5.4.2—Reorganizing production

Outsourcing or subcontracting transfers an activity to an external provider; offshoring moves an activity to another country, whether internally owned or outsourced; insourcing brings an activity under the business's own control; reshoring returns an activity from abroad to the home country.

Outsourcing or offshoring may reduce cost, add specialist capability or increase flexibility, but can weaken quality control, expose supply chains and create coordination, ethical or reputation risks. Insourcing or reshoring may improve control, speed, intellectual-property protection and local employment, but requires investment, skills and potentially higher operating costs.

Separate the ownership decision from the geographic decision, then evaluate total cost, quality, control, flexibility, capacity, supply risk, employment and reputation. Include transition costs and whether the firm has the capability to perform the work internally.

A clothing business can outsource sewing to a specialist in its home country without offshoring, or reshore overseas production and keep it outsourced to a domestic supplier. These choices have different effects on ownership, logistics and employment.

Outsourcing does not necessarily mean abroad, and offshoring does not necessarily mean using an external supplier. Lower wage rates do not prove lower total cost once logistics, defects, delays and risk are included.