of 3 - Center for Global Outsourcings

partner for facilitating information exchange between the DS and the offshore vendor. This may
deter the timely and effective resolution of issues pertaining to quality, on-time delivery, order
completeness between the vendor and the DS due to inclusion of the parent company as an
intermediary partner.
Evidently, the geographic proximity of the manufacturer locations is compromised in the proposed
production offshoring strategy. As a consequence, the procurement lead time will be elevated,
demanding an increased level of in-transit inventory. In addition to a high lead time, delays due to
port congestions and uncertain wait times for clearing customs instill significant variability on the lead
time. The DS may have to reserve safety stock to mitigate the risk of stock outs that may be caused
by increased variability.
The cost of production and value of actual sales revenue may vary due to the difference in the
inflation rates between the US and Saudi Arabia. Besides inflation, the import/export taxes play a
significant role in global supply chains and it impacts the overall profitability of the business.
Incentives for globalization like tax holidays and property tax allowances may reduce cost of global
business transactions. These taxes may change based on favorable trade agreements that between
the US and Saudi Arabia. Presently, Saudi corporations earning income from foreign sources cannot
claim a tax credit, unlike the case of those in the US.
Similar to taxes, currency exchange rates can significantly influence the costs of firms with global
business functions. However, currency exchange rate is not an issue for the DS or the parent
company since the Government of Saudi Arabia has pegged SAR to the US dollar.
While operating a business on a global scale, corporations may have to deal with governments on
various issues. Trade laws and policies of one country may pose a barrier because of being
inconsistent with or antithetic to practices in the other country. Companies cannot initiate a business
without the consideration of domestic rules and regulations.
CONCLUSION
In this paper, we considered a distribution subsidiary (DS) in Texas that is managed by a familyowned
parent company located in Saudi Arabia in selling wooden doors and cabinets. The
production of doors and cabinets was contracted to manufacturers located within Texas.
However, a significant decline in revenue because of the recent crash in the US housing market
forced the management to solicit offshoring of production activities to a low cost manufacturer
located in Saudi Arabia. We performed an economic analysis for a scenario involving the USbased
subsidiary and the Saudi-based parent. Based on the results of our analysis, we inferred
that offshoring of production activities is an economically attractive alternative to manufacturing
in the US. We summarized our views on the impact of the offshoring strategy on the
performance of the supply chain.
REFERENCES
[1] Fortune, "CNN Money - Fortune," (2011). Available at http://finance.fortune.cnn.com/
2011/06/29/return-of-American-manufacturing/. Accessed on 30 Apr 2012.
[2] Trading Economics, "Trading Economics," (2011). Available at
http://www.tradingeconomics.com. Accessed on 30 Apr 2012.
[3] Tax Rates, (2009). Available at http://www.taxrates.cc/html/saudi-arabia-tax-rates.html
Accessed on 30 Apr 2012.
[4] P. G. Keat and P. K. Y. Young, Managerial Economics: Economic Tools for Today's
Decision Makers, Sixth ed., New Jersey: Prentice Hall, 2009.
[5] Google Finance, (2012). Available: http://www.google.com/finance?q=SARUSD.
Accessed on 30 Apr 2012.
Tenth Annual International Daejeon, South Korea P a g e | 38
Smart Sourcing Conference June 28-29, 2012