Outsourcing

Revise Outsourcing for Commerce 7100 (O Level) — revision notes, 2 practice questions and instant AI marking.

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Cambridge O Level Commerce 7100

Outsourcing

The big idea: More and more businesses keep the jobs they are best at, such as design, brand and customers, and pay specialists to do the rest. The two biggest areas of growth are making the product (contract manufacturing) and moving and storing it (logistics).

Summary — What This Chapter Covers

Outsourcing is hiring an external business to carry out work the business could do itself.
Contract manufacturing: another firm makes the product, to the business’s design and brand.
Outsourced logistics: a specialist firm (a third-party logistics provider) transports, stores and delivers the goods.
Outsourcing has grown because of global supply chains, cheaper communication, ecommerce, pressure to cut costs, and specialists with expertise and scale.
The growth brings risks: less control of quality and delivery, dependence on suppliers, and ethical and reputation risks.

1. What Outsourcing Means

Syllabus 2.2.1 · Papers 1 & 2

Paying a specialist to do it

Definition · Outsourcing A commercial practice in which a business hires an external business (a third party) to perform tasks, provide services or produce goods that were previously, or could be, done by the business itself.

Outsourcing is the opposite of in-house production (compared in the Production note). This note is about why outsourcing has grown, and the two areas where it has grown most: contract manufacturing and logistics.

2. Contract Manufacturing

Syllabus 2.2.1 · Papers 1 & 2

Your design, someone else’s factory

Definition · Contract manufacturing An agreement in which one business (the contract manufacturer) makes products for another business, to that business’s designs and specifications, often under that business’s brand name.

Many well-known brands of phones, trainers, clothes, toys and medicines do not own the factories that make their products. The brand owner designs the product, markets it and sells it; the contract manufacturer, often in a country with lower costs, makes it.

Benefits to the brand owner	Drawbacks to the brand owner
No need to buy factories and machines, so capital is released for design and marketing	Less control of quality: faulty products harm the brand, not the manufacturer
The manufacturer specialises and produces in high volumes, so the cost per unit is often lower	Risk that designs are copied or leaked
Access to expertise and modern equipment the business could not afford	Depends on the manufacturer’s reliability; delays or the manufacturer closing stop supplies
Output can be raised quickly for a large order or a busy season, and cut when demand falls	Long distances add transport time and communication problems
New products reach the market faster	Ethical risk: poor working conditions in the factory damage the brand’s reputation

Worked example

A business needs 10,000 phone cases. Making them in-house costs $3.20 per case in materials and labour, plus $18,000 to hire and run a machine for the year. A contract manufacturer will make them for $4.10 each. Calculate the saving from using the contract manufacturer.

In-house = 10,000 × $3.20 + $18,000 = 32,000 + 18,000 = $50,000
Contract manufacturer = 10,000 × $4.10 = $41,000
Saving = 50,000 − 41,000 = $9,000

3. Outsourced Logistics

Syllabus 2.2.1 · Papers 1 & 2

Moving and storing goods for someone else

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Also in the full note

The forces behind the trend
Outsourcing in longer answers

What's inside

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Outsourcing

Outsourcing

Paying a specialist to do it

Your design, someone else’s factory

Worked example

Moving and storing goods for someone else

Past papers that test Outsourcing

More Commerce topics