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Why Do Companies Outsource Manufacturing?

May 18, 2018

 

Outsource manufacturing

In a global economy that penalizes inefficiency, businesses turn to outsourcing. Outsource manufacturing has been long established as a go-to solution for businesses worldwide for decades. In 2017, 53% of US businesses outsourced their production in some capacity. At its most basic, outsource manufacturing is the business practice of shifting manufacturing of parts or an entire product to an external contracted third party.

When choosing to outsource, the “whys” rest on the business case.  Here are some typical considerations.

The Business Case

Focus:  Among the top reasons to outsource is to gain leverage, albeit the most difficult to justify.  The bottom line:  are you in the business of manufacturing…or in the business of innovating solutions that delight customers, grow revenue, and build your brand?  Battle-hardened outsourcers focus on selling and brand building.  (Think Apple, Cisco, Nike…)

Expertise: Also known as the experience curve, the more a company produces, the better it knows how to utilize its equipment, standardize, and optimize processes. The idea is that employees gain expertise over time and learn to work more efficiently, resulting in higher rate of production and increased cost savings.  Will outsourcing production bring your company skilled and experienced employees with specific processes – enabling you to increase speed to market without the investment of training?  Not to mention long lead times for finding these resources?

Assets: One of the greatest advantages of outsourcing is utilizing assets already in place without having to make investments in fixed costs.  Does your process require special equipment that you’d be better off “renting” from others?  If you bought it, would utilization be high enough for an acceptable ROI to your Board? 

Economies of scale: Especially in industries where fixed costs are high, pooling across organizations results in lower per unit cost for all parties involved.  Would you benefit from fractional resources, albeit at a slightly higher unit cost, vs. captive ones that are harder to shed?

Overhead cost: These costs include utilities and indirect labor costs which cover everything from gas, electric, and equipment to hiring and training costs of QA personnel, technicians, production and logistics workers. What are the total costs you’d have to absorb?  Would you also benefit from freeing up time by not having to deal directly with issues?  Few account for the cost of their time managing problems – which are amplified by opposite clock working hours, language barriers, and cultural differences.

Fixed cost: Another big benefit of outsourcing manufacturing is that it makes fixed costs variable. As a result, the barriers to entry are lowered – companies that could not previously afford to enter the space, can now do so and be competitive. Would you benefit from converting production to a variable cost and avoiding incurring upfront fixed cost for setting up the operations?   

Labor: While labor is usually among a company’s biggest costs in the West, the opposite is true in the East. Will outsourcing parts of production to a third party yield labor savings?  In Asia, social benefit costs must be factored in to the mix.


Other reasons:

Technology:  Can outsourcing can give you access to state-of-the-art production technology that you might not have otherwise had?

Flexibility: In responding to changes in market demand, outsourcing gives your business the ability to scale output accordingly. Given their demand, contract manufacturers can offer high production capacity which allows them to respond faster to changes in requirements. Can you lower risk by avoiding a large, one-time capital investment which could be obsolete if the demand diminishes?

Supply chain management: Outsourcing gives businesses the ability to select skilled suppliers in their specific industry niche. Does your strategy include gaining access to an extensive and focused vendor network, hence creating opportunities to establish new supplier relationships?

Time to market: By leveraging supplier expertise, in-house machinery, and assembly capabilities, outsource manufacturers are able to cut down time to market.


How CMD Can Help

A profitable outsourcing strategy requires detail intensive work both on the front-end and throughout execution. No matter the product you choose to outsource production of, there are countless moving parts, and with that, countless points of potential failure. With over three decades of experience, CMD works with you to minimize risk and accelerate results.

Source: CMD lowers your risk by introducing you to a multi-source strategy. We perform thorough market research to ensure you have the right data to drive complex, high stakes decisions. Due diligence is essential when vetting potential suppliers (performance measurement, onsite inspection, audit, etc.) and verifying fit. CMD takes care of everything right down to pricing, contract and order negotiations.   

Make: You’ll be able to leverage our expertise and network to speed product time to market. In the production phase, we take can care of design for manufacturability, tool inspections, quality reports, scrutinizing first samples, and tracking quality all the way through final production. We also confirm compliance throughout the entire process in terms of regulatory requirements, labeling and packaging. After the production phase, CMD supports smooth sailing in shipment. We oversee loading inspections, logistics, consolidation, as well as negotiate the best prices.

Fine Tune: CMD believes that there is always room for improvement, and that a project is never truly complete. We drive quality by constantly identifying areas for improvement. We perform reviews and efficiency improvements for incoming, WIP, and finished goods. We also work with you to leverage volume pricing, perform ongoing quality reports and focus on shortening lead times.

With CMD as your strategic execution arm, you’ll be in a strong position with a quality solution to sell in markets worldwide – for decades to come. Nothing should be left to chance. Your brand equity, reputation, and revenue depend on it.

Learn About the CMD Difference

Topics: Manufacturing, Operations