Free «Low Country Cost Sourcing» Essay

Low Country Cost Sourcing

Introduction

Low country cost sourcing is one of the strategies employed by businesses to lower the cost of production (Lockström, 2007). It aims at cutting operation costs by taking advantage of certain factors in a country or a city. Low country cost sourcing makes use of David Ricardo’s comparative advantage model (Lockström, 2007. According to the H-O model, factor endowments determine a country’s comparative advantage. In order for production costs to be lowered, the production needs to be taken to a relatively low-cost country. This strategy falls under a broad strategy called global sourcing (Lockström, 2007). The strategy is employed with the aim of bridging the cost difference between countries. However, not all low-cost countries are suitable to be destinations for a business.

Some low-cost countries have an unstable political environment and underdeveloped infrastructure. For a business to find the most suitable country with a stable legal environment, a range of countries should be carefully evaluated (Lockström, 2007). A company has to carefully balance the tradeoff between low costs accelerating growth and mitigating risks that arise with the shift in production. Thus, the best country where the production of sunglasses can be moved to is Bangladesh (Lockström, 2007). The foreign direct investments in the country increased by 50% between 2013 and 2014, which indicates that there is much investor confidence in the country.

Elements of National Business that Make Bangladesh Suitable

The country has a number of characteristics that make it a suitable destination. In contrast to China with its growing population, Bangladesh has a median age of 25 (Gereffi & Frederick, 2010). This implies that the most part of the country’s population comprises of young and vibrant youth that are ready to work in the industry. Young population is more suitable for business environment since they are more productive and flexible as compared to the aging population. Young population also guarantees easier and more effective training (Gereffi & Frederick, 2010). With the new dynamic technology that has been incorporated in the production process, it is easier to train a young person than an elderly person (Gereffi & Frederick, 2010). Since the main advantage of shifting production is saving on costs, saving on training cost is an advantage of the country.

Bangladesh has a population of about 164 million people (Mostafa, 2016). This is a relatively large population, and as the population increases, the number of people who actively look for employment increases correspondingly. In turn, this increases the labor force that is at the disposal of the company. The labor force can offer both skilled and semi-skilled professionals. Since the sunglass company needs two sets of skills, the country is a suitable destination. Bangladesh has a considerable number of high-quality manufacturing skilled employees. Their skills will be useful a successful production. The number of educated talents is also relatively high, which indicates that the country has the high-skilled labor force.

The country has a large container port, which is the 83 largest in the world (Mostafa, 2016). The port is considered to be one of the most attractive features of the nation. This means that export of the sunglasses would be accomplished easier, with one of the world’s biggest ports situated in the country. The port of Chittagong mainly deals with containerized products, especially clothes and garments. It is also easier to transport raw materials into the country through the port. This can be used as a business strength since the products can be exported with ease and the raw materials can be brought in the country without restraint, as well. Bangladesh has export destinations, which include the European Union with the turnover comprising 51.2%, the United States comprising 25.7%, Canada comprising 3.5% and China comprising 1.7%. Integrating with the export will ensure that the sunglasses are delivered to different parts of the world (Mostafa, 2016).

Raw materials that can be used in the manufacture of sunglasses can be found in Bangladesh (Mostafa, 2016). The country has about 3000 large scale and small scale plastic manufacturing units, which can supply raw materials to the sunglass plant (Mostafa, 2016). Buying at least a part of raw materials from the host country is advantageous since it reduces the cost of outsourcing the materials from other countries. This is also cost effective and adds to the incentive for choosing Bangladesh as a host country.

Developed infrastructure is the necessity for any business to flourish. The country under question is rapidly developing in terms of infrastructure (Mostafa, 2016). However, the existing infrastructure is able to sustain industries in the country. It has a relatively developed road network, and the electricity production in the country is stable. The country was producing 11,600 megawatts of electricity by the year 2015. The government has launched an ambitious plan of reaching 20000 megawatts by 2020 (Mostafa, 2016). The country is experiencing a steady growth in the economy; and hence, infrastructure is expected to develop further in the next couple of years (Mostafa, 2016). Some of the projects that are ongoing include the Padma Bridge that is expected to improve connectivity between different parts of the country. This will be a catalyst to the formation of favorable business environment in Baghlandesh.

 Political stability is another factor to be considered (Vassallo, Swinfen, Swinfen, & Wootton, 2001). Although the country experienced turmoil in the year 2015, the situation has stabilized by now. Political stability is an important aspect since a business cannot operate in an unstable environment and violent atmosphere (Mostafa, 2016). The government of Baghlandesh is also actively brings in foreign investment to the country to stimulate economic growth. It offers various incentives under its industrial policy and export-oriented growth (Mostafa, 2016). The sunglass company will benefit from the incentives since the export will encourage a better balance of trade. The legal system of the country is reltively adaptable and has no major restrictions. The acts that govern foreign investment involve the foreign private investment act of 1980, the Baghlandesh export processing zones authority act of 1980, the company’s act of 1994, the telecommunications act of 2001 and the Baghlandesh economic zones of 2010 (Mostafa, 2016). These legislations are an incentive to investors including a 100% foreign ownership in majority of sectors, exemptions, and tax holidays, reduced capital duty on imported raw materials, and duty-free imported goods for 100 percent exporters of products. Startup industries are currently enjoying a government tax holiday since the June of 2015 (Mostafa, 2016).  According to Mostafa (2016), the country has a tax rebate option for foreign investors that is meant to induce investments from abroad. All these factors will be highly favorable for the sunglass company to establish its production in the country.

The host country will become a market outlet for the sunglasses. Due to the large population in Bangladesh, the country will form a suitable market for the products. Having a market in the host country implies that shipping costs will be reduced significantly and cost of warehousing will also be low. The reason for this is the fact that the production plant is located in the market. This will also mean that the profit margin will be significantly increased due to the increasing sales rate. The brand can be sold to the people of the host country since they can easily identify with the product. Therefore, advertising costs can be reduced significantly considering the established publicity.

Obstacles in the International Business Environment

There are several obstacles that overcome company usually faces in the international business environment. Some include human resource management difficulties, management accounting and control issues, managing business risks and political risks (Islam, 2015). Human resource management is an issue that affects any business that goes global. The company will have to endure difficulties in staffing policies. It is a challenging task to select the right people who will be employed in the production plant. In addition, it is difficult to find the right mixture of local versus home experience (Islam, 2015). The company will have to adopt a suitable policy that allows fruitful cooperation between the Baghlandesh workforce and the home (the UAE) workers. One of the forthcoming problems is managing the expatriate workers and dealing with problems of repatriation. There are also other difficulties that may arise a result of moving the production to a new country. They include challenges of living and working overseas, offering performance appraisal for local workers, compensation packages, and fitting in the new labor laws. The language barrier also acts as a challenge since the host country has a different national language.

Doing business in a different country has an implication on key financial issues. Different accounting standards are employed in Baghlandesh. Different relationships between business and capital providers should be considered as well (Islam, 2015). There are restrictions on raising capital due to the economic policies that the Baghlandesh government has employed. Other accounting issues that accompany moving of production may include inflation accounting, differences in the taxation of multinationals and double taxation (Islam, 2015). There is also the financial risk of foreign exchange rate. Future changes in the country’s foreign exchange may damage the business venture to a great extent since changes in foreign exchange may negatively affect the operating income of the country. The greatest risk is transaction exposure of the net cash flows from individual transactions (Islam, 2015). Fluctuations in the foreign exchange may have severe consequences; hence, the sunglass company will have to introduce a policy that directs on such matters arising (Islam, 2015). Another risk that the company may face is the translation exposure. This can be defined as the impact of currency exchange rate as reported in the financial statements.

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The logistics of shipments are is also a sensitive matter. The company will need to deal with the exporting of finished goods and the importing of raw materials into the country (Islam, 2015). The logistics of the above transactions poses a challenge to the business and has to be properly addressed to ensure success.

The technological differences between the UAE and Baghlandesh can become another matter of concern. Baghlandesh is a relatively developing nation and has not incorporated some of the advanced technology. This may cause adaptation problems as the sunglass company adapts to the new technology. Insufficient technology may become a challenge in the business operation. The company will engage new partners in areas such as supply and sales (Islam, 2015). New partnerships always involve a risk for a business. This will be a big stumbling block before the business stabilizes its plant in Baghlandesh. The cultural differences will also pose a challenge. Different societies have different cultures, which may become the source of misunderstandings and thus lead to invalid cooperation.

The political environment in the can become another risk factor (Forsgren & Johanson, 2014).  This can be defined as the challenges that a company may face as a result of some government action or even lack of an action (Forsgren & Johanson, 2014). In addition, the company may suffer from the behavior of Baghlandesh government and other public sector organizations. The biggest threat under this aspect is the threat of nationalization. In times of crisis, some governments may impose exchange rate controls. However, it is worth noting that dramatic events such as wars are a rare occurrence in the international business arena today. Corruption is another challenge that the business will face. Corrupt practices both in the government and the private sector a common thing in Bangladesh (Islam, 2015). Thus, the company may be severely affected by the government’s unethical practices. In order to try and mitigate this risk, international business organizations are compelling the government to continuously reduce the level of corruption in the country.

Pollitical aspect plays a vital role in the creation of trade barriers, and this may make the company performance less efficient (Islam, 2015). Government policies on matters such as health, consumer protection policies, environmental regulations and technology transfers may have a negative impact as well. Changes that may be effected in the legal system may also significantly hinder the company’s pursuit for a lower cost of production.

Differences in Managing the Company with International Operations

Managing a company that has undertaken international activities is different from managing a national company. From the basic view, the company will now deal with assets and employees from more than one country (Wild, Wild, & Han, 2014). This means that the company will require a different approach to management. The foreign expansion brings about different dynamics into the business. The role of the manager changes extensively. Areas that need a significant change of tactics are human resources, procurement, export and procurement, financial accounting, and asset management (Wild, Wild, & Han, 2014).

According to Cullen & Parboteeah (2013), human resources department will be subject to a significant change. Managing and recruitment programs will have to change significantly. The human resources department will have to change the outlook since it will deal with employees from both Baghlandesh and the UAE. In addition, the wages will be paid in a different currency. Employees will also be differently taxed depending on the regulations put by the Bangladesh government.

Financial accounting will also need be managed differently. Cash flows will be denominated differently (Wild, Wild, & Han, 2013). Currency devaluations and inflation adjustments will need to be addressed in the financial analysis of the firm. In contrast to operating in one country, exchange rates differ due to the prevailing inflation in the other country. High inflation rate results in currency decline and thus makes it difficult to forecast the profit (Wild, Wild, & Han, 2014). Therefore, this will mean that the management of the company has to carefully integrate inflation indexes and deflate the figures accordingly. Tax reporting will also change since different government has different tax regulations. This complicates tax reporting and proves a task to managers. Hence, managing the firm will be different in this aspect and legal systems of Baghlandesh will have to be read and analyzed in order to ensure compliance (Wild, Wild, & Han, 2014). The legal system including licenses is also expected to be different in Baghlandesh.  Licenses will have to be procured differently.

Operating of the company in the new country will also include dealing with the new government. The government may enact laws such as nationalization that restrict the movement of money from the country. The managers of the firm will have to address issues arising from unpredictable behavior of the government and effectively mitigate political risks. The company will also have to procure assets in Baghlandesh. This will pose a challenge to effective management. The stock will need to be warehoused similar to finished products (Wild, Wild, & Han, 2014). In addition, transportation will need to be enhanced by the possible purchase of new motor vehicles. Procurement of the above actions will have to be carefully accomplished to ensure success.

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Since the company will now deal with export, a significant change in sales department will be experienced (Wild, Wild, & Han, 2014). The company will need to comply with export regulations such as tax and duties. This also means that the supply chain network will have to be restructured and include hiring of more employees to work within the company. Technology will also have to be incorporated to enhance efficiency.

Challenges Managing New Employees

Managing the workforce in a foreign country is a challenging task. The management has to increase productivity while complying with the new labor laws. Employees’ expectations should be met in terms of good working conditions and reasonable wages. The management will have to effectively remove barriers such as differences in cultures, currencies, and languages, regulatory requirements, among others.

Cultural setting in a country has a significant contribution to the success of the workforce. Bangladeshi culture is collectivistic (Islam, 2015). People belong to strong cohesive groups from birth. This means that the human resources should take advantage of this fact and make it a strength by encouraging teamwork in the industrial operations (Wild, Wild, & Han, 2014). In Bangladesh, cooperate culture is viewed as hierarchical one with clearly defined roles and responsibilities of each employee. Decision-making organs in the workforce will need to be empowered accordingly. There will also be a balanced strike between standardization and localization.

Language barrier is another problem that will need to be effectively managed (Wild, Wild, & Han, 2014). The management arm should create an interface, which will allow them interact with employees using their language. Due to the fact that a different currency will be used, the company will have to integrate real-time data from online currency transfer websites. The company will design a reward scheme that is both fair and motivating. The company philosophy will be designed in a way to reward good performance and increase productivity.

Legal risks and laws need to be recognized and appreciated. The regulatory requirements in Baghlandesh include a minimum wage of 3,000 takes per month. This can be translated to 38 US dollars at the current exchange rate. The wage board has recommended that the minimum wage is raised to 5300 takas or $68. Therefore, the company will need to design a payment scheme that complies with this minimum wage and any other labor requirements in the country. The human resource department should scrutinize any labor laws and requirements as per the constitution of Bangladesh in order to manage the workers effectively. The workers will also need to be trained effectively to ensure effective production process.

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