Why is Outsourcing Manufacturing Important to Your Business?
Companies project their activities to grow and obtain more profits. Still, their expansion processes are sometimes deterred because their human resources are finite, and they need specialized talent or the required infrastructure. In these situations, outsourcing manufacturing can evidence itself as an effective solution.
For this reason, business management must know and appreciates the importance of outsourcing, also known as subcontracting.
What is outsourcing manufacturing?
The word outsourcing literally means “outsourcing” and refers to companies outsourcing manufacturing services to other companies for varied reasons.
This form of contracting is of great value for companies since it can solve multiple problems without changing the structure itself.
The outsourcing of manufacturing is used for:
- Reducing the workload.
- Hire specialized companies with experts in certain areas of manufacturing
- Complementing areas of production (for example, outsourcing the manufacture of certain parts of our products or assembling the items at another company)
- Hire talent for special projects in certain areas of production that lack resources internally.
These are the most common areas for outsourcing manufacturing. The choice to outsource production elements depends on the company’s objective, which will determine the purpose of making this choice.
What is the purpose of outsourcing production?
An old popular saying says, “Cobbler to your shoes,” and outsourcing is precisely about looking for business talent in each area to add and advance together and cooperatively.
In short, outsourcing manufacturing is a contracting technique whose purpose is delegating tasks to external experts for the best possible results.
The idea is that the company’s structure dedicates all its energy to its core competencies, and the subcontracted companies do the same in their specialty.
In this way, workflows are optimized, execution times are reduced, less money is spent, and the proposed objectives of the company that outsources production are achieved much faster.
Outsourcing Manufacturing: When does your business need it?
There are some key questions to ask if the company needs to use the outsourcing of production:
- Does productivity stagnate because you need specialized personnel in some manufacturing process?
- Are the investments of time and money dispersed in secondary tasks to the core of the business?
- Do non-strategic areas create problems that affect workflows?
- Do you need to separate the company’s primary functions from others that are complementary and necessary but not central?
- Do you want to incorporate manufacturing technology to optimize processes, and do you need the best talent in the technological field?
If you answer positively to 2 or more questions, outsourcing manufacturing could provide you with the solution.
But what kind of hires are needed? First, we are going to examine how outsourcing production can be implemented.
Types of outsourcing
There are different ways to organize this form of contracting:
According to the objective:
- Tactical: another company is subcontracted for temporary manufacturing work or a specific task to reduce costs. This way, the organization does not have to focus its resources and energy on a secondary task.
- Strategic: a close collaborative relationship is built with the contracted manufacturing company since it is about adding external talent to the organization to improve work processes, quality, or production capacity.
According to the delimitation of responsibility:
- Co- Sourcing: the tasks are carried out within the contracting company, but both parties are responsible for the work results. It is a manufacturing partnership relationship.
- Out-tasking: as the word indicates, the tasks are carried out outside the contracting company and under the responsibility of the outsourced party.
According to the physical place where the work is carried out:
- In-house or on-site: manufacturing outsourcing is carried out within the facilities of the contracting company.
- Off-house or off-site: the services are executed in the company’s facilities to which manufacturing has been outsourced and are distributed to clients and consumers from there.
Depending on the geographic location
- Offshoring: when a job or service is outsourced to a company located abroad.
- Nearshoring is the same case above, but when outsourcing manufacturing is done in a neighboring country.
- Onshoring: the contracting company and the subcontractor are in the same country.
In any of the models described, outsourcing as a subcontracting system has the same characteristics described below.
Outsourcing characteristics: know them and take advantage of them
This form of organization between companies is characterized by the following:
The cost of outsourcing manufacturing is lower than that of directly hiring employees to do specific tasks and execute certain processes.
Suppose you need to have trained personnel in certain areas. In that case, outsourcing manufacturing can allow you to have them and reduce the possibility of process errors, with consequent delays and associated risks.
Maximizing flexibility and versatility
Outsourcing manufacturing is versatile and can provide solutions at a local, national, or international level and adapt to companies of different industries and sizes.
Advantages and disadvantages of outsourcing manufacturing
Once the concept of outsourcing production has been defined, including its types and characteristics, the next step is to discover how it can favor the company and what negative aspects its use could have.
- Optimization of operating expenses and human resources.
- Cost reduction thanks to specialization.
- Taking advantage of technological advances without the need to acquire them directly.
- Quick response to the needs of changes in workflows, processes, or technology.
- Building a reliable corporate network.
- Increased competitiveness and productive capacity.
- Application of technological improvements with the collaboration of experts.
- Improvement of company services.
- Relying on third parties to apply innovations.
- Isolation regarding technological innovations that could improve processes.
- Share sensitive information with other companies.
- Reduction of control in the production or delivery processes of manufactured goods.
- Take responsibility for the inefficiency of the outsourced company in case of delays or quality problems.
- Disadvantages for differing between companies in terms of organizational culture.
To avoid some of these problems that could arise, the process of outsourcing manufacturing must be planned and controlled by the contracting company since it is your organization that exposes its prestige and name.
Choosing the company for outsourcing: what to take into account
To carry out an outsourcing process and find the ideal partner that your business needs, it is imperative to do a preliminary investigation and determine the status of a potential manufacturing partner based on the following aspects:
The company that is hired must guarantee full compliance with the laws in force in the territory in which it operates. This is essential to avoid legal problems that can harm workflows and collaterally involve your company.
Outsourcing manufacturing implies that the chosen company must guarantee that the operation conforms to the plans and objectives of the contracting company.
One of the relevant factors to apply to outsourcing production is the search for talent with a high level of specialization. It may be impossible to hire such staff directly, but it can be feasible to do so by subcontracting for the execution of specific projects.
Trust and security
Companies that outsource manufacturing operations seek to build secure and reliable relationships with their subcontractors since both must work in a complementary, synchronized manner and with the same objective.
Both companies must be willing to sign contracts where duration, conditions, restrictions, confidentiality agreements, etc., are established.
It is necessary to sign a document where the quality standards of the service or product to be delivered are established. Remember that what is at stake is the brand of your company, its trajectory, and its prestige.
Outsourcing manufacturing requires both parties to be in active contact throughout the contractual relationship to achieve the expected results.
Pre-established prices and payment plans
When starting the process of outsourcing production, companies must present the prices and payment methods for the services in writing.
In summary, outsourcing manufacturing can be a good option for companies because it can reduce costs, provide access to skilled labor and flexibility, focus on core competencies, and save time and money. However, it is essential to note that it can also come with some risks. These include possible quality control issues and communication barriers that have to be overcome to complete production projects successfully. Therefore, responsible companies should consider the pros and cons before outsourcing manufacturing.