seren
- No big outlay. The $6 million stays free for new bakeries.
- Staff who know the line. Seren has made the croissants for years.
- But one tray in twenty is damaged, lorries can be held at the border, and Marovian wages keep rising.
Bring them home
- Quality and speed. No border, no two-day lorry, managers on the line every week.
- A small saving. $0.02 a croissant, about $208,000 a year, and 50 jobs at home.
- But $6 million up front, higher wages, months of building and training, and 60 jobs lost in Seren.
A judgement names its condition: Reshore if the damaged trays and late lorries are losing Goldcrust customers; keep Seren if they are not. The figures do not say which.
Say what the decision turns on, and what the case leaves out: here, how many sales the damaged croissants cost, and whether the home government would help pay for the line.
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How this comes up: Short questions first: state two advantages of reshoring, or define insourcing, for two marks each.
Then the big decision, for ten: recommend whether a business should keep outsourcing abroad or reshore production home, or discuss whether it should expand its factory at home or offshore some production to meet growing demand. Both need the case's figures, both options argued, and a judgement.
The ten-mark pattern
- Argue for the first option from the case. No outlay, staff who know the work, flexibility.
- Argue against it. Quality faults, slow or risky transport, dependence on someone far away.
- Argue for the second option. Control, quality, speed, a lower cost per unit, grants or jobs at home.
- Argue against it. The one-off cost, higher wages, missing skills, the months it takes.
- Decide, and say what it depends on. One option, the condition that would change your mind, and the figure the case does not give.
Two traps: Only one side. A recommendation means little if the other option was never tested. Give each option its case for and against before you choose.
Points that fit any business. 'Reshoring improves quality' could be about anyone. 'Managers could walk the line every week instead of finding one tray in twenty crushed' is about this one.
Recommend whether Goldcrust should keep making its croissants in Seren or reshore production to its home country.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.