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The (Many) Benefits of Outsourcing your Manufacturing

By Kahl

Put the antiquated idea of being a “one-stop shop” out of your mind once and for all. Doing everything under one roof, from initial design to finished product, is no longer the best strategy for creating growth and profits. In order to not just compete, but survive, in the current economic climate, you need to think way outside the box. You need to think “outsource,” and here are just a few of the ways outsourcing your manufacturing can significantly impact your bottom line, increase the likelihood of your company’s long-term survival, and pass on substantial savings to your customers.

Outsourcing Manufacturing

A number of factors have contributed to the globalization of business processes in the past 25 years: political factors such as the fall of the Berlin Wall, the breakup of the former Soviet Union, and abolishment of apartheid in South Africa. Economic influences include NAFTA, the adoption of the euro, and the huge wealth gains derived from the tech boom. Exponential increases in global computer connectivity, data capture, processing, and storage led to leaps in progress in business processes. The world was wide open and ready to do business.  Increased transparency helped to mitigate the widespread graft and corruption in markets once considered risky, and companies small and large put their toes in the new global business waters and ventured into new territories for new business opportunities and endeavors.

With countries outside the U.S. now possessing better logistics, equipment, and expertise, outsourcing certain departments soon became the norm. Call centers in India now handled customer service issues, Filipino accountants maintained the books, and, most notably, manufacturing demands on traditional players China and Mexico became so great that THEY themselves started outsourcing to nearby Vietnam, Thailand, Honduras and Guatemala just to keep up with demand. Formerly perpetually depressed economies in Ireland and Poland now offered themselves up as manufacturing epicenters of Europe and Great Britain. The world, according to Thomas Friedman’s runaway bestseller, had become flat.

Outsourcing Your Manufacturing

The Numbers Don’t Lie

Outsourcing your manufacturing can save your firm at least 15% in costs, and that is a conservative figure.[1]  However, making the decision to outsource any part of your business can carry a stigma, and result in some bad publicity and backlash against your company. Outsourcing and its kissing cousin, offshoring, are often lumped together in the media as being threats to our national livelihood and even our way of life. However, if you are willing to weather the potential storm of initial outrage against your firm, the upsides of outsourcing manufacturing are many.  Outsourcing just your manufacturing processes can help you realize significant long-term cost reductions, savings to you and your customers, and, ultimately, the survival of your company.

The Roof Over Your Head

Initial savings from outsourcing your manufacturing can be seen as you now can reduce, minimize, or outright eliminate the need for a production plant or factory. With this comes the savings in real estate maintenance overhead costs: property taxes, insurance, utilities and other overhead.

For some firms, the savings from outsourcing production can represent such a savings that a reduction in labor costs is unnecessary.

Labor and Delivery

Imagine doing business where you provide jobs to a ready and willing populace, without any undue and unwelcome interference from meddling, rapacious unions or outdated government regulations. Imagine being able to offer your workforce the flexibility to work various shifts to suit their culture and lifestyle, while still putting food on the table, and paying for children’s education. This is the reality available when you outsource your manufacturing to other parts of the world. The threat of a union strike, lockout, or shut out, the inability to terminate poorly performing employees, the prolonged and sometimes futile contract negotiations that leave everyone disgruntled and unhappy- this doesn’t have to happen if you choose the right market and put the right managers in charge.

Without union or government interference, you are able to control production schedules and even offer longer shifts to willing workers, with minimal overtime regulations and costs.  You will also see the benefits in not having to deal with domestic, sometimes byzantine human resources, payroll issues, overtime, and benefits

In addition, being able to negotiate directly with your managers and labor force means you can negotiate deliverables and terms, such as purchasing manufactured items by the piece, which can translate into significant cost savings.[2]

A Capital Idea

The savings from outsourcing manufacturing your product can increase revenues to invest in other areas of business, such as marketing, research, and development, salaries at HQ, debt retirement or debt restructuring, all contributing to a much more robust bottom line.  With outsourced manufacturing, the product price will likely fall. This will lead to increased sales, enlarged market share, and higher margins.

An Ounce of Prevention

The risks associated with outsourcing manufacturing are never far from the wise CEO’s mind. The risks of the occurrence of workplace abuses, economic, social or political instability and basic quality control are constant threats to a sound outsourcing strategy. While you can’t control certain externalities, such as a regime change, coup, malaria outbreak, or devastating typhoon, there are things you can control.  One practice that may pay great long-term dividends is to have an on-site manager of the plant, from your headquarters, overseeing production, at least in the initial stages of outsourcing. Keeping a close eye on the process not only helps keep quality standards high but can also foster great collaboration and instill a sense of accountability on the part of the local plant workers and managers.

The choice to outsource your manufacturing may be one of the best strategic business alternatives to help you focus on your core competencies, cut costs, increase margins, and stick around for a long, long time.

Resources:

[1] http://www.investopedia.com/terms/o/outsourcing.asp

[2] http://smallbusiness.chron.com/pros-amp-cons-outsourcing-manufacturing-jobs-40320.html

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