Should start-ups outsource manufacturing? 8 Reasons to Consider Outsourcing
Outsourcing manufacturing can be a game-changer for startups and SMBs. But why? And how do you ensure your manufacturer is the right one?
Outsourcing the production of goods is common for most entrepreneurs. This type of production plays an essential component in production processes in any industry, and its benefits are vast. This article provides insight into outsourcing manufacturing and why outsourcing may be important to your company’s supply chain – especially if you are a start up.
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What does outsourcing manufacturing mean?
Outsourcing manufacturing is when a company employs an outside firm to produce parts of a product or entire products. Most brands worldwide opt for outsourcing at least some of their manufacturing needs for various reasons. Some brands start their business outsourcing manufacturing and slowly grow into building their own manufacturing facility or facilities. Other brands, however, never make this transition and continuously outsource manufacturing from day one.
8 Benefits of Outsourcing Manufacturing
Outsourcing part or all of your manufacturing has many benefits. While a lot of these benefits are driven by cost, many of them are not. Below are 8 reasons why you might consider outsourcing manufacturing in your business.
Cost Reduction
The biggest reason many brands choose to outsource manufacturing because they can reduce their costs. Many times a large facility with a vast number of customers can produce a part or product cheaper than a smaller company can on their own. This is because larger factories benefit from economies of scale.
In other words, they receive raw materials, land, space, construction, and even utilities for cheaper than what an individual can. Therefore, scaled factories may achieve a significant decrease in production costs. These cost decreases are then passed onto the brand that is outsourcing manufacturing.
One way we cut costs for our customers at AMS is through our in-house engineering team and the design for manufacturability (DFM) service we provide. This process helps reduce manufacturing waste and time.
Labor Reduction
As brands outsource manufacturing, labor requirements decrease. Although the benefits of reducing labor requirements is closely tied to cost reduction, it also has other benefits. The less people you have on staff, the less management is required. People take a lot of time and effort to hire, train, and manage. Therefore, the less labor required to bring your product to the market, the leaner your overall business can be. For a start up, this means getting to profitability sooner.
A smaller workforce also reduces risk. This is because larger pools of labor can increase the company’s liability for expensive scenarios such as workers comp, unemployment, and other situations.
Capital Expenditure Reduction
A start up business usually requires an investment of funds, or capital, to propel into a rapid growth phase. Investors are interested in knowing what kind of return they will receive on their capital, and how soon they will see that return. If a large portion of the funds that go into a start up fall into capital expenditures to setup and run manufacturing, the investor may decide to look for other opportunities.
For this very reason, many start ups decide to outsourcing manufacturing from day one. This allows the company to devote more of their funds to building their brand rather than expensive equipment.
Increased Capacity
An increased demand from the market results in either increased prices, or an increase in supply. If this happens in your market, and your competitors do not increase their prices, then you may choose to outsource manufacturing in order to expand production capacity.
The benefit here is that your costs may only increase minimally, if at all, to ensure you acquire the expanded market share. If you choose to increase capacity with in house manufacturing, you may have a long lead time, which could cause you to miss out on the new expanded market opportunity. Additionally, it may only be a temporary shift. In this case, your capital expenditure will be wasted on a seasonal or temporary spike in demand.
Capability
Sometimes the simplest reason for outsourcing manufacturing is a lack of manufacturing capability. Some brands are really great marketing companies. They may excel at sales or marketing, but not at building and operating a manufacturing facility. Other companies may excel at product design, but not the capability to produce them internally. For these types of businesses, the benefits of outsourcing manufacturing outweigh the challenge of building a production line.
Focus
Sometimes, a start up or even established business may have the capability to build an entire product with in-house manufacturing. However, it still may not be a good idea. This is because capability does not mean control.
In other words, the operations of such a process in the business may cause other problems. For example, resources are finite in any business, not just start ups. As more and more resource dependent activities fill the pipeline, the tendency is to ignore other areas. When this happens, it could negatively affect the overall operation of the company. Support staff may utilize assets required for production, and vice versa.
For this reason, many start ups and other businesses choose to focus on their core business before they create an in-house manufacturing line.
Specialty Manufacturing Processes
Products often have components are assembly processes that require highly technical processes or machinery. These specialized requirements may not be available to a small to medium business without massive startup costs. When this happens, a company may decide to partner with speciality manufacturers already in place without having to build facilities themselves.
In these circumstances, the driving factor for outsourcing is to utilize the highly specialty contract manufacturing services they could not do internally. At least not without large fixed costs.
Diversifying Risk
One often overlooked of the benefits of outsourcing manufacturing is a reduction in risk. Risk is always a factor that should be considered when it comes to manufacturing. The problem with any supply chain is the risk of substantial and long lasting changes. These changes can be caused by extreme weather or even a supplier going bankrupt.
One excellent way to reduce concerns of supply chain issues is to diversify the number, and location of manufacturers. By doing so, you can establish one or more sources for continuing to receive product even if one part of your supply chain shuts down.
When Should I Outsource My Manufacturing?
Now that you know the benefits of outsourcing manufacturing, the next logical question is how do I know when or if I should outsource my manufacturing?
To begin answering this question, first you should determine what your priorities are in your specific startup or business. In other words, are you in a growth or cost cutting phase? Along with this, you should determine what kind of capability you have, and if you even have a taste for manufacturing.
Ultimately, you must determine for yourself if building out your own manufacturing line is right for you. Use the following questions as a guide to help you make that decision:
- Does in-house manufacturing give me a competitive advantage?
- Is cost reduction or cash-flow most important to me?
- Do I have the resources to support my business and a manufacturing line?
- Do I have the capability to support a manufacturing line?
- How long will it take for me to recover the up-front capital cost of the manufacturing facility?
- Can I manufacture my products in-house for cheaper than outsourcing?
- What risks exist that could affect my ability to get product to the market?
Finding the Right Manufacturer
It is important that you find a good contract manufacturer. If you choose an unqualified contractor you may face cost overruns, delays, or worse. While cost often drives choice, if it is the only decision making factor you have, you will run into a lot of problems. Quality should also be part of your business strategy. Because of the sheer number of contract manufacturing organizations in the world, it can be hard to find the best one for your business.
Work With a Trading Company
How does one go about finding the right manufacturer? One way to do this is locate a factory and build a direct relationship. Unfortunately, many factories are not equipped with sales managers or representatives. This makes communication difficult and cumbersome.
This is where an outsourcing company, also known as a trading company is helpful. An outsourcing company may operate as the sales arm of a factory or several factories in an area. They can help you purchase and negotiate with a factory to achieve your production goals.
At AMS, we operate as both a manufacturer and an outsourcing company. This helps position us for providing a vastly superior level of communication, but also oversight into quality and adherence to specification.
How to Qualify a Contract Manufacturer
While there are many benefits to outsourcing manufacturing, unfortunately there are lots of contract manufacturers who can do more harm than good. In these circumstances, your goal of lower labor costs or a decrease in production costs may not be realized after long delays or quality issues.
What are some things that you should look for when qualifying your contract manufacturing or outsourcing companies?
Check Supplier Communication Process
One key component that can destroy a supply chain is poor or even non-existent communication. When considering manufacturing companies, you should ask for case studies, examples, and an exact explanation of processes they use throughout the manufacturing process.
Reliable and responsible companies should respond with a well detailed plan for how you they ensure that you have the information that you need exactly when you need it. If, when you ask for this detail, you do not receive a detailed response, you may consider that a red flag.
Tired of poor supplier communication?
Don't Decide On Price-point Alone
It’s tempting to always go with the lowest cost solution. You start to think about how much you can save in your supply chain and either distribute back to investors or turn as a competitive advantage. Be very careful about falling to that temptation. Just because a supplier submitted a quote for a fraction of the cost doesn’t mean they will be good parts.
This is one of the greatest pitfalls companies make when outsourcing production. While a cost effective supplier exists, you can avoid a much more expensive and cumbersome problem by partnering with reliable and quality manufacturing companies from the start. Your per unit cost may be higher, but in the end your costs will be less.
Check Quality Assurance Process
When choosing to outsource production processes, you do not have direct oversight in the quality of your goods. Therefore, you should ensure that the manufacturing processes employed by the factory includes a well-defined process for not only checking quality, but also assuring it.
Ask for References
One great way to gather crucial information about a potential contract manufacturing partner is to interview those whom they have already done business with. If the supplier is established enough, they should have several references to provide you. A simple phone call to discuss the experience with any of these references goes a long way in solidifying your decision making.
Verify Other Costs
The worst costs in production processes to companies is the cost that no one expected. One example of this could be a manufacturer’s policy on pricing when the exchange rate shifts from one country to another. Another example could be costs that arise due to changes in the logistics or freight process. Either way, you want to do your due diligence to uncover any additional manufacturing costs so you can keep outsource manufacturing affordable to outsource production.
Ensure Accurate Lead Times
Any of the myriad of manufacturers out there can claim lead times of whatever they want. But can they actually deliver on those lead times? It is your job to determine the answer to that question. A delayed part or product could affect your entire supply chain. So it is vital to ensure that outsourced suppliers can produce and ship products according to their promised schedule.
Let Us Audit the Factory For You
If you are unable to do any qualifications yourself, or perhaps unsure, we can vet factories on your behalf. In some ways this is actually preferred as we can put boots on the ground in these facilities. This way you know for certain you’re getting the right information so you can make an educated decision.
Conclusion: Is Outsourcing Manufacturing For Me?
We have determined that companies may choose to outsource for cost related reasons. Notably, to reduce labor costs, fixed costs, and reduce the required capital investment. While cost is the main reason for choosing to outsource manufacturing, it should not be the only determining factor. Capacity plays a role, in deciding whether to build an entire product outsourced too.
If you rely upon outsourcing manufacturing processes, you should look at all the reasons for outsourcing. Efficiency, management, focus, costs, risk, and quality assurance should all play a part in your decision. You should answer the question, “what is my core business?” From there you can determine if manufacturing costs or cash flow are your current priorities.
Once you have that figured out, then it’s simply a matter of qualifying the right manufacturing companies for your products, or deciding to produce them internally.
With our turn-key approach to supply chain, we are the best option for building your supply chain strategy. From finding the right manufacturing partner (whether that is us or another factory) importing, and fulfilling your product, we do it all under one roof.