Outsourcing in Retail

Outsourcing in the Retail Industry: From Europe to India and China
September 2007

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Outsourcing in the Retail Industry:
From Europe to India and China

By

Sunil Agarwal
2007

A dissertation presented in part consideration of the
degree of MA Management


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Acknowledgements
My sincere thanks to my dissertation supervisor, Swee Hoon Chuah for her help and
guidance through out my dissertation and without her help and inputs this piece of work
wouldnt have been possible. Secondly I would like to thank my parents who has always
supported my decisions and been a strong pillar for me. I would also like to thank God
for all what I have today. My thanks to all the professors of Nottingham University
Business School, who have taught me a lot during the entire course. Also I thank all my
friends and other family members.

I would like to thank the firms, their respective employees, China-Britain Business
Council and Council for Leather Exports for giving their precious time for the interviews
and answering my queries, which was of great help to my dissertation.


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Abstract
Outsourcing is passing over the responsibility and accountability for performing certain
business functions or activities to an outside specialized vendor that are required by a
company to carry out its operation. Due to advantages of outsourcing there has been
constant increase in the outsourcing activity in the European retail industry, in particular
to India and China. It is becoming an important and key tool for the European retailers
leaving them to concentrate more on retailing rather than other business areas. Cost
reduction is always the main focus of every retailers behind outsourcing and it has been
seen that number of companies have successfully implemented outsourcing and have
gained their desired results.

India and China both possess some qualities like man-power, cheap labor, proficiency in
English, as well as highly developed skills which make them the most preferable
outsourcing destinations in the world. The outcome from the findings bring forward that
in todays competitive business atmosphere reduction in the cost is important for the
firms to remain competitive. A company outsources the non-core functions of its business
and the core functions are generally kept and nurtured in house to sustain and be
competitive in the market. Outsourcing has gained attraction from more and more firms
than in the past and it is believed that in future the outsourcing industry will grow more
with offshore outsourcing being the most common of all.


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Table of Contents

Acknowledgements

Abstract

Table of Contents

List of Figures and Tables
Chapter 1.0: Introduction
Chapter 2.0: Literature Review

2.1: Outsourcing

2.1.1: Different Categories of Outsourcing

2.2: Outsourcing to India and China

2.2.1: Strengths of India and China

2.3: Reasons for the growth of Outsourcing
Chapter 3.0: Research Questions and Methods

3.1: Research Questions

3.2: Research Methods
Chapter 4.0: Results

4.1: Firm Costs

4.2: The Make or Buy Decision

4.3: The Advantages and Disadvantages of Outsourcing

4.4: The Future of Outsourcing
Chapter 5.0: Conclusion

References
Appendix

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List of Figures and Tables

Table 1: Categorization of sourcing alternatives based on Percentage of
IS Budget as a Differentiator between Total and Selective Sourcing
Decisions.

Table 2: Categorization of sourcing alternatives based on How the
Client Manages or Utilizes the Suppliers.

Table 3: Categorization of outsourcing based on How the Client
Manages or Utilizes the Suppliers.

Table 4: Salary Gap-U.S.A. compared to India Hourly Wage.

Table 5: India and Chinas share of the world exports.

Table 6: National minimum wage (adult rate), 2004, in national currency
(gross).

Table 7: Minimum wages per month in China.

Table 8: Minimum wages per month in India.

Table 9: Advantages of Outsourcing.

Table 10: Asian countries leather exports.

Table 11: Ratio of imported to domestic intermediate inputs for textiles,
apparels and footwear.

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1.0: Introduction: -
Business activities and functions have changed a lot from the past. It is getting much
more difficult and complex today than in the past. In todays global market there is a
cutthroat competition among the sellers. On the other side buyers have become more
demanding and the seller has to make what the buyer wants.

Outsourcing has contributed significantly in the drastic change of the current business
environment. Outsourcing can be defined as handing or passing over to an external party,
responsibility for performing certain business functions or activities that are required for
a company to carry out its operation. In the present business environment Outsourcing
seems to be a normal business activity. If we see the past and present, there has been an
explosive growth in outsourcing to India and China by the European firms.

The nature of the outsourcing activity is very diverse. Most of the European retail firms
are all engaged in extensive outsourcing. As the importance of outsourcing continues to
grow, its nature and focus is developing. In the past outsourcing was only implemented in
the manufacturing industry but now with the widespread of its advantages it is now
spreading in the other industries also like service industry. Also if we see that today
outsourcing is increasingly becoming cross-national and global. There are many firms,
which not only outsource their non-core activity but also at the same time started
outsourcing of their core activities so extensively that they no longer indulge themselves
in any form of production.

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Outsourcing is a process of the non-core activities of the business into an agreement
relationship between the client and the supplier. The reason behind the outsourcing of the
business functions and activities are lowering firm costs and to make more efficient use
of in house or the available resources. A key driver for outsourcing business activity is
the facility to arbitrage in the cost reduction and also skilled labour in countries such as
India and China (Grant 2005, Davies 2004 as cited by Kevan and Graham, 2006).

According to the research conducted by Accenture, retail companies believe that
outsourcing delivers operational efficiencies and provides them with the ability to detect
and quickly respond to customer needs. Struggling for the lower margins and
commoditization, high-performance retailers are influencing outsourcing as a medium for
the increase in the operational effectiveness and gain productivity and lower costs.
(www.accenture.com)

All the companies involved in the activity of outsourcing have common aim of cost
reduction. Price remains the most important variable for many products. In some product
areas the differentiation in price due to the different production costs are considerable,
resulting in substantial non-UK sourcing by the European retailers. Let us take an
example of the production of Toys which has moved from low-production cost in Hong-
Kong, Taiwan to even lower production cost area like China. Also goods for the retailers
for resale and to there specifications are often produced in the low-labour-cost countries.


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A recent survey conducted by Accenture compromising of more than 800 health,
manufacturing, retail and the travel executives in the European countries represents that
around 86% said that the activity of outsourcing helps to offer them more and better
control over there business results in many critical areas like planning. Although cost-
cutting factor is among these key areas, the managements also accounted equivalent
levels of control in other areas like reliability, cost variability improvements and effective
implementation of the ideas. Also the survey represents that 55% of the sample said
outsourcing helps organizations to put into practice strategies and modify at a faster and
more controlled pace. And around 57% of the organization surveyed reported that they
experienced control gains in the first few months only of an outsourcing contract.
(www.accenture.com)
According to the BBC News 2006, China and India are one of the world-manufactories
and emerging markets. Many European organizations have successfully implemented
outsourcing with Indian and Chinese suppliers and more and more organizations are
interested in doing so. These two countries have become world renowned as a destination
for outsourcing activity. This is due to number of contextual specifics that have delivered
these two countries with a comparative advantage over other most likely outsourcing
destinations. Both countries offer cheap labour rates and there areas of expertise are
different.

On one hand we can see the activity of outsourcing as a powerful strategy to cost
reduction, improvement in the performance, and also for focus on the core activities of

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the business, it is sometimes seen that outsourcing fall short of management's
expectations. Implementation of the process of outsourcing activity successfully is not an
easy task. If we see the result, companies have obtained from outsourcing, there are a
number of companies, which have gained benefits, and other companies, which failed to
achieve success. To determine whether to make or buy is of great importance for any
company. It is very important to decide first which activity can be best performed by the
in-house department and which activity can be best performed by an external vendor.
This helps the company to understand from where its competitive advantage comes from.

In this dissertation, I will explain in details the activity of outsourcing, its implementation
and its effect on the business functions. To be more precise, I will look at the impact of
outsourcing in the European retail industry to India and China. I am focusing on the
outsourcing of the European retail industry as I have worked for three years in an Indian
organization who used to manufacture and export goods to retail stores in Europe.
Therefore this research will allow me to apply and also to enhance my knowledge in
these areas.

Today maximum numbers of products we see in European retail stores have labels, either
Made in India or Made in China. What is the reason behind products or services
being made or bought from India and China? The main aim of this dissertation is to make
a clear picture of the reasons behind retail companies in Europe outsourcing, particularly
to India and China and the advantages and disadvantages of this. Organizations face
dilemmas in deciding whether the required part or services are best developed within the

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organization or purchased from the market. Therefore it was also one of the primary
concerns to understand which of the two make vs. buy is more essential and important
for a companys success.

There is a boom in the current phase of outsourcing. Numerous companies are now
outsourcing maximum percentage of there functions. But it cannot be said that todays
boom will prevail in the future also. Therefore another reason behind this research was to
analyze and find out whether the present trend in outsourcing will continue to increase or
there will be a downfall.


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2.0: LITERATURE REVIEW:-
2.1: Outsourcing
Business needs are continuously changing. The past and the present business scenario are
totally different and have changed drastically. In the past very few companies used to
outsource there jobs to different companies but in the present scenario where the
customers are more and more demanding and the market being dominated by the buyer,
companies are focusing more on the quality of the products and there core competencies.
For large as well as small companies it becomes very difficult to manage all the activities
on its own and produce each and every single input required for the final output of the
company. Therefore the companies are focusing more on the internal strength i.e., the
activity at which the company is best at doing and outsource the other inputs from the
outside suppliers from the same country or from a foreign country.

Outsourcing means selectively turning over to a vendor some or all of the functions,
ranging from simple data entry to software development and maintenance, data centre
operations and full system integration (Apte, Sobol, Hanaoka, Shimada, Saarinen,
Salmela & Vepsalainen, 1997). Outsourcing is the contracting of various information
systems, sub-functions by user firms to outside information systems vendors.
(Chaudhury, Nam & Rao, 1995)

Companies come into contracts with external parties in the same country or foreign
countries for their various functions and activities. In detail we can say that it is an
activity, which is given to external vendor to provide the parts, products, services etc. The

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parts of activity given on contract to the external companies are generally the non-core
activities of the company.

Outsourcing is the use of an external vendor to provide parts, products, processes or
services and is a management strategy that has been growing dramatically within many
industries in recent years. The rapid and continuous growth of supply market enables
firms to outsource more organizational activities and functions as diverse as Information
Technology (IT), manufacturing, logistics, customer services and many back office
operations are now outsourced (Barthelemy & Adsit, 2003). Outsourcing is a
management strategy that is spreading within all forms of industry. It helps the
management to concentrate and focus on the companys core activity and outsource the
non-core activities

Outsourcing can be defined as a contractual agreement that entails the procurement of
goods and/ or services from an external provider. Drawing from our earlier discussion,
four additional basic features can be outlined:
Prior to being sourced from a local (domestic outsourcing) or foreign (off shoring)
enterprise, the activity was being carried out in-house;
Once outsourced, control over the activity resides with the external provider;
The outsourcing relationship is bound to be characterized by asymmetry of size
and power;
The activity outsourced to a more efficient provider must be non-core.
(Harbhajan, 2006)

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It is quite evident from the above mentioned four points that companies now outsource
the activities, previously carried out within the company but along with the job or
services this form of management strategy also passes the control over that particular
activity to the external supplier. It is not necessary that the external vendor has to be of
the same form of business or size; it can be smaller in size or a specialized provider.
Generally the companies only outsource their non-core activity, keeping the core activity
to be carried out in-house only.

Outsourcing is a form of privatization where one unit contracts with an external
organization (second unit) for providing service. Outsourcing seems to be a very common
activity in todays business. While many companies have benefited from outsourcing but
at the same time many other companies seem to have failed to implement it.

2.1.1: Different Categories of Outsourcing:
There are various forms of outsourcing like total outsourcing, selective sourcing, total
insourcing, multi-supplier outsourcing, joint-venture, general outsourcing, value added
outsourcing, business process outsourcing based on different characteristics like IS
budget, how the client manages or utilizes the suppliers. The three following charts
explain the different types of outsourcing and their definitions are.


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Table: 1 Categorization of sourcing alternatives based on Percentages of IS Budget
as a Differentiator between Total and Selective Sourcing Decisions.
Terminology Definition as quoted in literature (Lacity and Hirschheim, 1995)
Total Outsourcing ..to refer to those organizations that decided to outsource at least
80% of their IS budgets to third party providers.
Total Insourcing ..Refers to those organizations that formally evaluated
outsourcing but selected their internal IS departments? Bid over
external vendor bids, thus keeping over 80% of the IS budget
provided by the internal IS department.
Selective Sourcing ..Refers to organizations that opted to use third party vendors for
certain IS functions which represents between 20 and 60% of the
IS budget (typically around 40%) while still retaining a
substantial internal IS department.
Source: (Lacity & Hirschheim, 1995)


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Table: 2 Categorization of sourcing alternatives based on How the Client Manages
or Utilizes the Suppliers
Terminology Definition as quoted in literature
Total Outsourcing Total outsourcing is when an organization chooses to outsource
as much as 70 to 80% of its IT facility, usually to a large single
supplier. These contracts are usually for between 5 and 10 years.
Multi-Supplier
Sourcing
entered into IT sourcing arrangements with a variety of
suppliers
Joint-Venture/
Strategic Alliance
Sourcing
An organization enters into a joint venture with a supplier on a
shared risk/ reward basis. This may involve selecting an existing
IT supplier or helping to create a new company to which work
can be outsourced. Sometimes an organization may take share
ownership in an existing IT supplier or vice-versa.
Insourcing An organization opts to retain a large centralized IT department
and in source management and technical capabilities according to
the peaks and troughs of IT work. Contractors may be given
employment contracts lasting between 3 months and a year,
although there are many examples of them staying with an
organization for several years.
Source: (Currie & Willcocks, 1998)


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Table: 3 Categorization of outsourcing based on How the Client Manages or Utilizes
the Suppliers
Terminology Definition as quoted in literature
General Outsourcing ..encompasses three alternatives: (a) selective outsourcing (b)
value-added outsourcing or (c) cooperative outsourcing

(General Outsourcing)
Selective Outsourcing
..where one particular area of IS activity is chosen to be turned
over to a third party, such as data center operations
Value-added
Outsourcing
..where some area of IS activity is turned over to a third party
who is thought to be able to provide a level of support or service
which adds value to the activity that could not be cost
effectively provided by the internal IS group
Co-operative
Outsourcing
..where some targeted IS activity(ies) is (are) jointly performed
by a third party provider and the internal IS department
Transitional
Outsourcing
..involves the migration from one technological platform to
another
Business Process
Outsourcing
..Contractual agreement that defines the vendors contribution
to the client in terms of specific benefits to the business and
defines the contracting payment the customer will make based
upon the vendors ability to deliver those benefits. The goal is
to match actual costs with actual benefits and to share the

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risks.
Business benefit
contracting
..Contractual agreement that defines the vendors contribution
to the client in terms of specific benefits to the business and
defines the contracting payment the customer will make based
upon the vendors ability to deliver those benefits. The goal is
to match actual costs with actual and to share the risks.
Source: (Millar, 1994, as cited in Lacity & Hirschheim, 1995, pp. 45)

For carrying out outsourcing it is necessary for the companies to know which category of
outsourcing they relatively fall in. This will help the companies to get into the right
contract with the external vendor who are responsible for the activity outsourced.

Business process outsourcing refers to an outsourcing relationship where a vendor is
responsible for performing an entire business function for the client (Millar, 1994, as
cited in Lacity & Hirschheim, 1995, pp. 45). The management literature offers several
examples of how ages-old business methods and processes were abruptly displaced by
new ideas and techniques that did not exist just a few years ago (Leifer et al., 2000;
Christensen, 1997).

In the year 1980s and 1990s outsourcing mainly affected employees jobs or was
restricted only to the blue-collar jobs. This process of outsourcing made the companies

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and industries dominant in the cutthroat competitive global market and at the same time
employment stayed firm or started declining and the output of the companies started to
increase where the process of outsourcing used to take place. This necessarily didnt
affect the economy of the countrys net profit. For example the computer industry shows
sharp rise in the sales during the late 1980s and also in the 1990s, with the increased
activity of outsourcing of many inputs, which were previously manufactured in-house.
This effect was not only seen in the computer industry but went beyond it. The
accessibility of economical IT technology flared-up the demand for computer software
along with services jobs. Over a decade and half it was found that this resulted in
decrease of a million technologically advanced related manufacturing jobs, but at the
same time another 1.5 million services jobs were added. This affected more the routine
and lower paying jobs but at the same time growth was noticed in higher paying services
jobs. (Cynthia A. Kroll, 2004).

Outsourcing if we see is not a new business activity. Since long time jobs are transferred
from one company to another in the same country as well as foreign countries, although
the scenario of outsourcing today has changed to quite an extent. Today outsourcing is
not confined or restricted to a particular set of industries. It is spreading very fast even
through new geographic areas.

Outsourcing is driven by various factors such as wages, technical training, English
language etc. The requirement of the capital investment is also very low as compared to
the cost of investment for own or in-house manufacturing. The reasons behind the

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activity of outsourcing are many. Outsourcing helps to lower the manufacturing costs for
local firms and at the same time help to compete with other firms. It also helps the firm
with free resources for new investments and at the same time may generate demand for
other activities such as industries, job etc. Outsourcing is not done keeping only the cost
issue in the mind but firms outsource due to many other reasons also such as: -
Gaining access to the new and better technologies and ideas.
Focus more on the strength of the firm/ core competencies.
Reducing cost.
Lower capital investment.
Transfer of knowledge.
Provides access to the specialists.
Access to technology with further cost.

We exist in the era of outsourcing. Today organization are outsourcing more and more
business activities, varying from product assemblage to designing, from marketing to
research and development, even after sales service. The rising assimilation of world
markets brought a disintegration of the production process; in which manufacture or
services activities, done abroad are combined with those performed in the home country.
(Wang, 2006). Outsourcing can be defined as turning over all or part of an
organizational activity to an outside vendor (Baitheiemy, 2003). Today every
management comprises of some or more types of Outsourcing.


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The Economist Intelligence Unit report presents that in the year 1997 around 34 per cent
of the companies outsourced some or all of their information technology (IT). Also
according to the report these figures were estimated to reach 58 per cent by the end of the
year 2010. It is also estimated that there will similar increase in the percentage of
outsourcing in other activities like telecommunications, accounting, human resources and
other Business Process activities. Empirical evidence suggests that planned and carefully
done outsourcing strategies increases the performance of the company on the whole
(Baitheiemy, 2003). As the CEO of a medium-sized firm that had outsourced activities
as diverse as IT, logistics, financial services, and facilities management pointed out:
Outsourcing enabled us to double our operating income before tax while our revenues
remained stable." (Baitheiemy, 2003).

The concept of outsourcing was first made popular by Ross Perot when we founded
Electronic Data Systems (EDS) in 1962. EDS would say to a potential client, "You are
good at designing and manufacturing widgets, but we are skilled with managing
information technology. We will sell you the IT services that you require, and you can
pay us periodically with a minimum commitment of two years. Today, EDS is a multi-
billion dollar company with over 70,000 employees and is only one of many global BPO
firms. - The Outsourcing Times (www.blogsource.org). 16
th
July, 2006.
There are contradictory accounts about the beginning of outsourcing, but its first accepted
practice appears to be in the year 1954 in the area of information systems (IS) when
General Electric Corp. contracted with Arthur Andersen and Univac (Klepper & Jones,
1998). The process of outsourcing consists of various activities and sub activities and is a

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very vivid and complex process. It is very difficult for the managers of the company to
decide which part of the business activity to Outsource and which part of the business
activity should be manufactured within the firm. Therefore make vs. buy is a question
carrying many managerial dilemmas.

2.2 Outsourcing to India and China
Today outsourcing has pick up the pace. It becomes cheaper for the U.K., European or
U.S.A. companies to produce the same goods in India and China than in there own home
country. (See diagram for comparison between India and U.S.) The wages and labor cost
are cheap in India and China than compared to U.K. and U.S.A. (see diagram comparison
between India and U.S.)
Table: 4: SALARY GAP- US COMPARED TO INDIA HOURLY WAGE
OCCUPATION U.S. CA SIL.VAL. INDIA
TELEPHONE OPERATOR $ 13.85 $ 14.50 $ 16.80 < $ 1.00
HEALTH RECORD TECHS $ 11.50 $ 13.20 $ 15.00 $1.50-$2.00
PAYROLL CLERK $ 13.95 $ 15.90 $ 20.40 $1.50-$2.00
LEGAL ASSISTANT $ 18.25 $ 23.85 $ 27.10 $6.00-$8.00
ACCOUNTANT $ 22.60 $ 25.30 $ 28.30 $6.00-$15.00
FINANCIAL ANALYST $ 27.50 $ 30.85 $ 34.60 $6.00-$15.00
PROGRAMMER $ 30.00 $ 33.45 $ 36.90 $2.65-$6.00
Source: FCREUE from US BLS, interviews and reviews of want ads as cited in (Cynthia
A. Kroll, 2004 Background on Business Services Outsourcing and the California
Economy University of California Berkeley).

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India and China undoubtedly are two countries certainly a vigor to think when it comes to
the factor of Outsourcing. India and China are, and will stay in demand for the activity of
offshore outsourcing. Outsourcing to these countries is turning out to be a good thing for
the organizations. The reasons why companies are drawing their attention towards these
two countries are there edge over the quality and cost benefits. The level of superiority
and distinction that these two countries have achieved in the field of outsourcing has not
come overnight. Various factors such as different government policies, infrastructure,
people speaking fluent English, who can adapt to western accents, have all played a
crucial role and participated in making these two countries destination of Outsourcing.
India and China are overall ultimate destination for the companies outsourcing. Some of
the reasons why the two countries have advantages are mentioned below.

2.2.1: Strengths of India and China
The manpower
India and China has great manpower in terms of both attributes - quality as well as
quantities, which outnumber others in the world. Their man powers are known in the
world for their characteristics like dedication, determination, adjustability and immense
talent. Companies outsourcing to these two countries can get specialized talent in specific
areas.
Indias prevailing education system and Chinas upcoming education system.
There was an age-old belief that the education system that prevailed in India was faulty
and imperfection, killing individuals creativity. This belief has been proved wrong.
Indeed this education system has produced students with multi talents. Grip over

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quantitative models, along with a confident command over the communication skills, has
cemented the way for students to the peak. Also today we can see that more and more
Chinese people are learning English and becoming aware of proper education.

Government Policies
Indian and the Chinese government have taken numerous liberalization proposals to
support the development and growth of outsourcing sector and also trying to draw lot of
FDI (foreign direct investment) into the country.
http://www.indiasoftwaredevelopment.com/outsourcing-to-india.asp. The decision of
outsourcing is a very composite procedure, addressing concerns in a variety of domains,
such as political (e. g., union pressures), economical (e. g., financial feasibility) and
technological (e. g., performance metrics). (Harbhajan, 2006)

Due to the various significant advantages of outsourcing, we can see that companies these
days implement the activity of outsourcing. The activity of outsourcing is basically
considered to be a mighty tool for cutting a companys cost through less internal
investment and use of suppliers, which are more located, overseas like India and China.
(Barthelemy & Adsit, 2003) For example we can see that there are figures indicating that
Asian suppliers can provide key components or finished products for many different
industries at up to 60% less than in-house production (Bettis et al, 1992).

For example: Feenstra (1998) have described the production process of Nike Company.
About 75000 people are employed in Asia in the production of shoes and clothing for

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Nike, though only a few hundred of these are actually employees of the company. The
rest are employed in factories that have some contractual arrangement with Nike,
possibly run by the third parties (Feenstra, 1998). We can also see that large
pharmaceutical companies like GlaxoSmithKline, Pfizer and Bayer, now commonly
outsource part of their R& D to small, specialist biotech companies (Mc Namara, 2000).

India and China both the countries have become world renowned as a destination for
Outsourcing in every field. This is due to a number of contextual specifics that have
provided both the countries with a comparative advantage over the other potential
outsourcing destinations. Every firm producing goods need some components for its final
output. Therefore the firm has two choices either the firm can select in-house vertical
integration or secondly it can outsource the components required either from the home
country or from a foreign country. Outsourcing is not a new phenomenon and also cannot
be restricted only to the IT industry (Dibbern et al, 2004). There are other forms of jobs
and services which can be outsourced apart from IT outsourcing (ITO), like business
process outsourcing (BPO) of various back office functions, which can include human
resources, finance and accounting, processing of insurance and credit transactions,
procurement, and IT services (Kevan Penter & Graham Pervan, 2006,)

In the developed economies, there has been a drastic change in the retailing environment.
Companies into retail business have grown at an exceptional scale and are progressively
becoming international companies. Today we can see that consumers are more mobile

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and well-heeled, demanding for specialized goods and services. New retailing business
environment has to adapt to these changes in order to sustain the market. Responding to
the culture of the customers is very essential for the success of the retailers.

While retail industry lags behind other industries such as car manufacturing, banking and
financial services, when it comes to the amount of business activities which has been
moved to outsourcing, its augmentation is a reflection on the shift from manufacturer-
based economies to service-based economies. Traditionally the safeguard of the product
manufacturing such as private label, there has increasingly been a move to the
outsourcing of services including IT and logistics. Outsourcing used as a planned tool to
gain and sustain competitive advantage, outsourcing is now hard at work in the retail
business. Whether there are disputes in favor of or against the outsourcing, it is certainly
going to play an increasing role in international retailing as globalization takes hold.
(http://www.foodinternational.net/articles/ecr/10/outsourcing-tool-of-the-future-for-
retailers.html cited on 16/07/2007)

The decision whether to outsource or not remains a potential minefield for the retailers.
On the other hand, with the retail market becoming more and more competitive the
opportunity to restructure costs is one that many businesses cannot afford to miss, says
John Broy (Straight to the source, 2006, Retail Systems October -November). Buying is
one of the main activities performed in the retail environment. What to purchase from the
market and what should be manufactured internally? How to buy? Where to buy? These
are some questions, which are kept in the mind before the actual buying activity take

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place. It is very essential for the success of the retail business to make the
purchase/buying effectively.

A survey conducted by Shaw et al. (1992) indicates that out of the goods outsourced 39
% of products were purchased from non-domestic suppliers i.e. from the overseas market.
It is also necessary for the company to decide whether to buy locally i.e., from the
domestic market or from a foreign supplier. The key things, which should be, consider
for evaluating the decision are price differential between the two, variety, quality and
availability.

In some industry the company becomes specific and gives each and every single detail of
the goods to its supplier. For example, in the textile industry the firms often provide its
suppliers design of the garment, specifying the fibre, fabric, colours, quantities etc. and in
the leather industry the firm provide it suppliers with the type of leather, colours, design
of the model, and other descriptions. Therefore we can say a leather goods retailer in
Europe will give its supplier in India or China each and every detail, exp. the type of
leather, colour of the leather, model of the wallets and purses, fabric colour and style,
buttons, zipper sizes etc.

It is often time consuming to locate and identify the suppliers in other countries for the
retailers and for the same the retailers even establish buying-offices in those countries.
For exp. Retailers like Elcorte Ingles of Spain has their buying-offices in the suburbs of
Delhi, India. Otto Versand, a German based retailer has 10 buying offices in Asia. The

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main responsibilities of the buying offices are searching the market for the suppliers and
also representing the retailers in dealing with the suppliers. The buyer from the retail
companies also visits different trade exhibitions held in different countries for the
procurement of the goods.

Conventionally the safeguard of product manufacturing such as private label, there has
been more and more move to the outsourcing of services along with IT and logistics.
Outsourcing also appears in other forms such as advertising, public relations, marketing
and sales promotion. And now the growth of services is being highlighted by the
dramatic economic growth of India, China and other Asian countries.

China and India as exporters of manufacturers since the middle of the 1990s has
contributed together to the changing pattern and volume of the global trade. From the
chart below we can see that by 2004 Chinas share of worlds manufacturing exports
accounted to 8.3 percent and Indias accounted to 0.9 percent. In commercial services we
can see that Chinas share of exports reported 2.9 percent and Indias share 1.9 percent.


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Table: 5: INDIA AND CHINAS SHARE OF THE WORLD EXPORTS
Chinas and Indias share of the World exports
1980 1990 2004
World exports China India China India China India
A. Manufacturing 0.8 0.5 1.9 0.5 8.3 0.9
1. Iron & Steel 0.3 0.1 1.2 0.2 5.2 1.6
2. Chemicals 0.8 0.3 1.3 0.4 2.7 0.7
2.1 Pharmaceuticals -- -- 1.6 1.2 1.3 1.0
3. Office machines &
telecommunications
equipments.
0.1 1.0 0.8 15.2 0.6
4. Auto parts 0.0 0.0 0.1 0.1 0.7 0.1
5. Textiles 4.6 2.4 6.9 2.1 17.2 4.0
6. Clothing 4.0 1.7 8.9 2.3 24.0 2.9
B. Commercial services -- -- -- -- 2.9 1.9
1. Transports -- -- -- -- -- --
2. Travel -- -- -- -- 4.1 --
3. Others -- -- -- -- 2.4 3.1
Source: Srinivasan 2006 as cited in Winters Alan (2007)


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The activity of outsourcing IT and business processes yields more than $10 billion a year
for India giving employment to more or less half a million of Indian workers (Harbhajan,
2006). The emerging Indian and Chinese organizations that now rule the global sector got
in full swing only after multinational companies initiated the approach, proved the world
that India and China were viable outsourcing destination with trained critical mass of
local employees. Foreign organizations sharpen up the effectiveness and productivity of
the local industries by inducing in new capital, technology, new business models, and
management skills. Global outsourcing offers a compelling podium to study the matters
of upgrading competitive advantage in developed countries and contract out non-core
competencies to emerging markets.

According to the report textiles and clothing exports account for 7 % of total world
exports where China leads the market followed by India. Indias textile industry trails
well behind that of China. Due to the incorporation with the global production network
having direct connections with the retailers in the organizations for economic co-
operation and developed countries an also through foreign investments, China has a sharp
advantage over the others. For example in the year 2004 Wal-Mart, U.S. based retail
company purchased around $18 billion worth of goods from China itself. Indian
organizations have very less direct contacts with the retailers. India and China, though
both competing with each other in some forms of exports are mounting and both the
countries are emerging to dominate the global market to an even greater level than it used
to in the past. (Winters Alan, 2007)

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Outsourcing can make retailers more competitive, but it is about more than just saving
money. It requires serious effort and retailers must be clear from the outset about their
aims and objectives. These were the words of Kevin Hawkins, Director General of the
British Retail Consortium, commenting on the first ever Pinsent Masons survey
conducted with the British Retail Consortium over the summer. (David Philpot, 2007)
The prevalent location choices for this offshore outsourcing trend are India and China,
primarily due to the potential of exploiting labour cost arbitrage to achieve an overall
reduction in operation costs.

2.3: Reasons for the Growth of Outsourcing:
There are many reasons to consider outsourcing: for example, to reduce cost, to reduce
capital investment, and to have access to technology. According to Outsourcing Journal,
April 2002, interests in outsourcing were for the following reasons:
Improving core business results.. 39%
Cost savings 36%
Upgrade current service levels.. 9%
Inability to staff appropriately... 7%
Implementation of large scale initiatives... 5%
Avoiding needed investment. 4%
Every industry or organization has its own unique challenges. But in the retail industry,
retail stores and the constantly increasing segment of E-business catalogues sales has an
entire shopping cart filled with challenges.

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Outsourcing is used as a tactical tool for achieving success and sustaining competitive
advantage in cutthroat competitive market. This activity is now firm at work in the retail
business. As globalization takes place in the world market, outsourcing is certainly going
to play an ever-increasing role in the international retailing sector irrespective of the
arguments in favour or against the outsourcing. In an idyllic business atmosphere,
retailers would have very few or no need to outsource services or production. In the late
19th century and as well as into the 20th century, when information technology was not
even a blip on the horizon, retailers owned their own farms, manufacturing sites and there
was very few or no need to outsource. For exp; Boots, the UK-based retailer, used to
have their own fire service and even employed its own gardeners who grew Boots own
label bedding-out plants and bred Boots own ladybirds.

Amit Bajaj, head of retail and consumer industries at TATA Consulting Services (TCS),
says outsourcing has traditionally focused on two activities in the retail sector: products
and services. (http://www.foodinternational.net/articles/ecr/10/outsourcing-tool-of-the-
future-for-retailers.html as cited on 16/07/2007). The ultimate goal of many people is to
make their own decisions and build up their business so that they can ascertain the
success of the firm. But for many companies or organizations, which have reached a
certain level and size this idea, seems to be vague and no longer possible. Due to the
lesser and tighter margins and increasing legislation it is important that the retailers have
knowledge in every corner of their business activities. Keeping this information and
knowledge in mind outsourcing non-core business functions to professional specialists

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who can provide an efficient and dedicated work let retailers to concentrate on what they
know best retailing.

According to Davies P. (2004), more than half of the UK FTSE 100 companies now
contract some portion or the whole of their business processes to outside organizations in
the same country or foreign country, a position that is also replicated to an even greater
degree with the Fortune 1000 companies in the USA (Friedman 2006). The activity of
Outsourcing today has become significantly important for many local and global
companies but many companies have not been able to achieve the craving and likely
benefits from outsourcing due to the problems like no formal outsourcing process, limited
cost analysis, and core business definition.
(http://www.asiawebmedia.com/Definition_of_outsourcing.htm as cited on 17/07/2007)

The nature of outsourcing is very diverse. We see that some organizations now days
outsource there core production activities so broadly that they no longer indulge
themselves into production as they used to do before. (Knemeyer et al., 2003; Zsidisin,
2003). The term Core competencies was mentioned in 1990 in Harvard Business
Review Article as the Core Competence of the Corporation. (Prahalad and Hamel,
1990; cited by Corbett, 2004). Core competencies are deemed to underpin the ability of
the organization to outperform the competition (McIvor, 2000) and thus convention
suggests that they should be protected and nurtured i.e., kept in-house. According to
Bettis, Bradley and Hamel, 1992, the reason why the core competencies were not usually

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outsourced was because contracting out such activity of organization to an outside
supplier was threat to the firms competitive advantages.

While we also see that there are other firms outsourcing extensively secondary value-
chain activities for exp. accounting systems, distribution, human resource management,
information technology, logistics etc. (Johnson and Schneider, 1995; Lacity and
Wilcocks, 1998; Odagiri, 2003; Ono, 2003).

Along with critically analyzing the different facets of the business, it is the responsibility
of the managers also to intermingle with the different layers of the organizations in order
to be aware of different associated implications. Like any other business move, there is a
level of risk involved with outsourcing (Aubert, Patry & Rivard, 1998; Earl, 1996 as cited
in Harbhajan, 2006). In its 2004 report, the research group Gartner states that as many as
80% of outsourcing deals are unsuccessful and that European businesses wasted $7
billion on poorly managed contracts. (Harbhajan, 2006). Global competition and
shareholder expectations have led European companies to focus on reducing their
operating costs and on core competencies. To achieve this in the global economy,
companies are turning to business process outsourcing (BPO), outsourcing.

While global executives began outsourcing substantial portions of their operations, more
than a decade ago, to offload activities regarded to be non-core to cut costs and refine
their strategies, modern outsourcing companies are looking around globally for more
fundamental reasons to facilitate rapid organizational change, to launch new strategies,

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and to reshape business models. In essence, they are engaging in transformational
outsourcing, which is partnering with globally scattered companies to achieve rapid,
substantial, and sustainable improvements in performance.


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3.0 Research Questions and Methods
3.1 Research Questions:
There are four research questions and surrounding these questions the interviews were
conducted and the secondary data were collected. The four research questions have been
selected keeping in mind the global growth of outsourcing.

The research questions are as follows:-
1. How do companies reduce cost and what are the difficulties faced in doing so?
Reducing the production and operating cost of any company is very essential for any
company to gain and sustain competitive advantage. Therefore how companies reduces
cost and how far are they successful in doing so is one of the main research questions.

2. What is better make or buy?
It is very important for companies to decide whether they should make i.e., produce the
goods in-house or should buy i.e., purchase the goods from the external sources.

3. What are the advantages and disadvantages of outsourcing?
If a company is outsourcing its goods then it is necessary for the company to know the
advantages and disadvantages of the activity also.

4. What is the future of outsourcing?
My last research question will decide whether the present boom in the activity of
outsourcing will increase or decrease due to its advantages or disadvantages.

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3.2 Research Methods:
Whatever are the advantages or ideas supporting the decision of outsourcing, evidence
can be seen that the main decision is mainly cost-based decision. It is always seen that if
the products or functions can be purchased/available from the market cheaper than
manufacturing in the company, then it should be outsourced rather than going for the in-
house production. But this has to be kept in mind that if a company only outsources to
reduce its costs i.e., mainly cost based decision then the main strengths may be lost to the
market and the firms success is sometimes put at risk. Now, when we study the
European retail industry we see that off late more and more European firms have started
becoming even more dependent on developing countries for procurement of raw
materials as well as finished goods in particularly manufacturing industry. When we go to
a retail store in U.K. most of the products displayed or available in the store has a tag on
its back written Made in India or Made in China etc. Why is it so? Why firms are not
manufacturing but outsourcing from the market? It is because they can buy the same
goods at a cheaper rate and sustain competitive advantage. The government removing
quotas from import and exports in some of the Asian countries like India and China has
also led people in Europe to import goods from these countries. The main basis of the
primary research is to identify the issues that effects and influence a companys decision
of outsourcing and the future of outsourcing.

The next step is the data collection systems as well as the edge of the research. Thought
and concern should also be given to the exclusive features of the research subject, the
range of the research and the resources needed to complete the method (Yin, 1994). The

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required objective should be attainable within the limitations of time and the individual
researchers abilities (Yin, 1994), and the nature of the study will represent whether the
study should be qualitative or quantitative.

Quantitative study method focuses on facts and numbers that signify opinions or concepts.
Cost is a centre and main concern in the discussion of outsourcing and quantitative
examination of variables such as production and transaction costs would give helpful
insight into the cost-effective explanations for outsourcing. But Qualitative research
study edges on words and inspections to convey truth and efforts to describe people and
the matters in normal situations (Easterby-Smith et al, 1991). Qualitative research method
was deemed as appropriate. While a range of theoretical concepts has been applied to the
debate, few academic studies explicitly examine the hands-on experience of
outsourcing firms, especially within a single industry. By using a qualitative research
design it was hoped that a richer, more realistic and a meaningful view of this
management trend would be provided. The theoretical and questions suggested appeared
from the literature review in actual fact forms the walls of the primary study. The above
mentioned two aspects express the choice of parts of study, the reason that will be used to
link data to the suggestions and the criteria for data explanation (Yin, 1994).

The criteria such as Core competency, competitive advantage, cost benefit etc within the
context of the literature review above seeks to ascertain appropriate for decision making
so as to which function of the business can and should be outsourced and which function
of the business should not be outsourced. The study of the topic is thus planned to test

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decision-making theory within the companies (Carroll & Johnson, 1992) by applying
these ideas to European retail firms and the intensity of outsourcing that they put into
practice.

After critically evaluating the topic it was decided to investigate and study a number of
European retail companies, agents who buys good on behalf of the retailers, one Indian
manufacturer cum Export Company supplying goods to European companies so as to
represent outsourcing variety and range of scale, from lesser integration companies
through to those into high-level outsourcing. Critically analyzing how these firms decided
particular strategies and aligning the outcomes with literature, it was expected to offer
companies wishing to outsource more wide-ranging direction for making the most
suitable conclusion for their business. The main purpose of this study is to get an insight
into companies know-how of the functions of outsourcing and the application of
different criteria when making decisions. The questionnaire was made of total 9 questions
to get an overview of companies involved into the activity of outsourcing. Detail
literature study was done to get idea of outsourcing, its advantages and disadvantages and
the effect of outsourcing on the business and employment. Also the future of outsourcing
was to be studied and this particular question was included in the questionnaire. Also
press articles have been analyzed to get an insight of the present scenario of the
outsourcing. All answers to the research questions will be supported from the literature
part i.e., the secondary data also. All the four research questions will be answered both
from the primary data and the secondary data i.e., findings from the interviews as well as
literature.

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Four interviews from the European retailers and one interview from the agent working on
behalf of his clients were taken by the e-mail. The interview of the Indian manufacturer
was taped and transcribed for the data analysis. The interviews were compared and
summarized and then it was extracted. The secondary data collected from various sources
such as journals, books, press releases etc. were together collected and summarized and
used where appropriate to enhance the analysis and provide better and broader matter so
as to give a clear picture. The results of the interviews were then discussed in relation to
the theories supported from the secondary data. Comparison of the findings of the study
with ideas relevant to the decision-making procedure proposed a number of suggestions
for the managers and giving directives for putting into practice an effective outsourcing
strategy, together with promising areas for future study.

Mainly the European based companies working primarily with the Indian and Chinese
suppliers were selected for the interview and the data collection. Also the Indian
manufacturer cum exporter supplying goods to the European companies was taken into
consideration for the data and interview. The reason why the companies were chosen
was their current outsourcing strategy and their relation with the European retail industry.
The size of the company chosen varied from each other and each of them had different
nature of business. Only the C.E.O., primarily owners or the senior managers who were
directly involved in the business having control over the activity of outsourcing were
interviewed. The interviews were conducted only once due to limitations of time
although regular contact with them were kept by e-mail whenever needed. The primary

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data was collected keeping in mind the recent changes and therefore maximum selection
of journals, books and articles was not too old.


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4.0: Findings:
Four European based retailers based in different countries of Europe, one agent
outsourcing for his clients based in Switzerland and one Indian manufacture cum exporter
supplying goods to the European companies were interviewed and the response suggested
that in todays global environment, outsourcing is a topic which every people would like
to discuss. As the market is becoming more and more competitive and going on a global
scale more and more people are opting for outsourcing.

Firstly the following table will represent an overview of firms selected for interview in
terms of its size, years in the following business, turnover.
Firm No No. Of Employees Years in the business Turnover
1 4 4 years 650.000 Euros
2 30 20 years 10,00,000 Euros
3 3 26 years CHF 2, 5 Million
4 17 11 years 8.5 million Euros
5 11 22 years 6 million Euros
6 10 years 5 million Euros

Although the nature of the firms varied from each other but all of them had one thing in
common i.e., outsourcing. Firms used to outsource some or the other parts of the business
functions to the external supplier for various reasons.


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4.1 Firm Costs:
How do companies reduce cost? Difficulties faced in doing so?

All firms have realized that the cost has become significantly important and many of the
firms has put into practice methods to lower it. The reduction in cost is due to the
consumer demand for lower price goods and increasing in the attitude of use and throw.
If a customer can buy a pair of Jeans from a store for 5 to 10 Euros he or she only needs
to wear that jeans couple of times, not always and then throw away. Consumers are more
prices oriented and the retailers sell what the consumer wants. (Firm 4)

According to the firm 4 Cost reduction is not an easy task. It is a complicated network
and a challenging task. Reduction of costs is not necessarily reduction of specific
expenses only but wherever possible. It is sometimes very difficult to reduce costs in an
increase item but then one can try to get more output from this expense and thus increase
profits.

Also when selling at lower price, the volume of the turnover will be high and because of
this, the firms to allow customers price demand and to sustain themselves in the market
many have outsourced there manufacturing to external suppliers. Also it states that the
lower wage rates prevailing in some country enable the European firms to make
substantial savings. In this way the firms shift their production to these countries where
the rates are lower. For example: The minimum wage pays in U.K. for adults (which

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mean people aged 22 and over) receive the full rate of 5.35 an hour (From 1 October
2007 this will increase to 5.52)
(http://www.direct.gov.uk/en/Employment/Employees/Pay/DG_10027201) whereas the
minimum wage pays in China and India are very less compared to the above. The
following chart presents the minimum wages prevailing in different European countries
and Indian and China.


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Table 6. National minimum wage (adult rate), 2004, in national currency (gross)*
Belgium Monthly EUR 1,210
Hourly BGN 0.71 (EUR 0.36)
Bulgaria
Monthly BGN 120 (EUR 61.43)
Hourly CZK 39.60 (EUR 1.24)
Czech Republic
Monthly CZK 6,700 (EUR 210.09)
Hourly EEK 14.60 (EUR 0.93)
Estonia
Monthly EEK 2,480 (EUR 158.50)
Hourly EUR 7.61**
France
Monthly EUR 1,286.09**
Daily EUR 25.01
Greece
Monthly EUR 559.98
Hourly HUF 305.00 (EUR 1.21)
Daily HUF 2,440 (EUR 9.70)
Weekly HUF 12,000 (EUR 47.68)
Hungary
Monthly HUF 53,000 (EUR 210.60)
Ireland Hourly EUR 7.00
Hourly LVL 0.474 (EUR 0.71)
Latvia
Monthly LVL 80 (EUR 120.26)
Hourly LTL 2.95 (EUR 0.85)
Lithuania
Monthly LTL 500 (EUR 144.81)
Malta Weekly MTL 53.88 (EUR 125.89)
Netherlands Monthly EUR 1,264.80
Poland Monthly PLN 860 (EUR 189.98)
Hourly ROL 16,342.44 (EUR 0.40)
Romania
Monthly ROL 2,800,000 (EUR 69.12)
Hourly SKK 37.40 (EUR 0.93)
Slovakia
Monthly SKK 6,500 (EUR 162.41)
Slovenia Monthly SIT 117,500 (EUR 491.45)
Daily EUR 16.36
Spain
Monthly EUR 490.80
UK Hourly GBP 4.85 (EUR 7.14)
* Conversions into EUR, where necessary ** Rate applies only to workers on 39-hour
week.
Source: http://www.eurofound.europa.eu/eiro/2005/07/study/tn0507101s.html


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Table: 7: Minimum Wages per month in China
City in China Minimum wage (per
month) in Local currency
Minimum Wage (per
month) in and Euro**
Guangzhou RMB 780 52 and Euro 76.60
Beijing RMB 730 49 and Euro 72.18
Shanghai RMB 760 51 and Euro 75.15
Local minimum wage (per month) **Euros to 1GBP= 1.47299 Source:
CBBC office. www.cbbc.org
Table: 8 Minimum Wages per month in India
City in India Minimum wage (Per
month) in Local currency
Minimum wage (per
month) in Euro*
Delhi Rs. 3325 Euro 60.45
Mumbai Rs. 2450 Euro 44.55
Kolkata Rs. 2125- 2375 Euro 38.64 43.20
*1 Euro= 55.00 INR
Source: www.paycheck.in

If we see the above three tables we can clearly see the difference among the minimum
legal wages prevailing in Europe, China and India. The wages paid to the labour in India

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and China compared to Europe is very less and this is one of the basic reasons why
European companies prefer to get their work or activities done in these two countries.
Secondly when the work is outsourced there is reduction in cost of capital investment.
When you plan to intake all the activities to be performed in house, then there is huge
capital investment as compared to when the work is being outsourced.

When asked the purchase manager of the firm 5, he replied that reducing cost is very
essential to gain competitive advantage. On one hand the firm looks for growth and on
the other hand there is always a demand to reduce cost. Both have to be done
simultaneously. We generally contract out activities like human resource, billing, pay-roll,
goods for resale to third party. This helps the firm to reduce the cost and gain
professional skills at the same time. The strategy of reducing cost and at the same time,
which does not compromise on the firms growth, is a very tricky situation. As it is said
that Your job is to trim the fat not cut into the bone which means to (trim) lower the
(fat) cost and not just remove the cost.

Many firms considered more and more foreign competition has focused for the demand
of lesser manufacturing cost and as a result of lower cost many retailers now source
directly or indirectly from the external suppliers within the country or overseas. In 2005
Firm 1 had an order for 1 million leather bags from its client. That year the company
outsourced all the goods from its supplier in India although the company had the
production capacity for producing all the goods in-house only. The reason behind the
outsourcing of the task to India was that of lower price as the profit margin in the above

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order was so less due to cut-throat competition that the production of the goods has to be
done at a lower cost, that is why the goods were outsourced to India.

According to firm 1 Several tasks in a trading company get outsourced to different
companies or suppliers. On one hand the contra of outsourcing is that there is no direct
access, but it is given by controlling the supplier or outsourcing company. The pro is that
you can concentrate on the main business referring to product development and sales and
can calculate outsourced tasks. Disturbances in case of illness do not influence you.

Firm 2 has been supplying goods to its clients for the past twenty years and states that
they have supplied the goods to almost all the major brands in Europe. According to the
partner of the firm when we first went to conduct the meeting with the companies in
Germany, they were shocked to see the quality of the goods and that too at such a cheap
price. But now due to the increased competition in the internal market everyone is
offering goods at a very low price to the clients and due to this more and more companies
which previously used to produce all the goods in-house have started to contract out there
work to external suppliers. This presents that there are inner competition among the
Indian suppliers as well and every individual firm is offering goods or services at a lower
price than others, lowering down their return margin. This is also one of the reasons
behind the European companies getting attracted to the Indian companies.

Also Firm 2 states that We generally give the jobs on contract to our suppliers in order
to complete the job. This helps us to reduce fixed cost of the firm. The same work is done

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outside with lesser capital investment and fixed cost. The difficulties faced in doing so
are the control over the suppliers and their delivery time. Due to outsourcing the firm
can save in their capital asset, which can be utilized for other purposes as well. Firm 3
outsource promotional items for its clients to a Chinese manufacturer because we cant
produce the same for such a lower price. They have got the advantage on the price and
the quality is also very good.

But reduction in cost is not the only concern for every firm. There are also problems in
doing so. Sometimes according to the C.E.O. of firm no. 3 Cost reduction by cost
comparison in buying - but it is also very important to get good quality for an appropriate
price. So it does not serve to us and to our clients when getting a very low price but also
the quality of the goods are terrible. When you tend to go for lower price goods you
cannot always expect high quality. It is even difficult to handle the supplier and the
clients when things go wrong in the goods. Quality comes before the price and also
quality is the base of the firms strategy and they will not negotiate this for the goods kept
in-house just to match in a foreign country pricing. Therefore this firm reduces cost by
keeping the minimum stock level as far as possible. It is therefore seen that looking for
reduction in the costs of production can be harmful for the companys image due to
problems like inferior quality of goods or services.

For the importers, transportation cost is a very important matter to consider. Air is the
most costly mode of transportation whereas transportation of goods by rail or water is
comparatively cheaper. The logistics manager of firm 6 used to plan the buying for their

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company, 6 months in advance and place orders to its suppliers. This helped them to get
their goods transported by keeping time in hand. By this, we no longer use air transport
and all our transports are by sea. This reduces our costs by 7%. This way planning in
advance helps them to reduce costs but then it has one disadvantage also. Being in the
retail industry of fashion items, trends are constantly changing and to plan the buying in
advance is very difficult task.


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4.2: The Make or Buy Decision
Which is better make or buy?

Make vs. buy is a question to be dealt with lot of care and attention. It is of great
importance to decide whether to manufacture the goods in-house i.e. Make or purchase
the same from the external suppliers available in the market i.e. Buy.

According to the Transaction Cost theory the decision whether a company should make
or buy will always be made in regards to the possibility for cost reduction (Williamson,
1985). The strategy of Supply chain is a related thought since either make or buy; any of
the two choices will have an impact on a companys operational performance. There are
chances of company doing the outsourced activity better by focusing on the activity but
this lead to chances in resulting lesser focus and attention on the core competencies
(Barthelemy & Adsit, 2003). The decision to make or buy is also determined by
advantages aimed to the betterment of a companys competitive advantage in the market
(Porter, 1985).

Make versus buy means which activity of the firm will be carried inside the firm (make)
and which activity will be carried outside the firm (buy). In todays market many firms
do manufacture their own products and at the same time buy from the market. There are
lot of changing technologies and resultant emergence of the flexible manufacturing
strategies, than work to eliminate at least some of the transaction costs for investments in
specific assets. Today consumers are demanding higher quality specialized goods.

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Therefore the firms manufacture those parts in which they are specialized and the area in
which they are more expertise while buying the rest production components from the
outside suppliers. Due to this many firms prefers to buy than manufacturing their own
products. For example, today due to high labour cost and higher production cost firms in
Europe (even big brands) have started importing high quality merchandise from Indian
and China.

There are some key points, which are kept in consideration before making the decision. A
firm will manufacture where they have an advantage over the others in terms of cost and
quality but if the production cost is more or goods are of inferior quality, outside
suppliers will be asked to provide the components. The decision whether to make or buy
is very important and therefore requires careful handling of the matter. There must be a
centralized managerial effort to coordinate among the make or buy decision. The
complex products are more likely to be produced internally, while less complex products
are procured through buying from the market or suppliers.

Transaction costs are the additional costs incurred by the economic interaction costs
above and beyond contracted price including the acquisition of costly information, the
costs of monitoring performance, the cost of committing specific assets and the costs of
handling complexity. (Fitz Roy R. Felix, Acs J. Zoltan and Gerlowsk A. Daniel).
Transaction costs differ from the production costs. It is used more in Economic terms.
It is very necessary that at least one of the parties may be required to modify some of its
resources to very specific needs. Williamson (1985: 55) Asset specificity as durable

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investments that are undertaken in support of particular transactions, the opportunity cost
of which investments is much lower in best alternative uses or by alternative users should
the original transaction be prematurely terminated. It refers to the degree to which
Capital Assets are specific to Transaction and thus cannot be redeployed to other uses
without sacrificing the majority of its productive value.

The most popular example for the consequences of assets specificity has been the
relationship between General Motors and Fisher Body between 1919 and 1926. After a
10 year contractual agreement was signed in 1919, GM's demand for closed-body cars
increased to extent that it became unhappy with the contractual price provisions and
"urged Fisher to locate its body plants adjacent to GM assembly plants, thereby to realize
transportation and inventory economies." [Williamson, AJS, p.561] Finally, Fisher Body
was merged into GM in 1926 after Fisher had resisted GM's location demands. As
R.Coase recalls, "I was told [by GM officials] that the main reason for the acquisition
was to make sure that the body plants were located next to General Motors assembly
plants." (Coase, 1993) "

Asset specificity is usually considered to be an argument for vertical integration. The
main idea is that specificity induces opportunistic behavior, and that vertical integration
reduces this problem of opportunism. (Ola Kavoloy, 2003). Vertical Integration or
make vs. buy decision has been described as the paradigm problem of TCE.
Monteverde and Teece (1982 b), made the first test of vertical integration examining the
effects on asset-specificity, for the decision to produce components internally or

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externally. They sorted out list of 133 automobile components each coded as either made
or bought. There thesis is that the greater is the applications engineering effort
associated with the development of any given automobile component, the higher are the
expected appropriate quasi-rents and, therefore, the greater is the likelihood of vertical
integration of production for that component (cited by Shelanski A. Howard and Klein
G. Peter, 1995)

If there is no asset specificity or investment specificity, we have a competitive market
with no need for contractual incentive schemes. Then the old rule would apply, saying
that the best manager of an asset is its owner. (Ola Kavoloy, 2003)

Analyzing all the five interviews and the literature review it can be said that buying helps
to get variety of goods and services, and the firms have different choices to select the best
suited for their firm i.e., which product or service are better for their stores and for the
growth of the firm, which is not possible in manufacturing in-house.
According to the firm 1 It is much more efficient to do regular business, well calculated,
than forcing turnover, because the spiral of increasing turnover results in delusion of the
real profit situation. Over proportional increase of turnover looks busy, but decreases the
success of all members of the company and the necessary happiness of everybody
to work together successfully. So the circle is closed to have a happy private life
and enjoying the profession. Some firm think its better to do less work rather than
increasing the turnover and do quality job. This leads to the conclusion that people can do

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regular business activities rather than getting involved in the complex activity of
manufacturing. This will also save the firm from capital investment and trying to get
more and more result from the same.
In every business there are some amounts of minimum monthly costs like rent,
electricity, staff, telephones, etc. and it is necessary to overcome these expenses and earn
profit. It is also necessary to see what the profit margin is. If firms sells their products at
a lower margin then they will have to look at internal manufacturing also so that the cost
of the goods becomes less, but then at the same time like firm 6 if the profit margin is
high then it is better to concentrate on the core activity like regular sales and its
development rather than internal manufacturing of the goods.
According to the firm 3 the question of make or buy depends from job to job. Some
things are better to be done internally whereas others are better to be bought from the
market. Our clients keep the core activities in-house and outsource non-core functions.
Generally sampling and activities at which the clients are specialized are kept in house
and rest are outsourced. Also when it comes to bulk quantities the jobs are outsourced
rather than manufacturing internally.

According to the firm 2 Well this of course is a very complicated question. It depends
from company to company, firm to firm whether to make or buy. For one company
manufacturing may be the only option whereas for the other company getting thing done
from outside and manufacturing both may be suitable. Therefore it depends. But this
question was responded and answered very clearly in an explicit manner by the Purchase

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manager of firm 4 which says that if a firm is looking from a short term point of view and
which is well within the efficiency set of the firms in-house development and production
team, the first thing the firm should do is to evaluate the same from the market and judge
between the two, I would always happily recommend that you should go for in-house job
rather than buying from external sources. But if a firm is looking from larger and longer
term-view concept and which is not within the efficiency and capacity set by the firms in
house development and production team and where there is leader in the same group
available in the market chosen by all the other firms in the same industry, his preference
would always be buying rather than in-house manufacturing. According to his experience
even if the buying would appear expensive here he will always opt for this option only
because unless there is a planning or have any interest of becoming competitor with that
leader which is available in the market he will always find its products cheaper in the
long-run.


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4.3 Advantages and Disadvantages of Outsourcing:
What are the advantages and disadvantages of outsourcing?
If we look at outsourcing from a laymans point of view, the activity of outsourcing
would appear as a waste of money, time and energy, as well as an unnecessary
complication. Why is it necessary to send business to some other company in the same
country or abroad, when the work can most likely be done better at home? If we look
outsourcing from a legislators point of view, it serves as an objection to captivating jobs
of our own countrymen. Different people have different view points to the same term.
But if we see outsourcing from a businessmans point of view, it is a fortunate thing
allowing businesses to outsource the noncore activities of the business, leaving the
businessmen free, to totally concentrate on the core activities of the business and the
areas of the company where it specializes.
Undoubtedly the most attractive and dynamic advantage of outsourcing is the cost
effective reason. Labour, IT and other services in the Europe are very expensive if we
compare to India and China. Lets avoid complicated business language and say that the
activity of outsourcing is principally an option that offers these services at a much lower
rate but highly productive mass work force. For example in India, more than thousands of
highly intelligent individuals graduate in number of fields every year, having high
ambitions. Most of them speak better English than the English people. Business Process
Outsourcing has boomed in India in the last few years has given these highly ambitious
individuals a chance to realize there dreams. This also helps them to stay at home or close
to home and earn rather then going abroad and taking jobs. If we see on an average basis,

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an individual would earn 200 to 350 per month which is petite sum to a British
individual, but an Indian would be relatively happy with this salary taking into account
the exchange rate. In the situation of outsourcing both the companies; the company
outsourcing and the company to whom it has been outsourced enjoys the advantages.
(http://EzineArticles.com/?expert=Beneifer_Irani as cited on 2/7/2007)
Table: 9: ADVANTAGES OF OUTSOURCING
According to The 2004 Outsourcing World Summit, top 10 reasons for Outsourcing
(percentage terms) are as follows: -

Source: The 2004 Outsourcing World Summit

INNOVATION
(3%)
CONSERVE CAPITAL (3%)
IMPROVE QUALITY (3%)
GROW REVENUE (4%)
ACCESS TO SKILL (9%)
VARIABLE COST STRUCTURE (12%)
IMPROVE FOCUS (17%)
REDUCE COSTS (49%)

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The above diagram illustrates seven advantages in terms of percentage; innovation,
conserve capital and improving quality (3%), growth of revenue (4%), access to skill
(9%), variable cost structure (12%), improvement (17%) and mainly to reduce costs
(49%).

The advantages of outsourcing are as follows: -
Low cost expertise and cost saving.
According to firm 2, The main advantage of Outsourcing is less capital investment and
the things can be outsourced at cheaper rates. The first force for many companies is the
fact that outsourcing is cost effective. We know that economies of scale reduce costs
because the unit costs go down as volumes increase. External suppliers can attain
economies of scale, which is unavailable to the individual companies outsourcing when
they work for numerous companies.
For example in manufacturing, an external supplier having a shop that specializes in a
certain type of machining requires a significant capital investment. If generously
proportioned machines are more economical and efficient, and if the same can be used to
manufacture any type of parts for any clients, then this supplier may very well
manufacture parts at a lesser cost than a company could by setting up such a shop within.
Also secondly due to labour costs difference India and China can produce the same
output at a much lower cost than in Europe for producing the same output.
http://www.sourcingmag.com/content/c051011a.asp#authors by Dean Meyer on
6/08/2007

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Outsourcing can help you share risk.
In finance during investment in shares, it's always best to spread your investment in
different stocks i.e., diversifying portfolio rather than putting all your investment in one
stock. This helps to lower down the risk. But now the question arises why diversification
reduces risk? This is right, for example if the market as a whole goes downward; you'll
lose. But in the situation of the diverted investments even if the market goes down its not
necessary that all the stock invested in will go down, some stock might do well and
therefore it will put you in a better situation than if you would have invested all your
money in one stock. This is also true in business investments. Outsourcing helps to share
risks among numerous companies. For example in a manufacturing plant, if all work is
being done under one roof, problems like labour disputes etc. will put you out of your
business but if you spread your business to different plants, therefore a labour dispute in
one plant would not effect the work of other plants. Therefore the risk is reduced.
(http://www.sourcingmag.com/content/c051011a.asp#authors by Dean Meyer on
6/08/2007)
Outsourcing can help in developing internal staff
It is to be noted that outsourcing in the right way can help in developing the internal
employees of the company. Two strategies can accomplish this:
1. Suppliers can be used to relieve of less appealing "commodity" or end-of-life work.
This offers staff free and independently to pursue new, developmental chances.

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And at the same time on the other hand, suppliers should never become conversant with
new, growth-oriented activities while internal employees is left with old-fashioned work.
This would refute the employees learning opportunities, while building dependent on the
supplier. Indeed employees may think that the company is not interested to invest in their
professional growth.
2. Consultants and the suppliers can be used to bring in new ideas and to train internal
employee.
6/08/2007
Scope for improvement in the quality of the products
Due to outsourcing there are higher chances of improvement in the quality of the
products. This is due to the reason that the external supplier may have better ideas and
new developed technologies for the production. Also because the goods or services are
transferred in the hands of professional experts and skilled labours in that particular work,
the job can be executed more efficiently.
Opportunity to focus on core business
Companies outsource only non-core business activities leaving the core activities to be
nurtured in-house. This allows the companies to focus more and diverting their minds
towards the core activities. For example from my personal experience gained during my
work, a fashion garment or a leather goods manufacturer cum retailer may have their core

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activity as sampling but they may outsource there production to external suppliers. This
helps the company to focus with full attention towards the sampling of the new designs
and models leaving the production for the external suppliers. Firm 3 states that the
advantage of outsourcing is lesser cost and can focus on other primary works.
World-class solutions and expertise are accessed
Due to outsourcing to external suppliers in home or foreign country world-class solutions,
ideas, technology, and expertise can be accessed which is not possible when all the work
is done under one-roof.
Other advantages of outsourcing are as follows: -
Frees up space that can be put to alternative uses
If the task outsourced had done in-house, then it would have required some space for
conducting out the activity. But due to outsourcing the space can be used for some
alternative use.
Frees up management time
It helps the management to take out time for other regular functions of the business.
Management can focus or concentrate on other business activities and gain or achieve
better results.


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Can reduce cash outflow
Outsourcing helps to reduce cash outflow. If the manufacturing of a product has to be
done in-house only then it would have required some amount of cash flow in terms of
capital expenses, labour cost etc. But due to outsourcing the cash flow is reduced.
Competitiveness is enhanced
The knowledge and skills of the external supplier and procurement of the goods/functions
at a cheaper price enhances the firms competitiveness. Also by outsourcing firms are
exposed to variety of goods and this way they are not restricted to limited products.
Inside resources are freed for other purposes
Similarly like space the in-house resources can be utilized for other purposes.

Capital funds are made available
The capital funds which would have been utilized and fixed in the activity outsourced can
now be available and can be utilized if necessary for other investments. It is of great
strength in the market if the firm has surplus capital.
Operating expenses are reduced and controlled
The cost of the firms operation are reduced and controlled better than before outsourcing.


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Disadvantages of Outsourcing
Outsourcing can provide a shortcut to a more competitive product, but it typically
contributes little to building the people-embodied skills that are needed to sustain product
leadership (Prahalad & Hamel, 1990). Attention is repeatedly given to what a company
does rather than its implicit organizational skills, which can form prolong competitive
benefit. Eastman Kodak disintegrated its camcorder production to save on what they
supposed to be too substantial investment of capital in technology. But they finally
realized that the internal skills, knowledge etc which they could have gain through
internal production would have given them better and strong competitive advantage.
(Leavy, 2004).

According to Prahalad & Hamel, external suppliers may gain more information and
knowledge of the outsourced product and they can use it to begin advertising the product
themselves (Prahalad & Hamel, 1990). Chinese supplier of bicycle frames to UK firm
Pachley became a direct opponent once it had built up its know-how and knowledge via
the outsourcing relationship between the two (Quinn & Hilmer, 1994). Companies
outsourcing should therefore put into effect more care and attention when outsourcing
certain activities but this presumes that they are capable of spotting which functions they
can safely outsource to better or cheaper suppliers correctly (Quinn & Hilmer, 1994, Kak
& Sushil, 2002). Also sometimes for example if the skills are lost it becomes very
difficult to bring the activity again to in-house or internal which was outsourced.


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Among the firms interviewed number of firms mentioned that irrespective of numerous
advantages, outsourcing also has few limitations for example delays in the shipment, loss
of control, inferior quality, slow responses to the queries.

The following are some of the disadvantages of outsourcing: -
Loss of control
Due to contracting out the activity to the third party or the external supplier the control
over the activity is also transferred to the external supplier and therefore the company
contracting out the activity loses control over the same.
Among the firms interviewed two firms believes that the disadvantages of outsourcing is
loosing control over the job to other person. According to the firm 1 there is not always
control of outsourced tasks, but the selection of the right partners, keeps the rate of
mistakes lower, than doing all tasks in the own company. Although there is loss of
control over the job to external suppliers but if the right external supplier is chosen then
even if the control is transferred along with the job, it would hardly matter because he
will take care of the good or services. It is very essential that the company outsourcing
select suppliers who can easily work alongside. Outsourcing does not mean transfer of
jobs or service to the external suppliers only, there has to be a close collaboration and
sound communication between the two for the successful output. Therefore it becomes
very important to make sure of the fact that the supplier is right for the company
outsourcing.

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Also firm 4 state that Once the job has been outsourced outside of the Spain we have no
uniqueness on the product, so a guy in India, Thailand, and China wherever can produce
exactly the same things for others.
Quality problems
Sometimes due to ignorance or in hurry inferior quality of goods or services are supplied
by the external suppliers
Slow response time
In the boom period there is sometimes very slow response time from the external
suppliers which ultimately delays in all work.
Language barriers
One of the biggest problems of offshore outsourcing is that language problem. Due to this
there are often misunderstandings between the two parties involved.
Sometimes doesnt produce the desired results
Sometimes in outsourcing the company does not get what was expected. This can be due
to many reasons.
Irritated customers due to delay of shipment
Due to delays in shipment, inferior quality of goods etc. the customers get irritated from
the external suppliers or its agent. According to the firm 4, Customers in big companies

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are not concerned even if you have given good service for last so many years. If you
make one mistake everything comes to an end. Customers are not sympathetic. Theyre
not interested in excuses if its not on time its a lost sale.
External suppliers can't handle volume of activities during the peak time
During the peak time the external suppliers are unable to handle the volume of orders
from its client and often these results in delays of shipment or inferior quality of goods.
According to the firm 2 Months before Christmas and New year all our customers will
place orders for the goods and everyone will ask to ship the goods before Christmas.
Therefore we have to take care and pay our full attention that we ship all the goods on
time as it makes no sense sending the goods after Christmas. It becomes very difficult
for the companies to handle and manage the production and distribution department
during the peak time.
Firm 6 outsource their logistics and during the peak season time sometimes extra smaller
deliveries are made between the stores for the exchange of merchandise and due to which
this form of outsourcing proves very costly.


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4.4 The Future of Outsourcing:
What is the future of outsourcing?
There are a number of limitations of outsourcing which can cause problems for the
growth of its industry as firm 4 thinks that in future companies will prefer manufacturing
rather than buying from the external sources. According to firm 4 it is very essential part
of a business to have owners control over the production, which is handed over to the
external supplier in outsourcing. In future government of the European countries should
take some legal regulations as outsourcing also creates unemployment problems in the
country, which can cause decline in the industry. Whether to outsource or not depends on
individual business and there line of work. According to the logistics manager of firm 6-
any outsourcing firm, which concentrates on the jobs, and services, which are difficult for
the business to obtain, will have a bright future.
But irrespective of the disadvantages there are various advantages and facts, which
represents that in future the outsourcing industry will grow more. Selection of the right
supplier and working with him side by side can give the same or better results. We can
also see that outsourcing is in itself is an industry.
Outsourcing is not just about cheap wages prevailing in another country but the fact
discovered by many executives is that it is all about the corporate growth, better use of
internal staff and even creation of employment. It does not only reduce cost but at the
same time boosts quality also. (http://yaleglobal.yale.edu/display.article?id=6908 as cited
on 21/07/2007)

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Outsourcing is increasingly done in complicated and difficult areas also. It has been
known as familiar business practices for ages but due to the change in the Global
markets, developments in the technology and the communications, there has been more
competition prevailing in the market. This resulted in the change of nature of outsourcing
concept taking more strategic hue.
It is better for the retailer to focus on what to produce rather than manufacturing. This
helps them to concentrate more on the regular business functions than complex
manufacturing activity. Outsourcing in the past was very restricted but if we see figures
of Outsourcing industry today, we can see that there has been a drastic change and it has
gone up very rapidly. In todays cut-throat market where the customers need better
product for lesser price, more companies are looking towards cost reduction.
Due to globalization, Outsourcing irrespective of its limitations will definitely grow
more and more. If we analyse, in the past very few companies used to Outsource but now
we see many companies outsourcing. It (outsourcing industry) will definitely grow in the
near future. These days companies not only outsource in the domestic markets but also to
the foreign markets. (Partner, firm 2) Firms are eyeing on the developing countries
more these days.

If we see that international trade exhibitions are held each year in every field all over the
Europe. The main participants in these exhibitions are the Asians from India, China,
Pakistan, Bangladesh, Korea etc. The council bodies like Council for Leather Exports,
International Production Association, and Foreign Trade Promotional Council are

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regularly in touch with the organisers like Messe Frankfurt, Intertex etc. to book large
area for the companies in their countries. This helps direct face to face communication
between the supplier and the companies and also new companies build new relationship
with new suppliers. These trade exhibitions are expanding and growing every year to
promote more jobs to the Asian countries and more business deals are taking place than
the past. For example Messe Frankfurt organizes more than 120 trade exhibitions every
year. The company sources represents that there are 65,000 regular exhibitors from all
over the world where 70% are the Asians and over three million visitors from all over the
world.

Table: 10: ASIAN COUNTRIES LEATHER EXPORTS
Asian Exporting Countries of Leather and Leather Products
Values in Thousand US$
Country 2001 2002 2003 2004 2005
China 14691959 16160702 19240562 21464307 25727392
India 1969620 1875214 2204958 2386500 2777518
Source: Council for Leather Exports
The above chart represents the value of exports of leather and leather products from India
and China is increasing every year. This shows an increasing tendency in sourcing goods
from these two countries.
According to firm 1, Because of international globalisation, outsourcing has become
more important, because contract partners take hard experience, if regress takes place. In

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addition, tasks like warehousing, drive your attention away from, in our case sales and
own targets can not get reached. Further outsourced tasks are calculated in the
product prices.
Due to the advantages of outsourcing in being able to know the costs of the services
before in advance without unwanted overheads or surprises and if the margins of the
profits are able to absorb the extra costs, outsourcing can achieve better results for the
company (Firm 6). In our opinion outsourcing should get much more forced, because
better results can be achieved, if all participants concentrate on their main business and
do them professionally. Example a) internal warehouse: our experience is, that even in
high season the optimum capacity is not more than 60%. Out of season the lower capacity
increases loss, because employment and overhead costs have to be paid anyway. Example
b) External warehouse: the costs for shipment are higher, but taking all costs into
consideration, the result is about 30% reasonable. (Sales Advisor firm 1).
Outsourcing to India and China are expected to grow and take on some of the more
complex outsourced tasks also at the same time, as more workers are now skilled than the
past. The language problem is now not a barrier to outsourcing industry any more.
According to the firm 4 More people today know English and many are learning, as
English is now a global language and people are becoming aware of it. English is a
language which is now wide-spread among all the countries of the world and people are
becoming aware of the importance of the language.

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Irrespective of the disadvantages and the negative forecasts about the likeliness for the
growth of outsourcing industry, there are still a number of firms eyeing to outsource
goods or services in future due to its advantages. A recent Hewitt survey indicates that
only 53% of the companies are currently using offshore services, and that another 11%
are committed to doing this in future.
(http://www.blogsource.org/2005/03/outsourcing_has.html cited on 29/08/2007). This
clearly indicates that in future more companies will start investing in the outsourcing
industry.
Although the companies are making huge investments, they all have similar needs i.e., to
reduce overheads as much as possible. Two out of the four firms interviewed also named
Business Process Outsourcing (BPO) as an upcoming trend. According to the C.E.O. of
the firm 3, Business Process Outsourcing refers to the growing development to relocate
entire business activities to outsourcing vendors, normally in low cost places. There has
to be a strong relationship between the parties involved for the success. Due to the
advantages companies get from the cheap labour and lesser amount of capital investment
in developing countries, numerous companies have setup secondary units or appointed
suppliers in India and in other places and this will continue in the future also. There is an
increase in the companies setting their units in developing countries because they can see
the companys future there.
It is believed that offshore outsourcing i.e., outsourcing to foreign countries will continue
to grow. According to the firm 4" Outsourcing is growing in terms of industry as well as

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in geographic dimension. More and more companies are investing in Outsourcing
industry. Their individual needs are all similar i.e. overhead cost reduction as much as
possible and if the existing trend will continue, outsourcing industry will grow more in
the near future. Offshore outsourcing are more likely to grow and more and more
companies will outsource their jobs to countries where labour costs are lower.
According to the study cited by Global Insight Inc offshore Outsourcing will create more
than 337,000 jobs by the end of the year 2010. If more jobs are outsourced it will create
more employment to the countries where the job has been outsourced. Therefore
according to the survey there will be rise in the offshore outsourcing in the coming future,
which will create more employment.
The increased importance of offshore outsourcing in comparison to the domestic
outsourcing can be presented from the chart below where we can see clearly that there
has been drastic increase in the ratio of imported to domestic production in some
European countries over the years.


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Table: 11: Ratio of imported to domestic intermediate inputs for textiles, apparels
and footwear
Ratio of imported to domestic intermediate inputs for textiles, apparels and footwear
Country Early 1980s (%) Mid/late 1980s (%) Mid/late 1990s
France 15 26 42
Germany n.a. 49 64
U.K. 19 33 48
Source: Audet (1996) as cited in Peter Barrar and Roxane Geravis, 2006
Outsourcing as in the present, in the future also will be considered as a necessary
business skill. According to the companies, outsourcing does not help in reducing costs
but also at the same time assure to advance companys business performance and
successful operations.
Where do you see outsourcing after 5 years from now? When I asked this question to the
Indian company where I use to work, he replied that in the past the people working in the
European firms never used to do any sort of business with us, but today the scenario has
changed and they are always willing to keep us busy with their work. It is an undoubtedly
award of money, agreements for the present and successful future for the Indian
companies.
If the retailers make sure that what is in their mind to gain from an outsourcing activity,
they can then convey that to the outsourcer so that they can increase the efficiency and

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gain outsourcing benefits. Business Process Outsourcing (BPO) will include IT
outsourcing and mainstream BPO expenditure is likely to grow worldwide by 10 per cent
a year from $140 billion in 2005 to over $220 billion by 2010. (Source: Logica CMG
study)
4.4.1: The future trends of outsourcing are as follows:
(http://www.outsource2india.com/trends/future_outsourcing.asp as cited on 28/08/2007)
1. The cost of outsourcing will rise in the future but this will not effect outsourcing
as the cost will be higher everywhere.
2. More and more countries will discover outsourcing as attractive. Following the
guide of the UK and the European Union bazaars will increase there off shoring
activities and will increasingly look to China and India for its needs.
3. Due to its limitations companies outsourcing will take more care and greater
control in driving and designing deals. But this will be beneficial for the success
of the contract.
4. The relation between the countries due to offshore outsourcing will create
steadiness, as companies will put stress on the governments to keep away from
wars.
5. Risk factors, natural disasters and economic disorders can throw a disturbance in
work.
6. The rise in the price of oil will set growing pressure on the companies to both
make use of technology and to outsource to remain profitable also it will cause oil

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consuming countries like the USA to be less competitive resulting in more
outsourcing to India and China.
7. India will show superiority in Services and functions that require advanced
English.
8. Political counterattack over outsourcing is expected to lessen over time as
economies strengthen and companies continue to reap the benefits of off shoring.
9. There will be shifting of the technological power from the West to East as India
and China come forward as big players in the global outsourcing market. The two
countries have the size and weight to make over the 21st century global economy.
10. It is estimated that by the end of 2015 China will be the leader followed by India
in the global top five outsourcing destinations.
Also because today outsourcing has become such an integral part of the business
functions that even the government of all the countries are removing quotas on trade
import and export to promote outsourcing. Due to this removal of the quotas now more
and more companies will take the initiative to invest in import and export and the
companies already used to outsource will outsource more in the future.
The important role of outsourcing in delivering advantages to business will continue to
evolve and increase; developing business services and needs in the future.


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5.0 Conclusion:

The main purpose of this dissertation was to explain and generate insight into outsourcing
in the European retail industry to India and China and the problems and challenges that is
caused due to this activity. Extensive evaluation of literature on this topic was done from
the various journals, books, periodicals, press releases which helped to give a clear
picture of the topic studied. Also the six firms selected for the interview helped a lot
through the interviews and their matter was used as an important tool for the purpose of
this dissertation.

Above cited matter in this dissertation clearly states that the developing countries like
India and China are among the top two hot destinations for the European retailers to
outsource there business functions or activities. India and China both posses some
qualities like man-power, cheap labour, good English speaking, highly developed skills
etc. which make them the most preferable outsourcing destination in the world. India and
China both the countries have highly skilled labor force and their skills are getting more
enhanced due to the various factors like emerging markets, boom in the economy,
improvement in the education and technology co-operations from Europe.

If we see the main decision appearing behind the Outsourcing is reduction in cost, but the
results from the research put forward that the change in the competitive business
atmosphere has forced this reaction and discloses how much reduction in the cost is
important for firms to remain competitive today. All the firms interviewed had cost as the
central reason behind the decision of outsourcing but other factors like responsiveness,

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quality of goods and services, punctuality were also included. This means that the main
decision behind the Outsourcing can be cost reduction but it can also be approached with
concerns beyond minimization of costs. Companies do try to reduce cost as far as
possible but not paying price for the poor quality or bad services. Every company tries to
reduce cost or gain maximum output from the cost incurred. Outsourcing if properly
implemented can make retailers and other firms more competitive than others but it cant
be just saving money or reducing cost beyond that. Generally in Europe the retailers
outsource for the following advantages it offers to the organizations.

Focus more on core competencies;
Access to experts, new and latest technologies and skills
Reduce cost;
Lesser capital investment;
Eliminating the necessary for recruiting, training and retain staff in the non-core
activities of the business.

The decision to outsource is a major concern for any firm dealing with questions like
what, where, how and why to outsource. It is a much more complicated task then it seems
to be. It is of great importance for the firms to utilize and incorporate multiple internal
and external factors for outsourcing to be successful. Despite of the several advantages
mentioned above it is not necessary that every firm or retailer outsourcing business
functions achieve the desired results, there are companies which fail to implement the
strategy of outsourcing. Sometimes it gets difficult to handle the offshore outsourcing

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relationship due to various factors like long distance between the two parties involved,
cultural difference, lack of communication, loss of control and so on. If implemented
correctly with full care and attention using all the available factors the desired result out
of outsourcing can be achieved. One of the main concerns of every firm interviewed was
the transfer of control to the external suppliers along with job.

Undoubtedly there are various advantages of outsourcing that helps the firm to gain and
sustain competitive advantage in the market. Firms generally outsource to reduce cost but
behind this main reason there are other reasons also. Whatever be the reason behind
outsourcing we have seen the advantages of outsourcing in the firms success. But the
cost driven theory does not necessarily work everywhere and every time. In the past and
also today many European firms failed to either implement the outsourcing strategy or
have not gained success from outsourcing. A cost-based move towards is justified and
acceptable but this approach stands for only one route, and it does not necessarily mean
that implanting with this approach promises successful outsourcing. Other criteria also
must be considered and included to make successful implementation of outsourcing,
rather than cost reduction as main driver for outsourcing.

A company outsource there non-core functions of the business and the core functions are
generally kept and nurtured in house only to sustain and be competitive to the others in
the market. It is of great importance to deal with the question what to make and what to
buy i.e. which function or activity of the business should be done in house and which
activity or functions to be passed on to the external suppliers. Also deciding or answering

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this question requires careful attention towards the matter. The question has to be dealt
from both long-term and short-term viewpoints. Keeping in mind the above other
necessary factors such as core competency, suppliers reliability and availability etc.
should be considered before going for any of the two. Some work is better to be made
whereas some work is better to be bought. Innovative and specialized firms should not
pass on there skills and knowledge to outsiders rather should keep them in house only.
New ideas or developments passed to the external supplier may result in the copy of the
idea and development and as a result the firm will not gain first mover advantage.

However irrespective of the disadvantages of outsourcing the business functions, we have
seen increase in this industry. Outsourcing has gained attraction from more and more
firms and retailers than in the past. In past only limited companies used to outsource to
limited countries only. There has been sharp increase in offshore outsourcing also. More
and more firms are eyeing on outsourcing their jobs to the developing countries. It has
been seen from the literature review and the interviews that in the future the outsourcing
industry will gain more and more attraction and will increase undoubtedly. It can be also
concluded from the above that the future of outsourcing is Business Process Outsourcing
(BPO) and of course offshore outsourcing.


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th
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Logica CMG study


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Interview: 1

1. What is your Company background nature of business, years in business, turnover,
and number of employees, etc?
Ans: The Company BrandMotion is doing product development, design, sales
and maintenance of the brands Corklifter, KitchenTools and Brown Bear.
The company was founded four years ago as a profit centre that not only gets its
variable gross margin by trading, but by licensing or by compensation for use.
Therefore turnover is minor important, because turnover is not equal to
productivity.
Our turnover in 2007 = 650.000 (planned), 4 employees
2. What is your designation and how long have you been with the firm?
Ans: My personal position is Sales Advisor and I'm working at BrandMotion for
almost 1 year, a long-term relation is planned.
3. How do you reduce cost? Difficulties faced in doing so?
Ans: Several tasks in a trading company get outsourced to different companies
or suppliers. On one hand the contra of outsourcing is, that there is no direct
access, but it is given by controlling the supplier or outsourcing company. The
pro is that you can concentrate on the main business ref. to product development
and sales and can calculate outsourced tasks. Disturbances in case of illness
or i.e. does not influence you.
4. What processes does your firm currently outsource/vertically integrate and why?
What percentage of the business do they represent?
Ans: The following tasks are outsourced: a) warehouse, fixing of single
components to a finished product. In total you can say at the size of our
company, that the monthly costs are reduced by 60% and higher product costs
are calculated into product an do not effect overhead costs.
5. What form does the outsourcing take i.e. purely contractual, managed, JV, wholly
Owned? How do you manage the outsourcing relationship?
Ans: Outsourced tasks are secured by contracts and mistakes or wrong
shipments get charged. An outsourcing company, i.e. packing company, can
work much more efficient and professional, than an own warehouse with shipping
department. Nobody can do every job successful.


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6. Which is better make vs. busy?
Ans: It is much more efficient to do regular business, well calculated, than forcing
turnover, because the spiral of increasing turnover results in delusion of the real
profit situation. Over proportional increase of turnover looks busy, but decreases
the success of all members of the company and the necessary happiness
of everybody to work together successfully. So the circle is closed to have a
happy private life and enjoying the profession.

7. What are the pros and cons of Outsourcing according to your experience?

Ans: As mentioned earlier, there is not always control of outsourced tasks, but
the selection of the right partners, keeps the rate of mistakes lower, than doing all
tasks in the own company

8. What is the future of Outsourcing?
Ans: Because of international globalisation outsourcing comes more and more
important, because contract partners take hard experience, if regress takes
place. In addition, tasks like warehousing, drive your attention away from, in our
case sales and own targets can not get reached. Further outsourced tasks are
calculated in the product prices.
9. Given the chance would you make the outsourcing decision differently? From
Your experience what advice would you offer other firms for deciding what and
How to outsource?
Ans: In our opinion outsourcing should get much more forced, because better
results can reached, if all participants concentrate on their main business and do
them professional. Example a) internal warehouse: our experience is, that even
in high season the optimum capacity is not more than 60%. Out of season the
lower capacity increases loss, because employment and overhead costs have to
be paid anyway. Example b) External warehouse: the costs for shipment are
higher, but taking all costs into consideration, the result is about 30% reasonable.

Thanking you very much for your kind co-operation and your patience.


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Interview: 2


We are manufacturer and exporter of small leather goods and embroidered silk fabrics for
our European clients. These clients are in different countries of Europe like Germany,
France, Italy, Spain and Greece. Either the clients are designers looking goods for their
boutiques or big retailers having numerous chains of shops over the countries. Some
clients do not deal directly and therefore a middleman exists for the transaction between
the two.

I have been in this business since last twenty years. Currently there are 30 employees
and the turnover of the firm is around 1 million Euros.


I am a Partner of the firm and have been associated with this firm since last 20 years.


We generally give the jobs on contract to our suppliers in order to complete the job. This
helps us to reduce fixed cost of the firm whereas the same work is done outside with
lesser capital investment and fixed cost. The difficulties faced in doing so are the control
over the suppliers and their delivery time.


Generally we do entire manufacturing of our products in house only but around 20 % of
the manufacturing work is given to the contractors as this helps us to save time and get
the work completed outside the factory. Also this helps us to concentrate on more
important works.


Managing the outsourcing relationship is difficult and complicated task that is why some
people try to avoid it but then due to its advantages the complications has to be solved.
We generally state all the terms and conditions in our agreement and monitoring the same
helps us to manage the relationship between us.


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6. Which is better make vs. buy?

Well this of course is a very complicated question. It depends from company to company,
firm to firm whether to make or buy. For one company manufacturing may be the only
option whereas for the other company getting thing done from outside and manufacturing
both may be suitable. Therefore it depends.


The main advantage of Outsourcing according to my experience is less capital investment
and the things can be outsourced at cheaper rates and disadvantages of outsourcing are
loosing control over the job to other person.


Due to globalization, Outsourcing irrespective of its limitations will definitely grow more
and more. If we analyse in the past only very few companies used to Outsource but now
we see many companies outsourcing. It (outsourcing industry) will definitely grow more
and more in the near future. These days companies not only outsource in the domestic
market but also to the foreign markets.

How to outsource?

According to my experience, firms should outsource their non-core activities. The core
activities should not be outsourced. Outsourcing if done in wrong way can prove negative
for the companys result. Therefore proper medium, with full attention and care should be
taken to outsource any product.



September 2007

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Interview: 3


Ans: Import and wholesale of small leather goods, since 1981, with own stock
Import and wholesale of promotion items, since 1999, without own stock (buying
only the ordered quantities by other importers)
Turnover: CHF 2, 5 Mio
Number of employees: 3


C.E.O.
Since 1986 in company


Cost reduction by cost comparison in buying - but it is also very important to get
a good quality for an appropriate price. So it does not serve to us and to our
clients when getting a very low price but also the quality of the goods is terrible.
When you tend to go for lesser price you cannot expect high quality always.
Even it is difficult to handle the supplier and the clients when things go wrong in
the goods. Quality comes before the price and also quality is the base of the
firms strategy and they will not negotiate this for the products they have kept in-
house just to match overseas pricing.
Keeping the employee "stock" on a lowest possible level


We generally outsource goods for our clients who have stores all over the country. These
goods are either in the form or semi-finished or finished goods. They represent 60 % of
the total business.


Purely contractual. Mistakes, delays in shipment, inferior quality goods etc all are
penalized. The contract is carried out in a professional manner with all the points related
to contract is stated on the agreement.



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Depends from job to job. Some thing is better to be done internally whereas some things
are better to be bought from the market. Our clients keep the core activities in-house and
outsource non-core functions. Generally sampling and activities at which the clients are
specialized are kept in house and rest are outsourced. Also when it comes to bulk
quantities the jobs are outsourced rather than manufacturing internally

Pros: lesser cost and can focus on other work
Cons: delays in the shipment lose of control, inferior quality.


Business Process Outsourcing refers to the growing development to relocate entire
business activities to outsourcing vendors, normally in low cost places. There has to be a
strong relationship between the parties involved for the success. Due to the advantages
companies get from the cheap labour and lesser amount of capital investment in
developing countries, numerous companies have setup secondary unit or appointed
suppliers in India and in other places and this will continue in the future also

How to outsource?



September 2007

91
Interview: 4


Manufacturing and retailing based in Spain from last 11 years.
Turnover = 8.5 million Euros (approx)
No of employees 17


Purchase Manager


If a customer can buy a pair of Jeans from a store for 5 to 10 Euros he or she only needs
to wear that jeans couple of times, not always and then throw away. Consumers are more
prices oriented and the retailers sell what the consumer wants

Cost reduction is not an easy task. It is a complicated network and a challenging task.
Reduction of costs is not necessarily reduction of specific expenses only. It is also
sometimes very difficult to reduce costs in an increase item but then you can try to get
you more output from this expense and thus increase your profits.


Works like warehousing, logistics, and other goods and services are generally outsourced
representing around 40 to 50 % of the work.


We have a joint-venture relationship in our logistics department and others are purely
contractual.


If you are looking from a short term point of view and which is well within efficiency set
of the firms in-house development and production team, the first thing the firm should
do is to evaluate the same from the market and judge between the two, I would always
happily recommend that you should go for in-house job rather then buying from external
sources.

But if you look from large and long term-view concept and which is not within the

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proficiency and capacity set of the firms in house development and production team,
where there is leader in the same available in the market chosen by all the other firms in
the same industry, my preference would always be buying rather than in-house
manufacturing. According to my experience even if the buying would appear expensive
here I will opt for this option only because unless you are planning or have any interest of
becoming competitor with that leader available in the market you will always find its
product cheaper in the long-run.


Numerous advantages are gained due to outsourcing like cost-reduction, utilization of
resources, focusing in the core business.

Disadvantages of outsourcing is loss of control for example once the job has been
outsourced outside of the Spain we have no uniqueness on the product, so a guy in India,
Thailand, and China wherever can produce exactly the same things for others.

Secondary delay in the shipment causes many complications in our business. Customers
in big companies are not concerned even if you have given good service for last so many
years. If you make one mistake everything comes to an end. Customers are not
sympathetic. Theyre not interested in excuses if its not on time its a lost sale.

More and more people today know English and many are learning as English is global
language and people are becoming aware of it. Outsourcing is growing in terms of
industry as well as in geographic dimension. More and more companies are investing in
Outsourcing industry. Their individual needs are all similar i.e. overhead cost reduction
as much as possible and if the existing trend will continue, outsourcing industry will
grow more in the near future. Offshore outsourcing are more likely to grow and more and
more companies will outsource there jobs to countries where labour costs are lower.

How to outsource?

Refer to question number 6.



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93
Interview: 5


We are into retailing of garments and fashion accessories based in Greece. The firm was
incorporated in the year 1995. The last two years have been wonderful for the firms
growth and our current turnover is 6 million Euros. We have 11 permanent employees in
our firm and the rest are part time working at our stores.


My designation in the firm is Purchase Manager and I have been associated with the firm
since last 4 years.


Reducing cost is very essential to gain competitive advantage. On one hand the firm
looks for growth and on the other hand there is always a demand to reduce costs. Both the
things have to be done simultaneously. We generally contract out activities like human
resource, billing, pay-roll, goods for resale to third party. This helps the firm to reduce
the cost and gain professional skills at the same time. The strategy reducing cost and at
the same time which does not compromise on the firms growth is a very tricky situation.
As it is said that Your job is to trim the fat not cut into the bone. We also have to
carefully handle the situation keeping an eye on what is happening around.


We are into retailing business and not manufacturing. Therefore if we see around 75 to 80
% of our business functions are generally outsourced.


The form of outsourcing depends on the conditions but the most outsourcing are on
purely contractual basis.

6. Which is better make vs. busy?

For us it is always buying rather than make. This helps us to get variety of goods rather
than manufacturing the same goods for our stores and we have an option to select from
variety of sources which product or goods are better for our stores and for the growth of
the firm.


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The only problem we face with outsourcing is in outsourcing to foreign countries. They
sometime lacks discipline and for this reason problems come in our way like late delivery
of the goods, inferior quality of goods, slow response to the queries etc.


There are lot of disadvantages and due to which I guess in future more and more
companies will prefer to manufacture rather than buying from the external sources. To be
successful in the market it is very necessary for a firm to have control on its products but
that is handed over to the external suppliers in outsourcing resulting in the loss of control
over the product. Also it creates employment in the country outsourcing and the same
will be governed by the legal legislators in the future, if not today.

How to outsource?

As told you in the above question, in the future the outsourcing industry will definitely
decrease due to the disadvantages mentioned above therefore according to me a firm
should outsource only very small percentage of there business functions if required.



September 2007

95
Interview: 6


Our company Boch is a retailer of ladies fashion accessories with 14 shops in Madrid,
Spain. We sell brands such as DKNY, Guess, Tommy, Pepe Jeans as well as our own
label BOCH. The company was founded over 10 years ago and our turnover in 2006
was almost 5 million euros.


I am the logistics manager & handle all imports and distribution.


To reduce transportations costs on imports we now plan our buying six months in
advance. By this, we no longer use air transport & all our shipments are by sea. This
reduces our costs by 7%. However the disadvantage being that trends for fashion items
are constantly changing.

4. What processes does your firm currently outsource/vertically integrate and why? What
percentage of the business do they represent?

We use the services of a transport company for distribution form our warehouse to each
retail outlet. The cost is higher than using our own transport, but we are not affected by
illness, vacation period, vehicle breakdown. This is very important in retail because if
goods do not reach the stores on time, sales & reputation is affected.


Purely contractual. If merchandise is not delivered on time then the transport company is
penalized.


In all business there are minimum monthly costs, such as rent, staff, electricity, etc. Our
profit margins are high so we concentrate on regular sales. However turnover increase in
Christmas period is always higher than the rest of the year.


September 2007

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In our case outsourcing transport is practible at the beginning of each season
(winter/summer) where regular & large deliveries are made from our warehouse to the
stores. However during the season extra smaller deliveries have to be made between
stores, exchanging merchandise & outsourcing in this case has become too costly.


It all depends on individual business & line of work. I think any outsourcing firm which
concentrates on services which are difficult to obtain will have a bright future.

9. Given the chance would you make the outsourcing decision differently? From Your
experience what advice would you offer other firms for deciding what and How to
outsource?

The advantage of outsourcing in being able to know the costs of the service in advance
without unwanted overheads or surprises. It all depends on volume & if the margin of
profit cans absorb the extra cost.
Is it worth paying more for piece of mind?


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