Type: Economics
Pages: 9 | Words: 2425
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With the decreased cost of transport making trade across international boundaries ever more feasible for small to smaller organizations like Leethal Fashion Accessories to seek to reduce overheads by outsourcing key aspects of the production process. It can be argued that while outsourcing is an increasingly necessary activity that smaller companies must engage in to remain competitive. Doing so successfully will require strong commitment on the part of the organization to choose suppliers carefully based on the riskiness of the external environment factors. The costs of dealing with foreign business practices weighed against the potential savings, how a supplier’s home country compares against alternative destinations and the feasibility of controlling quality and the company’s image over great distances.

Identify the external environment factors that would have impacted on a business like Leethal Fashion Accessories when attempting to access the Indian manufacturing scene for its production

While India is attractive to companies like LFA for the cheap labor costs, there is a wide variety of external factors that may have affected their penetration of the Indian manufacturing industry. India’s infrastructure lags far behind that of the west and even China. While large multinational companies can afford to build up infrastructure to support their offshore activities, small firms like LFA should work with whatever is in place. Power outages are an almost daily occurrence in India, sometimes lasting for days at a time, content power outages in a factory can negatively affect productivity and consistency of the quality of the delivered products. The transport network is also creaky. Any supplier not directly located next to an air cargo terminal would have to ship products via India’s notoriously dangerous roads to the nearest port of embarkation. The road system, despite a multi-billion dollar improvement scheme, is still mostly limited to speeds of fewer than 30 km per hour due to the large numbers of antiquated vehicles still on the road. As a result of this, if a company like LFA insists on fast and reliable shipment terms from suppliers, the supplier may prove unwilling or even unable to meet the schedule.

Despite being a country in which English is commonly spoken, standard business practices are very different in India. Power distance is much higher in India, which means that outsiders often have difficulty securing any time with a decision maker without benefit of a mutual acquaintance to make the introduction. Local standards for quality, which are significantly lower than in western countries, could likely have made the search for a supplier able to meet LFA’s quality criteria a long and arduous one.

Rampant corruption among minor government officials is another issue that could have been an issue while LFA was developing relationships with potential suppliers. While they would have been spared the arduous process of getting a business license in India, they would still be exposed to extortion from customs officials at the products point of disembarkation. This is a risk that bears significant gravity upon small companies like LFA. Large investors in India would not likely see many attempts to extort money as a complaint to the higher-ups would have consequences. A smaller organization like LFA would have to attempt to navigate the labyrinthine Indian bureaucracy to even report any such event. Deciding to simply pay a dishonest official off would be a very risky strategy to this problem, as the Austrade website makes it clear that bribery of government officials, at any levels, is considered a serious crime.

2.What are the issues confronting all Australian manufacturing businesses that make India a desirable outsourcing destination? What effect do these factors have on Australia?

In spite of all these challenges, the economic argument for taking advantage of the India’s competitive labor costs is a strong one for Australian companies. Liberalization of global trade practices has made the movement of goods affordable to even small organizations like LFA. Specifically beneficial to textile importers like LFA, under the World Trade Organization (WTO) Agreement on Textiles and Clothing, the textile quota scheme of quantitative import limitations under the multi-fiber arrangement (MFA) came to an end on 1st January, 2005. With elimination of the import quotas and steep reduction in trade tariffs, the cost benefits of moving products over vast distances rather than producing them locally has become quite significant.

Like all Western Economies, Australia has much higher labor costs than those found in the developing world, as is illustrated by Australia’s per capita purchasing power parity GDP of $40,800 USD (2011) of compared to India’s of $3,700 (Index Mundi 2012). In addition to needing to provide a relatively high salary to the workers, there are other costs associated with hiring native workers such as pension costs and other insurance requirements that a firm outsourcing to a country like India would find itself far less exposed to as a result.

Direct labor costs are just a part of the equation. Outsourcing the production removes the need for a company to buy, maintain and insure expensive manufacturing equipment. The company no longer needs to maintain account managers to handle relationships with suppliers of all the elements that go into each garment. Additionally, if the company wishes to employ a new production method, there is no need to invest in any new technology; all they need to do is to switch to a supplier that already has the desired procedure in place.

This dynamic has several implications for Australian economy. While the native labor force is too small for outsourcing of menial manufacturing tasks like textile production to become a source of discontent from an element of society who may feel their jobs have been “stolen”, it does mean that Australia over the course of time will lose the ability to produce any of these types of goods at all, besides, perhaps, a handful of luxury producers. However, there are benefits to be enjoyed by all. By tapping into low-cost opportunities elsewhere, the overall costs borne by Australian consumers will be reduced. The increased ratio of imports will protect Australian exports to India by narrowing the large trade deficit between the two countries. This decreases the chances of future draconian measures on the part of India to restrict the entry of Australian goods into the Indian market to improve their national balance of payment ratio.

Therefore, an Australian company outsourcing its manufacturing reduces both its fixed and variable costs significantly, enabling it to accomplish most of its needs with a small and nimble local workforce, while indirectly benefiting the Australian economy on the whole. With so many benefits to be gained by outsourcing manufacturing, it is understandable why many companies would entertain the notion of outsourcing production to a country like India.

3.Do a search on the Austrade website for the regulations to import and export from India. What are the advantages for outsourcing to India as compared to other countries you might identify? (You will need to mention the website in your reference list-this is not one of the six required references it is an extra reference)

As beneficial as Indian market conditions are to small Australian manufacturers, these benefits could alternatively be gained by outsourcing to any other country. According to Austrade, there are some obvious benefits to doing business in India. The shared commonwealth connection and large percentage of the population that speaks English makes communication easier than might otherwise be the case. Austrade notes that India’s government is committed to continuing the economic liberalization policies begun in 1991 and is actively encouraging foreign competition in a variety of sectors. An additional aspect worthy of consideration for companies seeking to import from India is that India would surely like to see their trade deficit with Australia narrowed.

Many importers might be more comfortable working with a more established, high-volume trading partner, such as China, Australia’s largest competitor. Despite the case studies’ claim that Chinese manufacturing is geared towards very high volume clients, a search on alibaba.com, a major import-export portal, will reveal many China-based textile manufacturers with minimum order volumes of 500 units or less. Transportation infrastructure has been heavily invested in to meet the demand of the many international manufacturers that have operations there and is far superior to that found in India. While there is a wider cultural gap and personal relationships are still more important for doing business than they may be in Australia, Australian companies may likely find the Chinese attention to punctuality of deliveries and meeting times easier to deal with than the relatively casual attitude towards time that is still common in Indian business practice. However, China’s low-cost labor advantage is starting to slip, as indicated by double-digit increases in the minimum wage in manufacturing-focused provinces like Shenzhen .

Another low wage alternative to India would be the Australia’s closest neighbor, Indonesia. With a labor cost advantage superior even to India’s, Indonesia also has long been a destination for offshore manufacturing, particularly for the textile industry. Additionally, Indonesia is a member of ASEAN, a regional trading block which concluded the ASEAN, Australia, New Zealand Free Trade Agreement (AANZFTA), which entered into force on the 1 of January, 2010. Since it only takes a couple more days to ship goods from India as opposed to Indonesia, such deals could result in a higher degree of savings for Australian businesses. The trade agreement, combined with the proximity of the two countries, should make it an increasingly popular destination for Australian outsourcing of manufacturing. However, while security situation is better in Indonesia than in India, the state of the national energy and transport infrastructure is on par with India’s, and while it is geographically close, vast cultural differences still make trade between the two nations a challenging procedure, as indicated by the relatively low trade value of only about $5 billion in either direction.

4.What types of control challenges face Leethal Fashion Accessories in outsourcing to India and how would they address them?

Maintaining control of LFA’s operations in India is the most crucial challenge the company must deal with if the arrangement is to be successful over the long term. One factor that may aid them in this is the increasing propensity for Indian firms engaged in outsourcing to act only according the client instructions within a rigid field of interpretation. While this tendency would be frustrating to a firm seeking innovation from its supplier, it suits a textile manufacturer which provides designs and specification like LFA perfectly.

However, just because a supplier is committed to following the spirit of a client’s instructions, there is no guarantee that they will abide by the letter of their promises. The lower expectation of unit quality brought about by the abundance of “Knock off” goods in countries such as India means that a company engaged in outsourcing production will need to be proactive in monitoring its suppliers, especially at the beginning of the relationship. Since it would be uneconomical for a small firm like LFA to station a permanent supervisor near its suppliers, it will need to make due t a combination of guarantees provided both by the supplier as well as reputable third parties. Fixing a compensation penalty for shipments that contain an unacceptable ratio of defective goods is one way to enforce the quality standards, although it cannot be too severe at the risk of either putting the supplier out of business or leading him to cancel the contract. A method commonly used by companies buying goods sourced overseas is to employ the services of an internationally recognized quality assurance firm.

In addition to the previously discussed cultural differences and difficulty of maintaining the quality control, not directly supervising day to day operations could lead to LFA being blasted in the press for using child labor, which is endemic in India.

Director Lee’s observation that the presence of many small, family owned “cottage industries” willing to accept low order volumes doesn’t include that many of these very small workshops may consist of 5 generations of the same family participating in the family business. While this is considered normal in India, it can provoke outrage in western countries like Australia.

While a company of LFA’s current volume may not be a target, the size of the Gap for investigative journalists to expose is much less equipped to survive the consequences of being accused of profiting off of the sweatshop labor. For example, assuming that a large number of consumers decided to avoid buying Gap product due to the child labor scandal, the most likely result would be a dip in short-term revenues. Being an established brand with thousands of outlets, the company has the resources to survive such a drop of revenue and all the while publicly proclaims that they are doing everything possible to fix the situation, including the recall of orders from the offending suppliers. Over time, sales would see a recovery as public consciousness move elsewhere.

LFA, whose role is primarily that of a wholesaler to large department stores, would face very different consequences. Just as easily as Gap was able to drop suppliers mired in a child labor scandal, so could LFA’s clients remove the brand from their store shelves. With a turnover of just $2,000,000, the loss of several large clients at a time, when the company would need to seek others, possibly more expensive suppliers, would likely be a death sentence.

LFA has an advantage over Gap in minimizing the odds of suffering from such a catastrophe as outlined above. A large multi-national corporation like Gap often ends up sourcing goods that have in turn been outsourced by suppliers one or even two steps down the supply chain. Director Lee’s practice of going to India personally means that she is able to see for herself whether the small suppliers she is contracting are employing a few teenaged cousins as seamstresses or keeping dozens of peasant children sold by their parents and chained in the basement. Verifying this is not necessarily as simple as making a few rounds of the production floor. It would be a good idea to hire a local investigator beforehand to ask around and verify that the supplier is not withholding any information regarding its labor practices.


In the final assessment, outsourcing production to India is not without its challenges, but the benefits are real. In order to continue benefiting from the reduced overheads and fixed costs such as arrangement, it is crucial that Director Lee and the rest of the LFA management team understand that just because someone else is doing the work for them, they have a license to work less themselves. Outsourcing manufacturing requires significant attention to be devoted to maintaining relationships, product quality and protection of the company’s image.

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