Back then when vertical enterprises were the norm, most operations functions were handled in-house. It seemed sensible that if a company manufactured products, it should store and distribute them, because it was seen as an advantage to the company. Who else but the manufacturer could make sure that the product it produced would get to its end customer on schedule and in one piece? Over time keeping all operations in-house rather has become a strain. This has its starting point with the increase of company mergers and acquisitions. The result was the formation of top-heavy organisations, expanding with operations and associated costs. The company soon had too much overhead in factories and distribution centres to be competitive. A method for fighting that bulge successfully was to outsource operations.
From there businesses such as contract manufacturers, third-party logistics providers and other outsourcing suppliers have formed and established themselves. By using those providers, companies are able to streamline manufacturing and distribution without the capital investment of new facilities.
The direct benefits of manufacturing outsourcing have to do with decreased costs, reduced cycle times and customer satisfaction.
Benefits of contract manufacturing
Focus on core competency: If manufacturing is outsourced, the relevant resources for production are not needed. The focused can be put on the core functions. If the core competency is the product formula or design, then there is more time to focus on the that particular process. The result is likely to be superior design and when the product gets to the end customer, it will be improved because it will be have been manufactured by a company whose sole purpose is to manufacture.
Access to superior technology and business networks: Businesses can take advantage of advanced skills that they may not possess. Contract manufacturers mostly have been doing what they do best for many years. Having worked with more suppliers and more clients, they have become well established and have built sophisticated relationships. Many are part of multilevel networks that are decisive for staying competitive and winning in a global marketplace. They are also using the superior technology associated with world-class manufacturing and distribution operations. When you work with one of these providers, you have the opportunity to access their network and utilise their technology.
Reduction in the manufacturing and logistics costs: While being able to consolidate operations, the manufacturer most likely is providing a shared service, so that you don’t have to pay for under-utilised capacity, which will in turn lower inventory-carrying and transportation costs. There’s also no responsibility to maintain factories, distribution centres or inventory.- Improved quality:Initially outsourcing was meant for many companies to cut costs. But it can also increase quality. This quality improvement is caused by the fact that manufacturers running volume operations and have better quality assurance programs in place than average company. It enables them to create reliable processes including quality control. The results also are improved response time to inquiries, less damage, less rework and greater production accuracy.
Improved service: Shorter order cycle time and faster time to market are results of outsourcing manufacturing. Tapping into capabilities not available internally increases resource availability, which brings along reduced time to market. Besides producing goods they store material or finished inventory and ship them to customers, while maintaining inventory. So, there’s improved visibility of available inventory and accountability, which ensures higher levels of customer satisfaction.
Improved accuracy: When someone has to perform only one specific task in a complex business environment, it is likely that if that involves manufacturing of a product, the completed task will be more accurate with a better production tracking. It allows you to concentrate on other matters and you can do a better job with them and also be more accurate.
Reduction in management and head count: It is a hard fact that in today’s market place a lean company that succeeds must do so with fewer employees than in the generation before. Outsourcing operations is one of the most effective methods for reducing head count and stay flexible.
Flexibility and wider range of services: You can offer your customers more because, although your company may actually be doing less within its walls, it is accomplishing more. Your firm can produce more, ship greater amounts professionally, and enter into product lines hitherto not considered as you are able to work with an expert in its field. For each specific field you can choose who is the best for certain tasks.
No capital investment: Relevant facilities don’t have to be on the balance sheet, be it factories or distribution centres. This makes capital more available for a company’s core functions. Outsourcing manufacturing also eliminates the need to demonstrate return on equity from capital investments in non-core areas, and this can improve certain financial measurements.
Take the opportunity
When the benefits of contract manufacturing are laid out, it’s easy to see why a lot of companies are already doing manufacturing outsourcing or planning to do so. If you work with experts who have made contract manufacturing a core competency, the benefits far outweigh any risks. The key to the contract manufacturing opportunity is in defining your goals and targets, finding the manufacturer with the right fit and managing the relationship. We address those issues next.