It’s quite incredible what you can outsource these days. Go back to the middle of the twentieth century and the idea that any entrepreneur could just hand over the job of production to a third party seemed ludicrous. Facilities just weren’t available.
But then developing countries built out their infrastructure and started offering factory facilities to western companies – and that changed everything.
Today, whether you outsource is usually a purely economic decision. For many brands, it’s cheaper and easier to hand the task over to another company instead of trying to do it yourself in your home country. However, it’s not always completely straightforward.
In this post, we take a look at some of the costs and benefits of outsourced manufacturing so that you can make a choice about which is best for you.
Benefits Of Outsourcing
The benefits of outsourcing are considerable. The first benefit is financial. For companies just looking to set up, it’s a great way to keep the balance sheet looking healthy and save on capital outlays. You don’t have to spend a lot of money on expensive plant and equipment. Manufacturers provide all that for you. The fees you pay are proportional to the number of goods you produce.
Offshore manufacturers often have better management than you could provide in-house – at least short-term. So that can provide efficiencies too: you don’t have to learn how to run a factory from scratch.
There are also other advantages available from outsourcing, such as better technology and market discipline. Any manufacturing firm you use probably already has many years of lowering costs and getting operations as lean as possible. That’s a process that can take many years for firms starting from scratch.
The Costs Of Outsourcing
It’s not all plain sailing though. There are substantial outsourcing costs firms need to consider.
One is the simple matter of getting goods into the country. Passing all border requirements and checks can be tricky. Most brands use a customs brokerage company to manage this aspect of their operations. However, that’s something you’ll need to consider in advance.
Whenever you outsource, you can also lose expertise from your company. If you use a factory in East Asia, for instance, you no longer need people with those technical skills in your firm. And that makes it harder to know whether you’re getting a quality product or not.
Then there’s the dependence that you have on your supplier. Your company might be making plenty of money, but that doesn’t mean the manufacturer is. Sometimes, outsourcing companies can go out of business, leaving you up the creek without a paddle.
Then, finally, there’s the cost issue. While outsourcing is usually cheaper than doing it yourself, you don’t have direct control over the costs that manufacturing incurs.
This simple fact means that you don’t have any control over your long-run cost curve. Maybe you’d like to invest in better machinery to improve efficiency. But when you outsource, that’s not always your choice to make.
Offshore manufacturing is generally a good idea. But it’s not all positive.
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