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What Are The Different Types Of Outsourcing?

Outsourcing, according to CIO, refers to the “business practice in which services or job functions are farmed out to a third party.” Companies of all sizes outsource certain services or functions, often as a means of minimising costs and/or as a means to focus on key services or functions.

In 2022, different types of outsourcing exist. This is the result of differing company or country priorities, as well as other external considerations such as geopolitical environment, geographical location, and legal compatibility.

In this week’s article, we will be discussing the different types of outsourcing and each types’ current trends. Types of outsourcing that will be discussed include: Offshoring, onshoring, nearshoring, reshoring, right-shoring, and friendshoring. It is important to understand the differences between the types of outsourcing, especially when deciding on the appropriate type of outsourcing.

offshoring (600 × 350 px)

Offshoring

Forbes describes offshoring as the act of relocating production from more expensive regions to less expensive regions, as a means to cut down overhead and production costs. Goods produced in offshore factories are then shipped back to the company’s home market. 

Offshoring in recent years has helped foster a more liberal and integrated global economy. Supply chains are now often built around offshore production sites. However, when the Covid-19 pandemic began, companies were forced to strengthen existing supply chains, states the New York Times.

Onshoring

On the other hand, Bloomberg describes onshoring as the process of relocating production within domestic borders. Companies, respite relocating, are still therefore based in their original country

Onshoring used to be the norm in the past. However, it can be argued this is no longer the norm in modern manufacturing. Though, recent global events such as the US-China Trade War and the Covid-19 Pandemic has seen the resurgence of these types of outsourcing. More on this later.

Nearshoring

Nearshoring also prioritises minimising supply chain vulnerabilities. However, while onshoring often sees companies relocate production back home, nearshoring sees companies relocate closer to home and, more importantly, closer to consumers and end users, writes the Wall Street Journal.

Nearshoring implies similar challenges as onshoring. The recent US-China Trade War had scared some companies enough to nearshore, especially following Biden’s push for nearshoring. Though, these companies have faced supplier issues, with companies nearshoring to Latin American experiencing shortages of the right raw materials, production quality, and corporate networks.

Reshoring

Reshoring essentially refers to when companies that have relocated production abroad return to home soil and home markets, writes the Brookings Institute. Evidently, while offshoring prioritises cost-saving reshoring prioritises minimising vulnerabilities, especially supply chain vulnerabilities.

The aforementioned Covid-19 supply chain disruptions made the concept of reshoring a promising endeavour. However, reshoring is not so simple. Areas that have not had production sites in quite some time and now see production returning often have inadequate infrastructure and do not possess a compatible labour force, according to the Washington Post.

Right-shoring

Right-shoring offers a more theoretical  understanding of outsourcing. According to Forbes, it promotes a brand of outsourcing that emphasises the need to consider multiple variables, the most important of which are volume, technology, lead-time, price, and certification, among others.

"The goal is to achieve the best overall margin performance and highest level of customer satisfaction. The definition of “right,” of course, differs for each company. Yet 70 percent of the high-tech executives surveyed by UPS said improved service levels were the top priority behind their decision to pursue a near-shoring strategy. Better control over product quality and intellectual property, as well as the need for manufacturing diversity, were additional factors," writes the Wall Street Journal.

Friend-shoring

Friend-shoring, a phrase coined by President Biden, emphasises the need to foster economic relations between US companies and US foreign allies. According to Bloomberg, it advocates for the relocation of production to allies with similar values, not only to foster stronger economic relations but also to strengthen economic resilience.

The Biden Administration report on friend-shoring, "Building Resilient Supply Chains, Revitalizing American Manufacturing, and Fostering Broad-Based Growth," had the following to say. “Methods of guarding against single-source risk in the critical minerals supply chain, for example, is limited in part by where natural resources exist. Tools including ally- and friend-shoring, and stockpiling, along with investments in sustainable domestic production and processing will all be necessary to strengthen resilience.” 

Conclusion

There are multiple methods for outsourcing production. From offshoring, onshoring, nearshoring, reshoring, right-shoring, and friend-shoring. All methods have their benefits and detriments.

Of course, it is worth noting that, in light of the United States- Association of Southeast Asian Nations Summit held on the 12th-13th of May, the US considers Southeast Asia as a key friend-shoring destination.

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