Here’s a question we get asked from time to time: When should I consider production outsourcing?
It could be that the market is pushing you to unfamiliar production territory or your workforce isn't skilled in new technology or materials. Maybe you don't have the capacity to maintain a sustainable quality level for larger quantities. Whatever the reason, production outsourcing is an option to carefully consider when you're faced with growth opportunities.
Outsourcing is a common way for manufacturers to to reduce costs as they're looking to scale up their company. By off-loading some operations, a company is able to reduce the number of employees on the payroll by using temporary workers, for example, or remain in a more cost-effective facility for longer than they might otherwise. [Note: outsourcing isn't synonymous with off-shoring. That might seem obvious, but many folks use the terms interchangeably. Outsourcing can take place domestically or overseas, while off-shoring means operations have moved outside the country.]
Outsourcing production typically goes to a contract manufacturer. Because they're often making products for multiple customers, contract manufacturers have production capacity other manufacturers don't have. They're not engaged in the sales and marketing, all they do is make the product, giving them greater flexibility to respond quickly to increases or decreases in production requirements. This saves the customer from having to make investments in additional equipment or workforce.
It's certainly not a decision to make lightly. Outsourcing is more than just gaining a financial edge. Here are a few things to consider before outsourcing manufacturing production:
- Design stability - You’ve completed the R&D and are now trying to scale.
You're out of start up mode and not making any tooling or design changes, which is not something you want to be doing when you're ready to produce.
- Volume - Your production run volumes are at least 3 to 4 times per year.
Outsourcing works best when there is enough volume to leverage the savings. Buy in bulk, right? Without enough volume, there is less economic value (no freight savings either).
- Economics - There is a strong economic advantage that will allow you to better compete in your market.
Sometimes economic advantage is simply cost — it may be cheaper, thus allowing you to achieve greater market share by selling lower and taking share from your competitor.
Other economic advantages may be more indirect. For example, you have a mature product and you want your team to focus on a new project, so you have a third party make the existing product. That’s not the case with new product introduction, which much more hands-on. So, the economic advantage may be “where’s the best use of your internal resources.”
- Capital - You can leverage someone else’s capital investment in without having to deploy your own.
Basically, you're using the contract manufacturer's capital and technical capability without having to spend millions on machines or a workforce of your own. The key is keeping your cash or investing it where it's better used.
Again, the decision to whether or not to outsource isn't a slam dunk and the variables informing the decision will differ from one company to the next. For example, you need to figure the difference between keeping production in-house versus outsourcing. You also need to have your eyes on the project. How much time can you devote to that, or will you need to hire a project manager?
So what's next? It's time to engage in the exercise of closely examining the pros and cons of outsourcing in light of your company's goals. It's really the best — and only — way to make a decision that is right for you, your company and your customers.