Outsourcing is the process of delegating the activities of an organization to other companies for efficient functioning and also to reduce the cost of running the business. Even though the non-core activities are mostly outsourced, there are many companies that outsource their core activities like production and sales to other organizations. Outsourcing the production or manufacturing function is a common practice seen among both the big multinational corporate and the small companies. Some of the advantages of outsourcing the manufacturing activities of a company are as follows.
Lower Labor Costs
The labor cost is the main expense incurred while producing a commodity. The labor cost varies depending on many factors including the work environment and also depending on the complexity of the work. The cost of labor will also vary from place to place. Therefore, one of the best method to reduce the cost of production is by outsourcing the activity to place where the labor cost is low. This will enable the producer to gain higher profit from the commodities produced.
Fuel is an overhead cost that is mandatory for the production process. All the machineries that are required for the manufacturing require fuel to run. The fuel can be either electricity or petroleum, diesel, etc. Whatever it be, the charge of fuel will be different depending on the location of the factory, i.e. if it is situated at any special industrial zone, the charge of electricity will be lower compared to other places. Therefore, it is better to handover the production process to places where the fuel cost is lower to reduce the cost of production.
Support Increased Demand
Sometimes, the demand of a commodity may increase in the market all of a sudden. Such demand may last for a long term but in most of the cases, it will be only for a short period or for a specific season. Therefore, to increase the sale during such time, it is better to increase the production. But if the company is getting demand for more than their maximum capacity, it is better to outsource the excess demand than establishing new production units. It will help in both increasing the revenue and also in reducing the capital cost.
Outsourcing the core activities of a business is effective in certain circumstances to increase the profit and also to reduce the revenue expenditure of a company. It also helps to sell goods at much lower rate and increase the customer base of a company. Therefore, outsourcing the core production process is better for a company to increase the profit and growth.