Outsourcing Manufacturing Far-Reaching Breaches US

Outsourcing Manufacturing

FAR-REACHING BREACHES

US Regulatory Agencies

federal government has 50 or so regulatory agencies, which are empowered to create and implement rules and regulations with the full force of the law (Longley, 2011). Examples are the Food and Drug Administration, Environmental Protection Agency and the Occupational Safety and Health Administration. They can fine, sanction, force to close or even prosecute individuals, businesses or any private or public organizations, which violate federal regulations. The rulemaking process creates and enacts federal regulations. This begins when Congress passes a law in recognition of and tackling an economic need or problem. The existing and appropriate regulatory agency creates the necessary regulations to implement the law. Acts by regulatory agencies are called "enabling legislations" as they empower the agencies to create the required regulations to implement them (Longley). These agencies are also called U.S. regulators.

International Businesses

Globalization is a gradual process, which began in the earlier centuries but has intensified in the past two decades because of the interdependency of nations. However, economic, political and legal systems and the cultures of societies still differ (Hill, 2007) Hence, international businesses confront many issues, mostly ethical in nature, in their operations. Ethics refers to the accepted belief on what is right or wrong. Business ethics refers to accepted principles of right and wrong in the conduct of business. There are a number of ethical issues in international business (Hill). Outsourcing manufacturing is one form of international business. Multinational managers must be aware of and sensitive to these differences and be guided by these in their decision-making function. The most common ethical issues in international business grow out of employment practices, human rights, environmental regulations, corruption and moral obligation of corporations (Hill).

Ethical Issues

Employment Practices

When work conditions in the host nation are largely and plainly inferior to those of the multinational corporation, the issue on which standard should be enforced arises. The standard may be replicated in the host nation or some divergence may be allowed. But the issue is the extent of divergence (Hill).

Human Rights

What is considered basic human rights in developed nations may not be present in the host nation (Hill, 2007). Examples of these basic rights are freedom of association, freedom of speech, freedom of assembly, freedom of movement, and freedom from political oppression. A multinational corporation in a host nation without these basic freedoms needs to know if it should operate in that nation and what actions to take to avoid the problem from developing (Hill).

Environmental Pollution

Developing nations often lack effective regulations on emission of pollutants, dumping of toxic wastes, and the use of toxic materials in the workplace, for example (Hill, 2007). One consequence is a higher level of pollution from the operations of the multinational corporation. Does it have the right to pollute the host nation? Doing so contributes to global pollution by operating where it can pump out pollutants into the atmosphere or its oceans and rivers. Decisions such as these violate basic standards of ethics and social responsibility (Hill).

Corruption

There will always be corrupt government officials in any host nation (Hill, 2007). A multinational corporation can always pay bribes to these officials to gain economic advantage for its operations. Some economists contend that corruption reduces return on investment of the business and results in low economic growth. Corrupt officials in the host nation who demand bribes in exchange for permission to operate can drain the business' profit. This reduces the business' incentive to invest as well as slows down the nation's economic growth rate. Corruption affects both the bribe giver and the bribe taker. It becomes very difficult or impossible to withdraw once the exchange starts (Hill).

Moral Obligation

Some believe that an international business or multinational corporation has the moral obligation to give back something to the society or nation, which contributes to its prosperity and growth (Hill, 2007). This is called "noblesse oblige" in French and refers to the benevolent and responsible behavior of a successful business. That business makes social investments, meant to further the welfare of the communities where the business operates. Some international businesses recognize this obligation (Hill).

Outsourcing Manufacturing

An international business that relies on outsourcing often finds it difficult to maintain control over its operations in the host country (Magno, 2008). It also discovers it must make ethical operational choices and to take better control of its outsourced production. Difficulty in managing the supply chain does not free the business from ethical responsibility to its customers (Magno).

The Promise of Emerging Economies

Recent healthcare reforms have focused on emerging economies, like China, for the manufacture of products (Jack, 2010). Earlier, U.S. President Obama demonstrated this through measures, such as lifting restrictions on stem cell research and nominating influential individuals to run the FDA and the National Institutes of Health. This coincided with the heightened concern by U.S. regulators over the globalization of the health and pharmaceutical industry. They are particularly apprehensive about the inclination towards low-cost outsourced manufacturing overseas. They respond to this new trend through increased factory inspections and warnings (Jack).

These new pressures from established markets have led to unprecedented diversification by large pharmaceutical companies (Jack, 2010). Many of them, including their smaller and specialty manufacturers, have expanded into these fast-growing markets abroad, particularly China. Many of the have increased their product range to adapt to the new situation. Manufacturing has shifted from patented medicine into new fields such as animal health, generic drugs, vaccines and other consumer healthcare and related options in the face of uncertainties involving prescription drugs (Jack).

Motivations for Outsourcing (Marzec 2011) eHow

Outsourcing provokes controversy because it moves jobs and money out of the home country into another (Marzec, 2011). Despite this, companies continue to outsource for specific reasons, which motivate them more strongly. These are cost, components, proximity, core competency, and expertise. The cost of electricity, labor and real estate is far less in the host country and the companies thus save on money. Some of these companies specializing in manufacturing components outsource specific parts produced by smaller companies in the host country. Specific examples of such components are LED diodes. Proximity is another motivation. It is cheaper to ship products the outsourcing company sells abroad from the host country closer to where the source of the products. AU.S. company, for example, finds it cheaper to manufacture products in Thailand to sell in Japan and then ship them through the Pacific. Core competency also drives outsourcing decisions. Some companies are better at manufacturing while others are more effective in marketing, branding, research or retail. Wal-Mart observes this advantage by outsourcing to companies abroad. And expertise in specific areas abroad is another motivation. Italians are experts in leather works while Afghanis are renowned embroiderers (Marzec).

Medical Outsourcing

What used to be a low-end, back-office type of work has become a popular global business. Outsourcing of complex services, such as medical diagnostics, has made India a favorite country because of its cost-effective labor (Joo, 2008). India was previously reputed to produce cheap Western medicines and sell them to developing countries. Its expertise in medicine manufacturing received a boost with the strengthening of patent law and cost pressures on prominent drug manufacturers in the West. India's drug industry has since grown 13% and earned over $24 billion. It also plans to embark into pharmaceutical research and development. Cheap labor allows India to discover and develop new drugs at "a 10th of the cost" otherwise heavily incurred in the United States (Joo).

The recent pharmaceutical boom in the country has its own risks. The major risk concerns product quality (Joo, 2008). USFDA cited several violations by Ranbaxy, the largest pharmaceutical manufacturer in India. Sanofi-Aventis withdrew the vaccines turned out by Shantha Biotechnics after vaccine users complained about white sediments in the vials and floating matters in plastic IV bags. Pfizer also withdrew injectible drugs manufactured by Claris Life Sciences, which were sold in the United States. The U.S. FDA, however, came to the rescue of India by preventing substandard and contaminated drugs from entering the U.S. It set up offices in India and plans to propose stronger regulation to concerned pharmaceutical companies and suggest a greater sense of responsibility towards product purity and safety. In the meantime, lower costs and avoidance of strict regulations remain strong motivations in pharmaceutical outsourcing. These motivations also suggest that other problems are likely to develop (Joo).

Options

Outsourcing manufacturing presents advantages as well as disadvantages (Marie,

2010). It enhances competitiveness with more opportunity use advanced technology and to reduce overhead costs while increasing production. The savings can be used for training, equipment and labor. The business also becomes more attuned to sudden changes to its advantage. It is likely to incur less expense and effort on a new product, for example. It will only need to present new specifications to a contractor who will manufacture a new product instead of reformatting the entire facility for the same objective. Moreover, quality control will not reduce revenue. The defects will be the concern of the local manufacturer and not that of the business. This, again, will mean savings on waste, labor and shipping. As a desirable consequence, outsourcing will boost the host country's economic condition by providing affordable products to the citizens. This enhances consumer spending (Marie).

Outsourcing manufacturing, however, encourages dependence on the outsourcing partner (Marie, 2010). This is a disadvantage on the side of the contractor if the partner goes out of business. Fortunately, this can be offset if the parts for manufacturing are distributed to different contractors and all the elements sent to a final contractor to assemble the finished product. Cost and time other disadvantages. Tests will require more time for fine tuning before distribution. These processes cannot be avoided. However, strategic planning with the right outsourcing partner may prevent or eliminate the risks of outsourcing manufacturing internationally (Marie).

Ethics and Social Responsibility

These issues can develop in connection with future employees and contractors (Marie, 2010). Hiring an international project manager instead of one from the United States illustrates this issue. Even if both of them possess the required skill, the international employee speaks more languages than the one from the U.S. But the employee from the U.S. is connected with the outsourcing partner and an issue develops from here. Social responsibility is another issue. This can evolve from child labor, waste disposal and product safety situations. The business has the social responsibility to carefully monitor each contractor on his way of handling production. The best way the management of the business can handle these issues is to avoid them. It can develop procedures and guidelines drawn from real-life situations and problems. These should be communicated in writing and thoroughly explained to everyone involved (Marie).

Outsourcing manufacturing decisions by international business should be based on skill, capital and social responsibility (Marie, 2010). It should carefully evaluate and weigh the advantages and disadvantages of every decision before making it. It should consider other options in facilitating manufacturing if other factors surface. Over and above, the business should be sensitive to dilemmas that arise from ethical and social responsibility and that sensitiveness and readiness should form part of the role of management (Marie).

Case Study: Nike

Nike makes $10 billion in annual revenues and sells its products to about 140 countries without manufacturing them (Hill, 2007). Nike only designs and markets its products, which its contractors manufacture from a global network of 600 factories. These factories are owned by subcontractors, which employ approximately 550,000 workers. This highly successful international enterprise has been cited for decades by repeat and persistent accusations. Nike's subcontractors are said to manufacture the products in sweatshops where many of the workers are children whose working conditions and wages are way below subsistence levels. Its critics see Nike's huge success and wealth as being built upon the burden and disadvantage of the world's poor. It is viewed as a symbol of exploitation and oppression. It engages these poor people to turn out expensive shoes and clothing for the rich in the developed world. This is why Niketown stores have become the regular targets of protesters, especially by human rights groups for human rights, environmental, political and social justice. The media have exposed the grim working conditions of factories, which produce Nike products (Hill).