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Deciding on In-House Production and Outsourcing Cost
Many companies make outsourcing or in-house decisions primarily to reduce headcounts and costs. Mainly, companies consider different types of expenses involved in creating a product and service, including monitoring, transactional, labor, waste disposal, and storage requirement costs. International and local organizations adopt the outsourcing strategy if obtaining goods and services from an outside supplier by a contract reduces the cost of production. Contrarily, the firms can also decide to maintain in-house productions if the production cost remains low compared to outsourcing. For instance, the Samsung Company decided to move a fifth of its production to China to reduce the overall production cost. The realms top smartphone manufacturer took advantage of the cheap Chinese labor and the availability of the raw materials to reduce their overall cost of production. Hence, outsourcing the products or carrying out an in-house output depends on the overall production cost.
Area of Expertise
Assessing a companys skills helps the respective firms pick the most suitable option between outsourcing and in-house production. Although the original equipment manufacturers are natural experts in their product manufacturing, they might consider adopting the outsourcing strategy to take advantage of the other peoples ideas entrenched in the manufacturing process. Indeed, many companies consider the idea of outsourcing if other companies contain additional knowledge and skills that may bring unexpected benefits to the respective product. Other companies decide to use an in-house production strategy since they possess the necessary technologies to produce quality products. For instance, international companies like Volkswagen, American Airlines, Amazon, and Paypal outsource information technology from International Business Machines Company (IBM) due to their expertise in the field. These international companies rely on IBM for staff augmentation, talent acquisition, procurement strategy, consulting services, financial planning, and analysis because that is its area of specialization. Ultimately, the companys level of expertise is a vital factor to consider before making essential decisions about in-house production or outsourcing.
Level of Flexibility and Reliability
The decision on where to maintain in-house production or turn to outsource largely depends on the firms level of flexibility. Companies need to analyze the flexibility of their values, processes, and vision before deciding on their manufacturing process. Less flexible companies should adopt the idea of in-house production to maintain central management, whereas highly malleable firms can adopt an outsourcing strategy to produce goods. For instance, many companies outsource customer services from a privately-owned company in Florida known as XACT. The ability of the company to meet the needs of both large and small firms may influence a companys decision on outsourcing or in-house production. Ultimately, the flexibility of the outsourcing company greatly influences the original product manufacturers verdict regarding outsourcing and in-house production.
Similarities Between Coase and Williamsons View on Free Market for Short-Term Contracts
Coase and Williamson agree that companies should maximize their profits by creating a gap between the revenue and the costs. Precisely, before making any decision regarding the means of production, the original product manufacturers should consider all forms of charges, including search, transaction, coordination, and contract fees. In his theory of the firm, Coase argues that an excellent organizational structure allows people to offer services to people within the firm, which reduces the costs encountered in the free market. Similarly, Williamson points out that the criteria of organizing the commercial transactions lie precisely on price economizing. According to him, the economization of the expenses takes two major segments, namely, the reduction of the production and transaction costs. Oliver Oliver Williamson expanded transactional cost economics, previously established by Ronald Coase. For example, Nike gained a competitive advantage and increased its profit margins by reducing costs and bringing its manufacturing process close to the raw materials. Hence, Coase and Williamson agree that haggling costs are vital for two independent contractors to make a relationship-specific investment.
Differences Between Coase and Williamsons View on Free Market for Short-Term Contracts
The examination of Coases and Williamsons arguments from their seminal contexts shows some differences in the transaction cost economics. Their works contain three major conflicting features: realistic vs. instrumentalist methodologies, pragmatic vs. calculative views of economic agents, and the description of transactional cost as natural cost agents vs. analytical devices. Unlike Coase, Oliver Williamson proposed that the combination of environmental and human factors causes organizational failures and leads to corporate and market failures. For instance, the contract between the Royal Bank of Scotland and their IT vendor failed due to a lack of trust in handing over to the government and inability to access money, making the customers move their businesses to other banks. Additionally, the transactional costs in Coases article remained non-operationalized, an idea that Oliver Williamson challenged. Coase describes transactional costs as actual expenses confronting relevant agents, and agents recognition in such expenditures causes institutional structuring. Differently, Williamson interprets transaction costs as the friction economic counterpart in physical systems, which serve as analytical tools for economists to identify the location of frictions and subsequently shift the analytical focus to agents opportunistic behavior regarding transaction attributes.
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