Introduction to Outsourcing
Outsourcing is a practice used by different companies to reduce costs of business operation and enhancing profit by transferring portions of work to outside suppliers rather than completing it internally. This process is generally used in capital intensive manufacturing and technology companies to achieve higher returns on business by reducing cost significantly.
Benefits of outsourcing include having skilled personnel, improved quality of products, augmenting production and mitigating risk in business process. The process works best between two organizations belonging to different types of economy. For example: an organization in USA (developed economy) gains substantially by outsourcing its production process to another company in China (developing economy).
Outsourcing failure can be experienced in case of certain events. Setting unrealistic goals, inadequate contract details, inflexible contracts, outsourcing products critical to their competitive position, inadequate management review and having limited knowledge and understanding of the supplier’s process. One of the most important reasons behind the failures is the outsourcing company’s inability to comprehend existing scope of work and have a clear vision of the task to be achieved which leaves them unprepared for future contingency problems.

Samsung Outsourcing Model
Samsung Electronics Company - headquartered in Suwon, South Korea is a South Korean multinational electronics and information technology company. Samsung Electronics has been the world’s largest IT Company by revenues since 2009. It deals with the manufacturing of Televisions, Cell Phones, Flash Memories, DRAM Chips, MP3 players, DVD Players, Refrigerators, Microwave Ovens, etc. Samsung is both in the chip market as well as in the consumer electronics market. Samsung is the number one global manufacturer of DRAM (used in PCs). Being present in 61 countries and employing around 222,000 people, it is the world’s largest mobile phone manufacturer. Over half of its memory chips were special orders from companies like Dell, Microsoft and Nokia. Samsung’s average prices were 17% above industry levels as a result of customization and reliable & timely supply of chips.
Samsung owns and operates 12 factories in mainland China and further has a large number of contracted factories which make up a part of Samsung’s supply chain.
As a sample, 8 supplier factories are chosen to demonstrate the issues faced by Samsung’s suppliers as a whole. * Shenzhen Samsung Kejian Mobile Telecommunication Technology Co., Ltd (SSKMT): 500 workers and owned 60% by Samsung; produces Samsung CDMA phones. * Huizhou Samsung Electronics Co., Ltd (SEHZ): 10,000 workers and owned 99% Samsung; produces Samsung MP3 players as well as DVD players for Samsung. * Tianjin Samsung Electronics Co., Ltd (TSEC): 2000 workers, 91% owned by Samsung; produces TV parts and DVD players. * Samsung Electronics (Shandong) Digital Printing Co., Ltd (SSDP): 2000 workers, 100% owned by Samsung; produces Samsung digital printers. * Suzhou Samsung Electronics Company Co., Ltd (SSEC): 4000 workers, 88% owned by Samsung; produces air conditioners, home appliances and refrigerators. * Tianjin Samsung Mobile Display Co., Ltd (TSMD): 3500 workers, 95% owned by Samsung; produces mobile displays. * Tianjin Intops Co., Ltd (Intops): 1200 workers and is a supplier factory for Samsung; manufactures cell phone casings. * Tianjin Chaarmtech Electronic Co., Ltd: 900 workers and is a supplier factory for Samsung; produces cell phone casings.
The issues faced by these 8 supplier factories are highlighted below.
Issues:

1. Lack of worker safety:
No safety training is provided to the workers at Intop and Chaarmtech. After investigations, it was discovered that there were plenty of safety concerns at the hazardous working environment in three of the supplier’s factories namely SSEC, SSDP and Intops. As an example, no worker is provided with protective masks although they come into contact with printing fumes on a daily basis. 2. Dependence on overtime:
A meager monthly base salary of around 1300 RMB ($ 205) is provided to the workers at Chaarmtech and Intops. This is considered the minimum wage in Tianjin. However, in these factories, the average monthly salary is about 3200 RMB and 3300 RMB respectively which implies that their monthly base pay is only around half of the monthly overtime salary. This implies that the workers have to work overtime in order to earn a salary with which they can survive. 3. No pay stubs: No pay receipts or stubs are provided to the workers at some of the supplier factories such as SSEC, SSDP and Chaarmtech. The only way the workers can check their wages is through the company computers. 4. Discrimination in benefits based on personal identity:
The workers who belong to the Tianjin area are given more insurance benefits as compared to non residents at the TSMD site. 5. Unfair and unreasonable rules:
Most of the factories had some or the other unfair or even a cruel rule. For instance, sick leaves at Intops are treated as work absences which affect the employee’s wages as well as performance grades. Workers at SEHZ are allowed to leave the probation period and become formal employees only during the month of July, indirectly punishing the employees who are recruited in any other month. Also at the same factory, the workers are forced to pay a part of their salary for the insurance benefits, but as these workers never really get the insurance cards, they are unable to enjoy these benefits when needed. 6. No Complaint Mechanisms:
There is no way for any worker to report their grievances at almost all the factories as there is no effective complaint mechanism in place at any of the sites. At most sites, there was no union of workers in place and even if there was, it was unable to voice the worker’s concerns to the management. 7. Forced and excessive overtime
In all factories except SSKMT overtime is maintained for at least half the year that reaches or exceeds 100 hours per month with only one day of rest during the entire month. TSMD workers have reached up to 186 hours of overtime during the peak season. Only SSKMT factory has never surpassed 100 hours of overtime, but the 50 hours of overtime it does also goes beyond the legal limit of 36 hours. Workers of the TSEC, TSMD, Chaarmtech, and SEHZ factories have reported being forced to work overtime. Workers in these factories have no option but to work overtime as their wages are very low. This leads to them to work overtime and view not being able to work overtime as a punishment. 8. Exhausting working conditions.
The factories require the workers to stand all the time for their shift, which is about 11 to 12 hours. This has been brought to the notice of the management that from a production perspective, in many cases, standing is not required. Further, the rate of production at these lines is also very high. For example, workers at SSEC have to assemble a meter-long panel and install two screws in 9 seconds and workers on the cell phone assembly production line at Intops have to finish assembling one cell phone casing in 5 seconds. 9. Extensive labor contract violations.
Almost all factories have violated labor contracts. These violations range from a blank contract, workers not provided a copy of the contract to no contract. Most workers at TSEC, TSMD Intops, and Chaarmtech have signed no legitimate contract with the factory. 10. Forced work without pay
In some factories such as TSEC, SSDP, and Intops, workers are required to come early for work by up to 20 minutes and no compensation is paid to them for this time. Another factory, SSEC, in some months does not pay overtime to workers beyond 36 hours but instead forces them to take up the option of an extra vacation 11. Inhumane treatment of workers.
Investigators have also found that in two factories, TMSD and Intops, workers have been treated inhumanely, which includes verbal and physical abuse. 12. Abuse of underage workers.
The factories TSMD, SEHZ, and SSKMT are alleged of employing people below 18 years, making them work in the same way as adult workers, denying additional security, protection and care for them. The SEHZ factory have hired underage workers by substituting the name on the young person’s ID card to the name of a past worker in order to artificially surpass the pangs of legal violation. 13. Severe discrimination based on age, gender, and individual characteristics unrelated to the job Every factory but SSDP and SSEC were employing mostly young people, the most shocking evidence being 16-20 years people employed at the SEHZ factory. The factories gain advantage by employing comparatively more cooperative and less demanding young work force than adults. All other factory except SSDP and SSKMT hire either males or females. Female workers are generally favored because they are considered more cooperative. SSEC employs male staff because of their higher workload to which female workers in general could not adjust. SEHZ was also alleged of not employing any individual below 1.55 meters tall or that has tattoos, dyed hair, or physical disabilities. 14. Abuse of labor dispatch workers
TSEC, TSMD, INTOPS, Chaarmtech, and SSEC factories employ a considerable portion of their workers through labor dispatch companies who offer the workers either unauthorized contract or sometimes no contract at all. The workers sign contract with the dispatch companies thereby, allowing the factory to evade much responsibility for their employees benefits and safety. 15. Abuse of student workers.
TSEC, TSMD, SSDP, SEHZ, and SSKMT greatly employ underage students directly from vocational school without a proper authorized legal labor contract. The factory engages in a contract with the vocational school depriving student their copy. Many students are compelled to accept this work as part of their program requirements. 16. Charging workers inordinately high fees to be hired. Workers employed through dispatch and employment agencies shell off up to 800 RMB ($125) per person, whereas the average monthly base salary for workers is below 1700 RMB ($267). For example, at the TSEC factory, dispatch workers had to shell out 300-700 RMB ($47-110) to be hired, which eroded up to half of their base monthly salary of 1450 RMB ($228). Furthermore, Intops, Chaarmtech, and SSEC charge workers up to 100 RMB ($15) for a health check required during the hiring process.

Recommendations
Establish worker hotlines in each factory. This communication channel between the factory and workers will address workers grievances as they can be identified, expressed and resolved. In the process, maintaining anonymity of workers is essential to avoid any negative retaliation from the factory and increase the effectiveness and transparency of the process and the factory shall also benefit from reduced worker turn over as majority of employee expectation shall be met.
· Establish third-party hotlines. Third party actors and social organizations, such as NGOs, can serve as intermediaries of labor problems and factories by allowing workers a direct communication channel to contact these NGOs can help workers express their grievances and take effective remedial actions by receiving feedbacks from these NGOs.
· Reduce internal audits and increase third party audits. Corporate social responsibility (CSR) audits in these cases prove ineffective as they are less independent and to some extent biased. Samsung should reduce these audits and replace them with regular independent third party audits. NGOs, which have no conflict of interest with Samsung, should do more justice by implementing CSR audits in factories, thereby reducing oversight and bringing about marked improvement in labor work conditions.
Educate managers: Managers at low management level in the factory should have access to communication and man-management training. With access to these learning modules, the verbal and physical abuse can be stopped.

Round-table discussions:
Samsung should have discussions with workers who represent the factories. Round table events will allow both sides to have open discussions about the factory environment, labor issues and treatment that are relevant to workers. Samsung should also make sure that there are an equal number of worker representatives and corporate and factory representatives to have an unbiased discussion.
Collective bargaining and unions.
All the factories should have a legitimate union, which they do not have at the moment. Samsung should support worker organized, operated and led unions in all of its factories. For these unions, all leadership representatives should be chosen by the workers that the union represents.

All the issues described in the issues section need immediate efforts to improve the current state of the workers. In order to improve the future conditions and relationships with the workers, Samsung should implement the recommendations suggested. By implementing these Samsung can lead the way in changing the way manufacturing workers are treated in outsourced factories.

Reference
http://www.bpmwatch.com/columns/how-samsung-plans-to-fix-outsourcing-issues-in-china/