Outsourcing Manufacturing Activities: Food for Thought

    By Michiel Beek | Small Business

    We’ve recently seen increasing numbers of manufacturing companies recalling production processes from (previously) lower wage countries like China. However, this doesn’t mean that they’re committed to carrying out these operations again themselves. Even at home, outsourcing them to the right partner can be a smart move.

    Let’s begin by exploring the key benefits of this approach to managing some of your production operations.

    1. Personnel costs: By using a flexible workforce (think temping agencies) you can save on the costs of full time salaries in periods when you’re less busy. In some cases, it is rewarding to relocate activities to other countries where the skills required command less remuneration. Take care though. Don’t forget that these savings need to be weighed up against additional transport costs and increases in delivery and issue response time.

    2. Overhead costs: Running a manufacturing operation involves a wide range of indirect costs. Think about the fees associated with your building for a start, including gas, water and lighting. The machinery, tools, maintenance, handling of materials and the full spectrum of management activities involved. By not having to support your own production facility, it’s possible to save on all these costs. Depending on the precise nature of your situation, this could make it very attractive to leave the manufacturing to someone else.

    3. Focus: A manufacturing business is often very strong in certain activities, and often less so in others. By outsourcing these processes to a team that can complete them with greater accuracy and efficiency, performance increases – it allows the manufacturers to focus on doing what they’re really good at. This could, for example, be design activities or custom-made orders. If that’s the case, the standard production could be given to another producer who specializes in that particular area. This allows all the aspects of your operation, and the quality of the output, to be optimally managed.

    4. Flexibility: A good relationship with your suppliers enables you to react quickly and effectively to the market. You can make firm agreements that enable accurate planning, but have the ability to adjust them when it’s necessary. You can include suppliers in the design process for your products to ensure the very best fit between your requirements and materials purchasing. You can look together for ways to create the greatest possible efficiency in the supply chain – sharing, for example, information on the production plan. And you can, of course, make use of each others specific technical and market related expertise.

    Choosing the right partners
    So…activities that distract you from your core business and/or can be carried out more effectively by others could well be better left to third parties. These partners could indeed be overseas, or could equally be in the local environment. Either way, the question remains the same – how do you know if you’re choosing the right people to do business with? Whoever you choose, you’re going to be heavily dependent on them.

    When considering whether to go into business with a new partner, there are five key areas to thoroughly consider and research.

    1. Delivery agreements: Business partners can easily promise delivery at a certain time, but how often are appointments going to be missed? That deliveries come too late (or even too early)? What exactly is the delivery reliability going to be? How reliable are your suppliers’ suppliers? And what are the alternatives if something does goes wrong? Be careful of false economy – going cheaper usually involves a compromise in reliability or quality (or both!).

    2. Quality: Can the new supplier consistently deliver the required quality? If not, what’s the bandwidth, and how often is it acceptable to fall outside it? Will there be entry and exit checks? Is certain certification necessary for your industry or specific customers, and if so, does the new partner have the necessary documentation? Does your manufacturing process follow the industry norms, are is your new partner likely to experience new demands by working with you?

    3. Continuity: Is your new partner a healthy business – are they genuinely on top of things? How sure can you be of creating a sustainable relationship with them? What are you able to discover about their financial situation? Do they have a strong credit profile? What is their market reputation? How many customers do they have? Are any of those significantly larger customers that they are heavily reliant upon?

    4. Price increases: How likely is it that you’ll be faced with unexpected price increases? How transparent are they? How transparent are their partners? Is it easy enough to get hold of the information you need ? How much variation is there in the base prices for the raw materials that they use?

    5. Cooperation: And to finish an extremely important question: what opportunities for effective co-operation and operational synergies exist?

    Does the potential partner have a level of technical expertise that would add value to the business – and vice-versa? Can you work together to make product development smarter? Where can you uncover improvements in the logistics process? Does the new partner have experience of creating these kinds of successful relationships with other progressive companies in its customer base?

    Think about benchmark setting companies like Scania or DAF trucks who have realized genuine lean performance in their businesses. What kinds of partners do these kinds of businesses choose? Maybe there are suppliers in those ecosystems that you could also work with, benefiting from their genuine (lean) expertise.

    If you can manage to find attractive answers to (most of) these questions, you’ll be able to enter into new relationships with more confidence that you’ve selected someone to effectively support you in your drive for success. An effective co-operative relationship can bring benefits on a number of levels – not least the freedom to concentrate fully on the things that you do best and create effective differentiation from your competitors.

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