As the global market opened and expanded in the 1970s, knowing how to outsource manufacturing became a popular choice for businesses. Doing this minimizes costs and improves their production processes.
Surely outsourcing can offer many benefits for businesses. One of the best examples of those is easy access to specialized skills and advanced technologies. However, there are also challenges and risks that you must consider before entering this setup.
What is Outsource Manufacturing?
Outsource manufacturing, also known as contract manufacturing, involves hiring a third party to produce goods or services. This can be done domestically or internationally, in order to save businesses time and money. Usually, businesses outsource manufacturing to perform services that are time-consuming for their employees.
Foreign countries normally do this setup. Their main goal is to reduce costs by minimizing labor costs and other manufacturing cost overheads. By hiring the services of a third-party company, businesses can save money compared to hiring their own employees. Outsourcing can also help businesses stay competitive by allowing them to focus on their core competencies.
The cost of outsourcing manufacturing depends on the technical capabilities of the manufacturing companies. It also involves the contract company chosen, the political environment, their demand, and the transportation cost. Beside cost reduction, outsourcing manufacturing can also increase production or reallocate resources.
How to Outsource Manufacturing
If you are a company seeking to know how to outsource manufacturing, there are 2 essential things you need to keep in mind:
- Look for a company with management styles and business philosophies similar to yours.
- Prioritize the best solution for your product, not just the lowest price.
In addition, there are a set of rules you must adhere to:
1. Make Room for Improvement
Perfect efficiency does not exist, so it is important not to spend too much time trying to achieve it. This will help you save unnecessary side business costs and expenses.
2. Keep Track of Production
When you outsource manufacturing, it is important to keep a close eye on the process. Ensure everything runs smoothly based on agreed terms and processes. It is essential to keep the entire manufacturing process and product workflow in mind when outsourcing manufacturing. Rather than just focusing on reducing costs in one area, considering the whole process can be more cost-effective.
3. Trust the Expert
It is important to keep some in-house production facilities and bring in people with the necessary expertise. Doing this can keep your outsource manufacturing and processes run smoothly. When looking to outsource manufacturing, consider advice from employees or other manufacturers on how you can reduce costs. They might have better insights into how your business can perform better.
4. Ensure Quality Improvement
When outsourcing manufacturing, your main objective should not be to just reduce overhead costs alone. Consider hiring a contractor that has better facilities than you to improve product quality, which will encourage returning customers.
5. Increase in other Operating Costs
Outsourcing manufacturing can lead to higher manufacturing costs and lead times. It can also increased transportation and storage costs. Thus, this can lead to additional expenses and affect your cash flow. It is important to add this cost to your calculation before committing fully to this strategy.
6. Be Precised in Planning & Executing First Initial Tasks
Maintaining finesse in the initial stages of production of your product will help you reduce larger subsequent tasks, like quality checks and repairs.
When Does Outsource Manufacturing Make Sense?
There are numerous reasons why manufacturers should consider the benefits of outsourcing their manufacturing processes.
One of the primary reasons is that outsourcing allows them to redistribute their resources, freeing up time to focus on other aspects of their business, such as research and development or marketing.
Outsourcing allows manufacturers who may lack the expertise to
build the product they have designed, to partner with a company that specializes in manufacturing. The process can also be beneficial for manufacturers who are not equipped to create a specific component that is necessary to finish their product.
Through outsourcing, manufacturers can ensure that they are able to produce high-quality products that meet the needs and expectations of their customers, while also saving time and resources.
Preferred Outsourcing Manufacturing Options
Contract manufacturing and shelter manufacturing are two popular outsourcing options. Let's see what's the best one for your business:
Shelter Manufacturing
Shelter manufacturing is a widely-used process that allows foreign manufacturers to establish a maquiladora, or manufacturing facility, in Mexico. They can do this without having to navigate the complexities of setting up a Mexican company.
This process avoids many bureaucratic hurdles that can make it difficult to do business in Mexico. Such issues include navigating the country's complex legal system, complying with local regulations, and dealing with issues like import/export laws, customs duties, and taxes.
By partnering with a shelter manufacturing provider, foreign manufacturers can quickly and easily establish a presence in Mexico. They can also tap into the country's skilled labor force, and take advantage of the many benefits that come with operating in Mexico. Some of the best benefits to get there are access to new markets, lower labor costs, and a more favorable business environment overall.
Contract Manufacturing
Contract manufacturing is a popular business model that has gained traction in recent years. It is a type of outsourcing that involves a company hiring a manufacturer to produce its products or components. This can be very beneficial for the contracting company, as it allows them to take advantage of the resources and expertise of an experienced manufacturer.
When you partner with a contract manufacturer, the contracting company can focus on other aspects of its business. You can work on the marketing and customer service, while the contract manufacturer handles the production. This can lead to increased efficiency and productivity, as well as cost savings. Furthermore, contract manufacturing can provide access to new technologies and manufacturing methods that may not be available in-house.
Overall, contract manufacturing is a valuable tool for companies looking to streamline their operations and remain competitive in today's market.
The risks for manufacturing companies that outsource
Here are the top 10 risks of outsourcing:
1. Loss of Control
Outsourcing can result in the company having little to no control, which can affect the quality of the outsourced service. Control also depends on the geographic distance of the vendor, which can make performance and productivity monitoring challenging.
How to Manage this Outsourcing Risk
- Weigh the responsibilities you are willing to hand over to the service provider.
- Set timelines for meetings
- Track KPIs and metrics
- Identify the person of contact to stay aware of everything at every stage of the process.
2. Communication Barriers
It is more difficult to communicate over the phone and video calls than in-person. This can make software outsourcing less efficient.
How to Manage this Outsourcing Risk
- Set core business hours
- Use effective project management tools
- Implement standardized formats for communication
- Use proper escalation mechanisms to bridge the communication gap
3. Unforeseen and Hidden Costs
Outsourcing can lead to unforeseen costs. From hardware or software upgrades, relocation or redeployment, after-hours services, to troubleshooting, everything can be costly. All of these add up to the total cost of the whole outsource project internally, pushing it beyond its original budget.
How to Manage this Outsourcing Risk
- Clearly define outsourced project requirements
- Pay close attention to every detail and money estimates your outsourcing partner provides
- Accurately clock in the work hours of each outsourced employee
4. Difficult to Find the Perfect Vendor
Picking the right vendor or service provider is tricky. They need to have the required skill sets and expertise for the job, access to the latest technology, be experienced in solving complex problems, be passionate about your project, and be flexible enough to tend to urgent issues.
How to Manage this Outsourcing Risk
- Conduct a background check on your vendors
- Determine how long the vendor has been in business and the clients they’ve worked with.
5. Privacy and Security Concerns
Outsourcing exposes your business assets to an outsider, which can lead to security problems. To deal with this security risk, draw up an airtight outsourcing contract with the help of an attorney.
6. Lack of Experience with Remote Teams
Managing a remote team can be more complicated than in theory. You need to constantly check in on results and have effective communication. You should also provide regular feedback, and appreciate their efforts to avoid a communication gap between you and your outsourced team.
How to Manage this Outsourcing Risk
- Choose an outsourcing vendor with a well-established setup
7. Outsourcing a Key Product
Outsourcing your key product can lead to you becoming dependent upon an outside vendor and eventually losing your entire product, expertise, and core competency. To minimize this risk, outsource only some parts of your project, keeping the crucial management and key employees in your office.
How to Manage this Outsourcing Risk
- Hire a specialist like a designer or a developer that will be an extension to your team
- Conduct a detailed background check of your source to measure their reliability
8. Vendor Failure to Deliver or Constant Delays
Outsourcing services can take four times as long to accomplish an outsourced function as quoted by the organization or remote employee. To overcome such operational risks, have constant check-ins with your service provider, and have a contingency plan or surplus inventory to deal with supply chain challenges.
9. Quality of the Outsourced Product
Quality failure in a physical product can be more severe if you’ve hired an offshore service provider. To help minimize this risk, prepare detailed product specifications for your suppliers, and insist on independent quality control inspections.
10. Geolocation
The efficiency of your outsourcing service depends upon the type of service you’re hiring. For making the correct vendor selection, ask them three questions: what’s the ideal mode of transportation, are constant physical check-ins possible, and will you face other supply chain issues?
Outsourcing is the best way to get your work done at a lower cost. However, it has its own risks. To avoid such situations, use the tips we mentioned to create a risk management strategy and choose the right outsourcing provider to focus on your core competencies!
So, Should You Outsource Manufacturing?
One of the primary reasons why companies choose to outsource their manufacturing needs is to clamp down on the cost of labor. When a business outsources a part of its production line to a third-party manufacturing company in a different location, they often see a significant decrease in production costs, either by lower labor costs or cheaper cost of native raw materials essential for production. Outsourcing can also utilize the existing assets of outsourced manufacturing operations or companies without requiring an investment in fixed costs.
For example, if you have invented a new product, outsourcing production may be the best use of your time and money. One important benefit of outsourcing production is that it allows you to focus on other aspects of your business, such as product development, marketing, and sales. By not investing heavily in developing your own internal infrastructure, you can allocate resources to areas that will drive growth and establish your brand.
In addition, outsourcing production can provide cost savings and other efficiencies. For example, if you partner with a manufacturer that has expertise in other production-related functions in your product category, they may be able to produce your product at a lower cost than you would be able to in-house. They may also be able to provide valuable insights and recommendations based on their experience working with similar products.
Outsourcing production can also help you scale your business more quickly. If your product takes off and demand increases rapidly, outsourcing allows you to quickly ramp up production without having to invest in new equipment or facilities. This can help you take advantage of opportunities in the market and capture market share.
Knowing how to outsourced manufacturing can be a smart strategy for those looking to focus on growth and efficiency in their company. By outsourcing production, executives can allocate resources to areas that will drive profitable growth and establish their brand, while also taking advantage of cost reduction and the ability to scale quickly.
Identifying the Right Manufacturer
The right manufacturer for your product can be identified as having the following attributes:
1. Experience
Evaluate the manufacturers' qualifications and experience by checking the businesses they've worked with. Reach out to their previous clients to learn more about their experience working with the manufacturer. Pay attention to how representatives answer your questions. Look for knowledge and experience demonstration.
2. Size
Large manufacturers have a lot of knowledge and experience, while small manufacturers offer greater flexibility. Do some market research before deciding which one to choose.
3. Turnaround Time
Inquire about the turnaround time and determine if it fits your desired production timeline. Be aware of how turnaround times correlate with production pricing.
4. Sourcing
Check if the partner you're considering outsources most of their production for specific product. Research the company they use for outsourcing to verify if they're reputable.
5. Minimum Order Requirements
Ensure the minimum orders work with your budget before partnering with a manufacturer.
6. Payment Terms
Verify if the manufacturer requires pre-production payment in full.
7. Quality Assurance
Ask about the quality assurance practices the partner has in place. This should happen at every stage of the production cycle to ensure all product components are devoid of defects.
How to outsource manufacturing with The Sourcing Guy
If you are interested in getting the most out of sourcing from different countries, my company, Imprint Genius, can help you navigate and get the best products with the best deals.
FAQs
How do companies outsource manufacturing?
Companies can outsource manufacturing, or contract manufacturing with a third party to produce goods or services by contracting specific processes essential to their production. This can be done domestically or internationally, saving businesses time, energy, and money — outsourcing can also help businesses stay competitive by focusing on their core competencies.
Is it cheaper to outsource manufacturing?
Yes, it is cheaper to outsource manufacturing. This advantage is often due to economies of scale and other cost-saving measures that large manufacturers can implement. Moreover, outsourcing manufacturing allows you to focus on your core competencies while leaving the manufacturing process to experts in the field.
Additionally, outsourcing eliminates the need to set up and maintain your own manufacturing facility, which can be a significant expense and time-consuming process. By utilizing manufacturing outsourcing services, you can free up resources to invest in other areas of your business, such as marketing, research, and development, or customer service.
How much does outsourcing services cost?
The cost of outsourcing services varies from country to country and the business processes they offer and specialize.
How do you calculate the cost of outsourcing?
You can calculate the cost of outsourcing by following these four steps:
- Define the business process to outsource.
- Calculate in-house costs that outsourcing can replace.
- Calculate total outsourcing costs.
- Determine savings by subtracting outsourcing costs from in-house costs.
