Many of our discussions with potential customers include the value of and potential return on outsourcing. The following information originally was published in the Houston Chronicle and may provide some food for thought if you’re considering moving some of your production to a contract manufacturer.
The term “outsourcing” in regard to manufacturing is often aligned with moving production out of the United States or offshore outsourcing, but outsourcing with the goal of increasing the bottom line can be done stateside as well. Manufacturing companies have a myriad of reasons for outsourcing production, but it usually boils down to one thing: cost reduction. Here are four factors to consider when weighing the outsourcing decision:
Labor Costs
Part of any analysis for a manufacturing company deciding to outsource any of its operations includes the cost of labor. Having employees on the company payroll means paying them a competitive wage and, for most companies, it also means providing some form of employee health benefits.
Overhead Cost
Many companies have outsourced their manufacturing to eliminate the overhead cost associated with operating a manufacturing facility. These overhead costs include utilities, such as gas, electric and water, and the maintenance required to operate production equipment. Other overhead costs include indirect labor such as quality assurance personnel, equipment technicians, material handlers, and shipping and receiving personnel.
Flexibility
Some manufacturing companies have gained increased flexibility by outsourcing their production to a contract manufacturer. Since the contract manufacturer has more production capacity than the original manufacturing company, it can respond to increased production requirements faster. Instead of the original manufacturer making a capital investment in new equipment required to increase its production capacity, the contract manufacturer makes that investment.
Focus
Some companies have experienced extreme paradigm shifts that have prompted them to outsource their manufacturing. A company that realizes its core competency, the thing it does best, is the sales and marketing of its product and not the production of its product may often choose to outsource its non-core activity, or the manufacturing of its goods. With the production outsourced, the company can now focus its resources, both human and financial, on the areas that increase revenue and profit.