Term Paper on "Case of the Plant Relocation"

Term Paper 10 pages (2773 words) Sources: 4 Style: APA

[EXCERPT] . . . .

Business and Political Argument Against Outsourcing - Plant Relocation

The Electrocorp Case Study

In his economic allegory of free trade, the Choice, Russell Roberts suggests that free trade is ultimately beneficial to everyone involved: workers, producers, and the general public (2002). According to Roberts, two countries specialize in terms of products because one country possesses a comparative advantage over the other when it comes to a particular product. Roberts illustrates this concept by using the metaphor of a man, an owner and manager of a large television factory. Although this manager is an excellent typist, Roberts points out, he has hired a secretary to do his typing for him. When it comes to managing, Roberts possesses a comparative advantage over his secretary. He gifted in management while the secretary is not. It is better, therefore, for the manager to use this principal of comparative advantage to specialize in managing while his secretary specializes in typing. This arrangement benefits both the typist and the manager, in addition to the population of those who work in the company. For this reason, Roberts argues that free trade is optimal, despite its negative side effects (2002).

Unfortunately, those negative side effects exist, and although they may be overshadowed by the benefits of free trade, it doesn't make them any easier. Outsourcing is one of those negative side effects. Traditionally, Americans have seen outsourcing as an evil, and not always a necessary one. Outsourcing, they argue, causes displaces hard working Americans in favor of foreign workers. According to some, it even increases social problems over seas because

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foreign workers are forced to work for pennies on the dollar. According to free trade economists, however, outsourcings not only creates more and better jobs for Americans, but it also improves the social climate in third world countries. Outdated jobs that can be done in less technologically savvy environments are outsourced, leaving American room for new jobs and new technologies that are ultimately better paying jobs which eventually produce a greater number of jobs. In the same vein, outsourcing allows residents of third world countries to learn new skills that will help them be more marketable. Free trade economists also argue that trade opens borders, allowing third world and oppressed countries to be more open to Western ideals of democracy and freedom. But even though free trade economists argue that the benefits of outsourcing outweigh the cost, most agree that a cost-benefit analysis concerning outsourcing must be performed before an individual company can make the monumental decision to outsource their company.

An excellent example of this is the case of plant relocation by Karen Musalo, director of the Markkula Center for Applied Ethics International Human Rights and Migration Project, who used this hypothetical situation to discuss the ethics and benefits of outsourcing with Stan Raggio, Senior Vice President for Sourcing and Logistics at the Gap. As the CEO of Electrocorp, an electronics company that has begun to see operation costs overshadowing profits, readers must decide whether or not to send the company to one of three third world countries by performing a cost-benefit analysis. By studying the business' operations if it moved to Mexico, the Philippines, South Africa, or stayed in the United States, readers can assume that while outsourcing may be profitable, the ethical costs are too high a price to pay.

According to the company's outsourcing consultant, relocating to Mexico would solve several problems for Electrocorp. Relocating to the area would surely solve the company's wage problem. At a wage of $15 an hour, Electrocorp is struggling to pay salaries primarily because of union negotiation. For about $3 a day, however, workers in Mexico are happy to perform the same work, and the absence of unions and minimum wage laws makes the offer even more attractive to companies who are struggling to survive because of large salaries. Though the company must worry about workers fleeing to work for better wages in the United States, Frank J. Casale argues that Mexico is producing large numbers of workers that are both educated and bilingual. For this reason, though Electrocorp may have to worry about rapid turnover, they will not have to consider a shortage of workers (2006).

According to Casale, Mexico also has a government base that makes it an attractive environment for United States' outsourcing (2006). Students of International Relations and Foreign Policy note that the Mexican and American governments have shared a unique relationship for many years. The Mexican government is dependent on the United States' government for many of its endeavors, including trade, economic aid, and border maintenance. Because of this, and because Mexico is a third world country that is hungry for large plants to be producing on its soil, Mexico's legal environment is amicable for American companies looking to outsource (Castle). In addition, Electrocorp's consultant has noticed that Mexico's environmental rules are more relaxed then the United States'. Because one of the reasons that the company is struggling financially is the expensive environmental regulation that the government has levied on it, relocating to Mexico, with its lower cost of operating would be a savvy business decision, according to some.

Finally, Casale argues that Mexico is a prime place for U.S. outsourcing because it very close to the United States. Airports feature short flights from the U.S. To Mexico, and clients or contractors may be more willing to visit the company and stay in a bordering U.S. town then some would be to travel to further locations like the Africa or the Middle East (2006).

Though Electrocorp will obviously benefit economically by outsourcing to Mexico, both business and ethical negatives exist that outweigh the positives. Although the company will no longer have to deal with Unions and high rates of pay, they will have to use workers that are impoverished, and most likely unable to produce as much output as a healthy, fit individual from the United States. In addition to increased output, which is a business incentive for staying in the United States, the ethical costs of removing to Mexico are also high. According to the business' consultant, worker turnover is high in Mexico because workers cannot afford to live on $3 a day. By moving the company to Mexico, Eletrocorp would fulfill the psychological definition of an enabler -- the company would allow the region to continue to pay workers low salaries instead of refusing to outsource to the area and drive up wages.

In regards to the government regulations in Mexico, which encourage American outsourcing by making the area financially amicable for American outsourcers and lowering ecological regulations, government instability mitigates these positives. By considering the last Mexican presidential election, company executives can understand that the area is neither a democracy nor a stable government. In the last election, riots and protests were held in light of the election's results and the effects of those protests hindered the democratic results from taking place. This instability is a negative incentive for business. By doing business in an unstable regime, companies are subject to laws that might change without notice, bribes, or large taxes levied without prior notice. In addition, the ethical considerations of the lowered environmental standards will hinder the company from relocating to the area. Lowered environmental standards might cost less money in the long run, but like any new technology, the benefits of investing in environmentally safe means of production will out weigh the costs in the long run. By outsourcing to Mexico and choosing simply to ignore the environmental problems, Electrocorp will eventually be left in the dust as its competitors prepare for the future.

Finally, even Casale's argument that Mexico's nearness to the United States will draw customers and clients is overshadowed by a business negative for moving to the site. According to the company's consultant, bad publicity exists in Mexico as protest groups have recently been rallying against the number of birth defects in the country possibly caused by possible contamination. Put off by these protests, the nearness to the United States will not suffice to encourage clients and contractors to visit the firm's near location. Thus, for both business and ethical reasons, the incentives of outsourcing to Mexico are far outweighed by the negatives.

But according to the company's consultant, a move to the Philippines may solve both the business and ethical problems of outsourcing to Mexico. In this country with poorer economic conditions than the U.S. border state, workers are willing to be employed for as little as $1 per day. If this rate seems exorbitant to Electrocorp's accountants, the firm may hire children under the age of sixteen for cents per day. According to PI Outsource, a Philippines outsourcing advocate group, the industry's market of outsourced businesses is one of the largest in the world, especially in terms of call centers. And with wages so low, companies like Electrocorp can certainly make a much larger profit by working on their shores. In addition, the company's consultant raves that the Philippine government is also ripe… READ MORE

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Quoted Instructions for "Case of the Plant Relocation" Assignment:

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Paper Requirements

Topic:

Read case study entitled *****The case of the Plant Relocation*****

Location: http://www.scu.edu/ethics/dialogue/candc/cases/relocation.htm

(also attached below)

1.You have to decide how you would like to proceed. Your options are to further investigate one or more of the overseas sites or to simply continue all operations within the United States.

2.10 pages (must be easy to read and understand)

From an organizational strategy perspective, examine each possibility and the factors you will consider in weighing the pros and cons. Also discuss what role, if any, ethical considerations will play in your decision to relocate or not. Paper must include details about the countries***** current economic, legal, social, and employment environment as well as any other factors that might influence your decision.

3.At least 4 sources

4.APA format

5.Need bibliography, references etc.

The Case of the Plant Relocation

By Karen Musalo

Production costs are rising. Your company can make more money for shareholders by relocating your plants to a country with lower labor costs and fewer regulations. Using this case, Stan Raggio, senior vice president for sourcing and logistics at The Gap, and Karen Musalo, then director of the Markkula Center for Applied Ethics International Human Rights and Migration Project, discussed the ethical issues companies should consider at an Ethics Roundtable for Executives.

You are the chief executive of Electrocorp, an electronics company, which makes the onboard computer components for automobiles. In your production plants, complex hydrocarbon solvents are used to clean the chips and other parts that go into the computer components. Some of the solvents used are carcinogens and must be handled with extreme care. Until recently, all of your production plants were located in the United States. However, the cost of production has risen, causing profits to decline.

A number of factors have increased production costs. First, the union representing the workers in your plant waged a successful strike resulting in increased salary and benefits. The pay and benefits package for beginning employees is around $15/hour. A second factor has been stringent safety regulations. These safety procedures, which apply inside the plant, have been expensive in both time and money. Finally, environmental regulations have made Electrocorp's operations more costly. Electrocorp is required to put its waste through an expensive process before depositing it at a special disposal facility.

Shareholders have been complaining to you about the declining fortunes of the company. Many of Electrocorp's competitors have moved their operations to less-developed countries, where their operating costs are less than in the United States, and you have begun to consider whether to relocate a number of plants to offshore sites. Electrocorp is a major employer in each of the U.S. cities where it is located, and you know that a plant closure will cause economic dislocation in these communities. You know that the employees who will be laid off because of plant closures will have difficulty finding equivalent positions and that increased unemployment, with its attendant social costs, will result. However, you are aware of many other corporations, including your competitors, that have shut down their U.S. operations, and it is something that you are willing to consider.

You have hired a consultant, Martha Smith, to investigate the sites for possible plant relocation. Ms. Smith has years of experience working with companies that have moved their operations to less-developed countries to reduce their operating costs. Based on your own research, you have asked Ms. Smith to more fully investigate the possibility of operations in Mexico, the Philippines, and South Africa. A summary of her report and recommendation for each country follows:

Mexico

A number of border cities in Mexico would be cost-efficient relocation sites based on both labor, and health and safety/environmental factors. Workers in production plants comparable to Electrocorp's earn about $3 per day, which is the prevailing wage. There is frequent worker turnover because employees complain that they cannot live on $3/day, and they head north to work illegally in the United States. However, a ready supply of workers takes their place.

Mexican health and environmental laws are also favorable to production. Exposure to toxic chemicals in the workplace is permitted at higher levels than in the United States, allowing corporations to dispense to some degree with costly procedures and equipment. Mexico's environmental laws are less strict than those of the United States, and a solvent recovery system, used to reduce the toxicity of the waste before dumping, is not required.

The only identifiable business risk is possible bad publicity. The rate of birth defects has been high in many Mexican border towns where similar plants are in operation. Citizen health groups have begun protests, accusing the companies of contamination leading to illness.

Philippines

Conditions in the Philippines are more favorable than those in Mexico in terms of labor and health and safety/environmental factors.

The prevailing wage in the Philippines is about $1/day, and young workers (under 16) may be paid even less. As in Mexico, the workers complain that the rate of pay is not a living wage, but it is the present market rate.

The health and safety and environmental regulations are equivalent to those in Mexico, but there have been no public complaints or opposition regarding birth defects, cancers, or other illnesses.

South Africa

Conditions in South Africa are positive in some respects, but not as favorable in economic terms as in Mexico or the Philippines. The prevailing wage in South Africa is about $10/day. Furthermore, there is a strong union movement, meaning that there may be future demands for increases in wages and benefits.

The unions and the government have been working together on health and safety issues and environmental protections. Exposure to toxic chemicals in the workplace is not permitted at as high a level as in Mexico and the Philippines. Although the equipment necessary to reduce toxic chemicals to an acceptable level is not as costly as in the United States, this expense would not be incurred in the other two countries. Furthermore, there are requirements for a solvent recovery system, which also increases operation expenses.

You have to decide how you would like to proceed. Your options are to further investigate one or more of the overseas sites or to simply continue all operations within the United States. Examine each possibility and the factors you will consider in weighing the pros and cons.

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