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How much of your production process should you outsource?

Manufacturing Outsourcing

When preparing for production, should you outsource purchasing, inventory management, and assembly or just assembly?

This article discusses the pros and cons of each option and offers suggestions to help you in your decision-making process.

Your manufacturing milestone: You’re a start-up getting ready for production. And now you have a decision to make.

Should you outsource purchasing, inventory management, and assembly or just assembly?

Factors in your decision:

Weigh the options before making a decision

Option A.

Outsource purchasing, inventory and assembly to your contract manufacturer

Option B.

Outsource assembly only

Option A: Outsource purchasing, inventory, and assembly

When this can work for you:

  • You have a simple product
  • Your product has a stable design
  • You can trust your supply chain partners
  • You have few employees, or lack in-house expertise
Potential Benefits
Focus on core competencies by outsourcing other parts of the process Less control of your supply chain
Mitigate sourcing and shortage issues Decreased IP security
Leverage economies of scale for better deals Fewer opportunities for supply chain innovation
Less visibility into actual part costs

Outsource purchasing, inventory, and assembly to focus on core competencies

The major benefit of delegating purchasing and inventory to your contract manufacturer is that your in-house team will have more time to focus on design and engineering. Purchasing and inventory can be very resource-intensive, and assembling and training a team to manage this work in-house takes time away from product maintenance and development. Pushing these responsibilities off to a CM gives your internal team a chance to develop expertise and strength in other areas.

Empower your CM partners to purchase the parts they need

Outsourcing purchasing, inventory, and assembly to your contract manufacturer also reduces sourcing and shortage issues. It makes a lot of sense to have your contract manufacturer find and purchase the parts that they will ultimately be using. Because CM teams are often more specialized than original equipment manufacturers (OEMs), they are often in the best position to ensure that they have what they need in order to do their work.

Use your CM network to take advantage of volume pricing

A third reason to outsource purchasing and inventory to your CM is that this move can help you reduce costs by leveraging quantities of scale.  Your CM may be doing similar work for other customers using the same components—if your CM purchases all the parts together, he or she can get volume pricing and (hopefully) pass the savings along to you.

Option B: Outsource assembly only

When this can work for you:

  • You have a highly complex product mix
  • You have security concerns
  • You are confident in your ability to leverage a diverse, competitive supply chain
Potential Benefits
Maintain flexibility and control Inability to get volume pricing
Empower innovation internally Decreased focus on specialized core competencies
Develop skill in-house Additional management responsibility
Reduce supplier management costs

If you want it done right, do it yourself.

If maintaining control and flexibility is important to you, you will probably want to handle purchasing and inventory yourself. Managing a supply chain can be a lot of work, but if you can develop it as a core competency it becomes a competitive edge (just look at what Tim Cook did for Apple.)

Develop competencies in-house to increase opportunities for innovation

New substitutes cut in on your market share, and in today’s world of rapid iteration and innovation, you may find competitors emerging much earlier in the product lifecycle than you expected. Often, a sound business model and production process can mean the difference between success and failure. If you pass along this task to an outside party you can miss a good opportunity to innovate on this front.

Avoid CM markups and fees

Another reason to keep purchasing and inventory in-house is that outsourcing can be expensive. Not only do most contract manufacturers charge a markup free, but they may not work as hard to get you the best deal. When you outsource purchasing, you have less control of the buying process, and can’t be certain that your total part cost is as low as possible. Even if working with a CM results in volume pricing, it is likely they will only pass the savings on to you if your business represents an important revenue stream for them. (Can you really blame them for wanting to keep the margins?)

Don’t pay more to do more work

Even if you pass off purchasing and inventory to your supplier, you will still need to manage change, communicate design, and tell your contract manufacturer what to buy.  So what can happen is that you end up managing the hard part of the task, passing off POs and inventory management to your contract manufacturer, and still paying a high price for your CM.

Bring purchasing in-house to protect your IP

Lastly, there is an inherent risk in giving a partner so much access and visibility into your supply chain. If your product comes with a lot of security concerns and you outsource purchasing and inventory, you may unintentionally be giving too much power, product knowledge, and control to your CM.

To recap

Consider outsourcing if:

  • Your product is stable in its design and not very complex
  • You have a partner that you really trust
  • You are just getting started and don’t have the expertise in-house (and don’t want to develop it)

Consider manufacturing in-house if:

  • You have a highly complex product mix or a highly complex product
  • You have IP or security concerns
  • You are confident you can leverage a diverse supply chain as a competitive advantage

Tips for making it work

If you decide to turn over purchasing and inventory management to a vendor, make sure you only work with people you trust. By outsourcing such an important part of your operation, you create many operational dependencies. This can make you more vulnerable, so keep an open eye, be flexible, and be ready to change if needed.

When you outsource purchasing, inventory, and assembly, you outsource a potential core competency or competitive advantage—so really think about what your company is trying to do strategically.  If you decide your supply chain isn’t a competitive differentiator, then consider moving forward with caution.

If you are a small company and are outsourcing these key processes because you lack the skills in-house, be ready to increase your staff and take over if needed. If you are a large company looking to focus more on engineering and design, be sure to do some testing and take it slow if you are considering changing your model.

If you decide that your purchasing and inventory should be managed in-house, don’t panic when mistakes are made—mistakes are inevitable, and this is a normal part of business maturity. You will inevitably counter supply chain breakdowns and errors, so create a “plan B” (or even a “plan C” and “plan D”).

No matter what you decide in this situation, make sure you are depending on the right people. Whether you in-source or outsource, it’s important to carefully select people with the right skill sets and industry knowledge. It’s also important to have the right tools and solutions to drive effective supply chain collaboration.