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When should your contract manufacturer handle purchasing, inventory and assembly?

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purchase orderFor organizations moving from prototype to production, there are a lot of decisions that must be made about how to source parts and build the product. A major part of this process is deciding what can be done in-house, and what must be outsourced. (And who are the partners, and how closely can they be brought into the fold and how will they work together . . . )

Most companies outsource in some capacity—whether it’s working with an external call center on the sales side, or paying a team in China to manufacture the whole thing—but deciding what to outsource can be tough. While it may be an easy decision to outsource something like custom part manufacturing, when it comes to core business processes like purchasing, inventory management and assembly, the decision gets a bit trickier.

The benefits of outsourcing purchasing, inventory and assembly

If you are thinking about outsourcing major processes like purchasing, inventory and assembly, there are definitely benefits to this approach. In offloading some of these processes to a contract manufacturer (CM), you free your in-house team up to focus on design and engineering. In many cases, this is a smart move because it allows your in-house team to develop strength in specific areas. Because purchasing and inventory is resource-intensive, assembling and training a team to manage it in-house can distract from product maintenance, development and other organizational priorities.

For some companies, outsourcing purchasing, inventory and assembly leads to significant cost savings. You may be able to reduce sourcing and shortage issues—since your contract manufacturer team is building the product, it can be synergistic to task them with finding and purchasing the parts as well. Plus, when you outsource the purchasing and inventory piece to a contract manufacturer, there is considerable potential for cost-reduction. Contract manufacturers often do similar work for multiple customers using the same components—if your parts get lumped in a volume purchase, economies of scale can save you some money.

When does outsourcing purchasing, inventory and assembly make sense?

While there are benefits in outsourcing purchasing, inventory and assembly, it’s not the right decision for everyone.

To help you decide how much of your production process you should outsource, start by asking yourself the following questions:

  • What is your company trying to do? (If you are trying to develop core competencies or a competitive advantage in a certain area, you probably shouldn’t outsource it!
  • How important is it to protect your IP? Can you take chances with an unknown supply chain partner—is there someone you trust?
  • What are your priorities as an organization? Does outsourcing more to a CM free you up to focus on competitive differentiators and core competencies, or are the additional management responsibilities distracting?
  • What is your tolerance for dependency? When you outsource major parts of your manufacturing process, you become more reliant on vendors and can increase your vulnerability.
  • What is the cost of purchasing errors and rework? Are you willing to risk occasional miscommunications and errors by working with an external team?
  • What is your system for managing BOMs and change—some of the outsourcing risks can be mitigated if you have an air-tight solution for collaborating with outside partners.
  • How efficient are you operationally? Can your in-house team manage purchasing, or are they too focused on other business aspects?
  • What’s your budget? (Everything has a cost!)

Once you get an idea of your business reality, you can begin to weigh your options, and decide if outsourcing purchasing, inventory and assembly is right for you.

A final word on outsourcing partnerships

If you ultimately decide to turn over purchasing, inventory management or assembly to a vendor, make sure you only work with people you trust! As with any outsourcing decision, selecting reliable vendors who supplement your internal skill sets and industry knowledge is key.

About the Author

Alex Gammelgard

Alex managed social media marketing and communications at Arena from 2011 to 2012. Although coming in fresh to the manufacturing industry, Alex is married to an engineer and is well ...

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