Assume you have been hired as a managing consultant by a company to offer some advice that will help it make a decision as to whether it should shut down completely or continue its operations. It currently uses 100 workers to produce 6,000 units of output per month (working 20 days / month). The daily wage (per worker) is $70, and the price of the firm’s output is $32. The cost of other variable inputs is $2,000 per day. You are told that the firm’s fixed cost is “high enough” so that the firm’s total costs exceed its total revenue. The marginal cost of the last unit is $30.
Rough Financial Statement
$ per Unit
Price Per Day
Number of Days
The company currently represents one of the last apparel manufactures that still manufactures all of its products in the United States. The company has been able to maintain its U.S. operations despite rising costs because the target market is in a niche that allows the company to charge a premium. All of the other manufactures in this industry have outsourced their entire manufacturing operation to foreign markets to take advantage of cheap labor and lower their operating costs. Mexico has bene a popular destination for a bulk of the industry given its proximity to the United States. However, this company call, U.S. Custom apparel, has decided to continue production in the U.S. because it supports their market niche. Furthermore, the company has a built a loyal customer base that values the fact that the company uses domestic labor and it willing to pay a premium for these goods.
However, at the same time, the company’s strategy is not profitable nor does it show any future potential. The current gross profits are roughly twelve thousand dollars before fixed costs are considered. Therefore, when fixed costs are added, it is reasonable to suspect that the company is operating at a substantial loss. While U.S. Custom Apparel can produce goods at roughly five dollars to twenty dollars per unit, many of the competitors can produce comparable products often with comparable quality for a fraction of the cost (Institute for Global Labour and Human Rights, 2005). Therefore, the time has come for the company to decide if its operating model is sustainable any longer given the competitive environment.
One of the emerging business trends that have helped companies keep their expenses down is that many are outsourcing a lot of administrative business functions. In the global market, small to medium sized enterprises (SMEs) can outsource entire business functions in order to keep their internal staff levels down. It is not only SMEs that have taken advantages of outsourcing opportunities in other countries such as India and China. Apple Inc. has grown to one of the world largest companies and still relies on outsourcing of production to manufacture its consumer goods (Lo, 2011). In many cases, outsourcing also allows firms who focus on some narrow niche to concentrate on their areas of expertise and let others handle other business functions they are not as comfortable with (Lesonsky, 2012).
One disadvantage to outsourcing internationally in developing markets is that these countries often lack the judicial system to protect property rights (Goldberg, 2009). However, since the design of U.S. Custom Apparel does not consist of any trade secrets, it is unlikely that there would be substantial risk by outsourcing some of its non-critical business functions. Given that U.S. Custom Apparel has built a niche and markets themselves as manufacturing their product domestically, the company would literally have to reinvent itself if it outsourced the entire production process. However, there are likely many compromises that could be made to outsource as many business functions and process as possible yet have the final product be assembled in the United States.
The global business environment also suggests that the company really needs to reduce its expenditures and exposure to another global downturn. The global recession reduced many consumers access to disposable incomes which in turn had implications for the entire retail industry. One effect of the recession is that consumers chose more economical purchases of clothing and were less likely to purchase high-end items (PRWEB, 2012). Since U.S. Custom Apparel customers pay a premium for their goods this puts the company at a disadvantage in the event of a recession. Therefore U.S. Custom Apparel should seek to outsource as many business functions and non-critical process to overseas partners. This would allow them to maintain some domestic presence as well as lower their total overhead.
Goldberg, P. (2009, December). Intellectual Property Rights Protection in Developing Countries: . Retrieved from Yale University: http://www.econ.yale.edu/~pg87/Goldberg_Marshall.pdf
Institute for Global Labour and Human Rights. (2005, June 20). How Can Wal-Mart Sell a Denim Shirt for $11.67? Retrieved from Institute for Global Labour and Human Rights: http://www.globallabourrights.org/reports?id=0042
Lesonsky, R. (2012, May 2012). The Pros and Cons of IT Outsourcing: Globally, Nationally and Locally. Retrieved from Read Write: http://readwrite.com/2012/05/17/the-pros-and-cons-of-it-outsourcing-globally-nationally-and-locally
Lo, C. (2011). Global outsourcing or foreign direct investment: Why apple chose outsourcing for the iPod. Japan and the World Economy, 163-169.
PRWEB. (2012, January 13). Global Footwear Sales to Reach U.S.$195.6 Billion by 2015, According to a New Industry Report by Global Industry Analysts, Inc. Retrieved July 3, 2012, from http://www.prweb.com/releases/footwear_sports_leather/athletic_footwear/prweb9101683.htm