Of the many choices companies face when producing products, outsourcing manufacturing ranks among the most difficult and confusing. There are numerous benefits from utilizing manufacturing outsourcing services in many cases, but there are also pros and cons to be considered. Furthermore, there are numerous ways to outsource, and not all of them make sense in every case.
So what’s the secret to smart outsource manufacturing?
Education is crucial. The process doesn’t have to be confusing, provided leaders are equipped with a basic understanding of outsourcing pros and cons, the various methods of outsourcing, and steps to getting outsourced manufacturing processes up and running.
In this comprehensive guide to smart outsource manufacturing, we will outline all the elements of a successful outsource operation to make smart outsource manufacturing effortless and effective. We’ll also explore various risks associated with outsourcing and provide strategic steps to take to negate this risks.
What Does Outsourcing Manufacturing Mean?
Labor is often among the most significant business costs. In order to cut costs, companies often delegate this function to external organizations in areas with lower labor costs. This move capitalizes on not only lower labor costs, but also on the infrastructure and equipment the outsource firm may already have in place. The business can fully handle all aspects of production while taking advantage of cost savings enjoyed by others willing to essentially sell their advantages.
Start-ups and smaller companies can particularly benefit from outsourcing, forgoing the substantial start-up investment. Supply specifics can be determined beforehand by market research, IP and product control can all be protected contractually, and the entire project can be managed remotely.
When Outsourcing Manufacturing Makes Sense
The four primary factors to consider when outsourcing manufacturing include:
- Labor costs: the price of employing a workforce to assemble and craft a product
- Overhead costs: those maintenance and utility costs associated with manufacturing operations
- Flexibility: the ability to focus capital and/or equipment on various endeavors rather than the manufacturing function being outsourced
- Focus: whether or not to maintain an area of manufacturing not central to the company mission or focus
Ultimately, the primary driving factor behind outsourcing manufacturing is, of course, the cost savings. Typically, outsourcing manufacturing costs noticeably less than manufacturing in-house. These savings can be realized in reducing labor costs, overhead maintenance costs, and distraction and redundancy costs. But how specifically does outsourcing manufacturing save money, and in what cases is it not worth the effort?
The first question to ask is whether or not some other supplier can perform a particular function faster or at a lower cost at any link in the value chain. If so, then is the savings sufficient to offset outsource costs such as increased shipping?
Business processes should be reviewed continuously for areas of streamlining and savings. Any redundant processes or processes that don’t contribute to profitable growth are potential opportunities for outsourcing to allow for more focus on higher value functions and efforts.
On the other hand, you might consider keeping some processes in-house in certain cases. If you have a highly complex proprietary product mix or elevated IP concerns, managing some processes in-house might be best. If security is a special concern, you might also consider retaining more control over any of these processes. Additionally, some businesses may feel they are in a position to leverage a diverse supply chain to a competitive advantage. If any of these are true for your situation, the many benefits of outsourcing may not appeal to you.
Specific Benefits of Outsourcing Manufacturing
Outsourcing manufacturing pros and cons are numerous, but the advantages of outsourcing manufacturing seem to outweigh the liability in most cases. Specialization is generally an optimal way to maximize savings, and this is especially true in the world of manufacturing.
Some of the primary benefits of outsourcing manufacturing include the following four advantages:
- Scalability: when a sudden uptick in demand occurs, outsourcing allows manufacturing operations to scale up rapidly
- Innovation Afforded: Prototyping and other production-related functions can be boosted to allow for innovation without draining internal resources
- Maximum Efficiency: Streamlined processes and functions maximize the efficiency and reduces wasted time, materials, and cost
- Reduced Labor Cost: Again, many areas of the world allow for skilled labor at a fraction of the cost for those companies who outsource outside of high labor-cost areas
Top 10 Risks of Outsourcing Manufacturing
While there are numerous and substantial benefits associated with delegating manufacturing to outsource firms, there are also potential risks. Care should be taken that any outsourcing strategy takes precautions to circumvent these possible problems. Some of the primary risks associated with utilizing manufacturing outsourcing services include:
- Undermining morale due to a premature announcement of outsourcing plans. Sufficient details should be determined and a strategic roadmap established before any major company-wide announcement is made.
- Failing to adequately calculate outsourcing manufacturing costs and identify processes before making the decision to outsource manufacturing. Even the simplest of outsourcing transitions requires careful planning and financial calculations that should be conducted before reaching a final decision.
- Failing to locate quality providers and vendors due to a limited search net. In the quest for excellence, care should be taken to not limit criteria so much that it filters out an accurate sampling of the talent in a given area.
- Overlooking capacity qualifications. While quality is especially important when transferring the manufacturing process to outsource manufacturing companies, it is also important to choose a vendor with the sufficient ability to scale production in response to expected demand increases.
- Creating a communication gap by failing to provide thoroughly detailed and documented specifications. All product details should be completely documented and communicated to the outsourced manufacturing operation to ensure quality and accuracy of work.
- Putting the production schedule in a bind due to unrealistic timelines. A flexible production timeline that allows for delays is best when working across country lines and time zones.
- Creating transition gaps by failing to properly outline a detailed transition plan. All steps of the transition should be carefully identified, detailed, assigned, and scheduled to avoid fumbles.
- Failing to communicate internally. While communication with the outsource manufacturing companies involved is paramount, it is also important that teams communicate about the outsource project internally.
- Failing to allow for disruptions at the outsourcing site. While careful vendor selection can rule out many problems, major disruptions are still a very real possibility. The outsourcing team should take such a risk into consideration and prepare contingency plans.
- Losing sight of the project as a result of insufficient touch points between company and vendor. Out of sight, out of mind. Any company outsourcing manufacturing should facilitate multiple points of contact and interaction to ensure a teamwork approach.
What Processes Should You Outsource?
While some companies only prefer to outsource assembly, it may be profitable to outsource other processes as well. From inventory to purchasing, companies are finding new ways to free up their focus and resources. There are even compelling reasons to outsource product design, such as:
- Access to a broader network
- Multidisciplinary perspective
- Market ownership potential
- Outsider intel
- More capacity for less
Some of the reasons you might benefit from outsourcing the purchasing and inventory function include:
- More capacity for design and engineering
- Fewer sourcing and shortage issues
- Reduced costs through leveraging volume pricing
Outsourcing logistics via a third-party logistics provider (3PL) may help reduce loss of cash flow. Just remember to create a thorough process that includes the following steps:
- Create a 3PL Selection Strategy
- An introductory meeting between the 3PL the executive team
- Ensure outsourcing provider understands all aspects of the business
- Consider any available sustainability measures
- Review vested outsourcing versus immediate benefits
Preferred Outsourcing Manufacturing Options
Among the most popular of outsourcing options are the choices to either work with a contract manufacturer or offshore with a shelter service. Both options are highly beneficial and viable options for most companies in need of outsourcing.
Shelter manufacturing involves contracting with a foreign company already adept at navigating the legal framework of the particular country, equipped with the facilities, and capable of sourcing qualified labor in the region. This option allows a company to maintain absolute control over all aspects of manufacturing while avoiding most of the headache of establishing a manufacturing operation overseas.
While China was once the first choice for offshoring, a new trend of nearshoring to Mexico is quickly overtaking that option. Outsourcing manufacturing to Mexico is extremely advantageous, especially for US companies. Shelter companies in Mexico, called maquiladoras, offer many benefits, some of which include:
- Simple and stress-free labor-union interaction
- Quick and easy startup
- Insider access to the best vendors
- Fewer border crossings
- No reporting requirements with the foreign government
Ordering through a contract manufacturer is often a less-involved option that requires even less commitment to a foreign manufacturing operation. Contract manufacturing in Mexico also allows manufacturers many benefits, some of which include:
- The advantage of low-cost, high-skill labor
- The benefit of not having to understand import/export regulations and taxes, as the contract manufacturer typically produces a finished product without involving the client in the regulatory framework
- Start-up time is nearly immediate
- The benefits of Mexico’s manufacturing economy without the hassle of acquiring a maquiladora operation
Smart Manufacturing Outsourcing Simplified
Utilizing the strategic steps and warnings provided in this comprehensive guide, domestic manufacturers can seamlessly navigate the outsourcing experience. With awareness of outsourcing manufacturing pros and cons and attention to proper planning and communication, certain parts or all of a company’s manufacturing can be delegated to a more cost-efficient workforce, resulting in increased capacity, more room for innovation, and a better bottom line.