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To outsource or not? What manufacturers should consider

March 12, 2012

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You can’t do it all. That’s what some manufacturers are realizing, and they’re responding by outsourcing tasks ranging from equipment maintenance to customer service.

When done correctly, outsourcing can save manufacturers money and allow them to focus on their core business functions. But before you look elsewhere for help with your company’s tasks, consider the decision from a strategic and financial standpoint.

Is it a core function? 

The first question to ask is whether the task you plan to outsource is a key business function. Supporting tasks, such as human resources, customer service, marketing and shipping, are prime targets for outsourcing, since investing the time and resources to do them in-house generally doesn’t enhance your company’s value.

Even if the task you’re considering outsourcing relates to your core business directly, outsourcing can give you a competitive advantage. As manufacturers struggle to keep up with shrinking customer attention spans, shorter product cycles and global customer bases, some are relying on outside vendors for engineering services or to produce a component of a product.

Outsourcing these functions can help manufacturers bring products to market more quickly, allowing them to capture customers’ attention sooner and build a stronger customer base. Since staffing needs fluctuate during the product development cycle, tapping outside help, as needed, instead of keeping employees on staff also can save money.

Other questions to ask when deciding whether to outsource include:

•    Does your business have the personnel and resources to handle a task in-house?

•    How will outsourcing affect the finished product’s quality?

•    Will outsourcing compromise your intellectual property portfolio?

You’ll also need to consider whether outsourcing a project will create too much reliance on the outside vendor in the long term.

Crunch the numbers

Before committing to an outsourcing relationship, complete a thorough review of all the costs associated with performing a function in-house vs. outsourcing it. Those costs can include labor, materials, software, rent and taxes. If you plan to outsource the task for multiple years, break down your comparison year by year, since items such as wages and taxes are apt to change over time.

When you’re crunching the numbers, don’t just compare your cost to perform the task internally with the amount that the vendor will charge. You also need to consider the indirect expenses of outsourcing, including having your attorney review the outsourcing contract, training the vendor, and investing time to schedule and coordinate the vendor’s work.

You should also take into account sunk costs in your calculations. If you have a long-term lease for the building where your customer support team works, for example, you’ll have to pay that rent even if you outsource customer service to another company.

Beyond calculating the direct costs of outsourcing a task, consider the indirect benefits that outsourcing may bring. Faster cycle times may allow you to charge more for a product because it reaches the market sooner, for example. If you’re operating at capacity, outsourcing production also may free up employee time or equipment for other tasks, allowing you to ramp up production and boost profits.

Consider the risks

While outsourcing has its advantages, the associated risks also need to be considered. Contracting a task to someone else means reduced control over the end result, which can result in subpar work. Thus, make sure you hire a professional whose standards match your own.

Outsourcing, particularly to an offshore company, also leaves you vulnerable to problems within the vendor’s company. Make sure you have a contingency plan in case your vendor is unable to complete its work because of bankruptcy or political turmoil in its country. Additionally, consider the cost of financing working capital to allow for longer lead times on international shipments.

A renewed focus

While manufacturers need to do their homework first, many find that outsourcing strengthens their companies by freeing up valuable time and resources. You may be unable to do it all, but outsourcing can make it easier for you to focus on what you do best. Discuss with your business advisor if outsourcing makes sense for your company.

Get the most from outsourcing

 

You’ve made the decision to outsource — so now what? If you’re ready to pull the trigger on outsourcing, here are some tips for getting the most for your money:

Shop around. Compare bids from multiple vendors before choosing one. Some vendors offer referral discounts or credits, so be sure to ask for one.

Read the fine print. Discuss the terms of your contract thoroughly with your business advisor, including deadlines, delivery dates and payment terms, to avoid surprises down the road. Have your advisor review the contract as well to make sure you’re protected in case the relationship must be terminated.

Buy in bulk. Some vendors will give you a discount if you can promise a certain volume, or if you sign a multiyear contract. Bundling several services, such as materials procurement and production, into one contract can also help you save.

Provide detailed instructions. Whether it’s a script for customer service representatives to follow or certain colors you want to include in your company brochure, give the vendor as much information as possible upfront to make sure you get what you’re expecting.

Check in regularly. While you shouldn’t have to hold your vendor’s hand, it’s a good idea to touch base regularly to make sure projects are progressing as planned and to head off any problems before they escalate.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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