According to research from Plunkett Research, Ltd., outsourced manufacturing services and other off-shoring activity will grow into a nearly $565.0 billion industry globally in 2017. Already, successful global corporations like Apple and Nike, spent upwards of $400 billion in 2016 on contract manufacturing.
So, the question arises: What do these companies seek to achieve from contracting their traditionally in-house services?
Beyond Cost and Operational Efficiencies
Outsourced manufacturing companies offer opportunities that go much beyond mere cost savings and operational efficiencies. A 2016 outsourcing survey by Deloitte confirmed this as well. According to the surveys’ authors:
“…today’s leading companies are approaching outsourcing in innovative ways to activate, create, integrate, and amplify business value.”
- While manufacturers encourage their operations teams to focus on their core competencies, contract manufacturers assume the role of innovation centers, bringing new ideas to the fore so their partners can become more competitive
- Using outsourced manufacturing services allows in-house operations teams the flexibility to solve capacity challenges. This is especially critical when dealing with unpredictable production volumes, or working with major clients whose business is seasonal and whom you can’t afford to lose as a client
- If you are a business that wishes to tap into extended markets, whether regional, national or global, it’s often very challenging and highly capital intensive to “go it alone”. By teaming up with a contract manufacturer that already has alliances and partnerships in your target markets, your operational teams can quickly turn their expansion plans into reality
- Even if you aren’t ambitious to spread your operations beyond your existing geographical territory, your operations team can leverage outsourced manufacturing services to quickly bring economies of scale to bear within existing markets. Such capability may be for the short-term, perhaps to prevent new-comers encroaching on your territory; or it may be longer-term to ensure broader availability of your products in under-served areas of your market
- Because of their specialization in areas such as kitting, lean manufacturing, distribution and packaging, outsourced manufacturing and fulfillment services can help dramatically reduce operating costs for many manufacturers. In-house operations teams can use those cost savings to enhance marketing activity, or spend it on other customer satisfaction-enhancing initiative
- Finally, using contract manufacturing can help management teams greatly enhance cost efficiencies within their own operations. Relying on a fixed-cost relationship brings much-needed cost predictability to manufacturers – something they often can’t achieve when assuming 100% of operational risk by themselves
Making It Work
Clearly outsourcing of some in-house manufacturing and distribution operations can bring tremendous synergies to bear between manufacturing partners. However, to make it work you need to ensure there are formal structures in place between your company and your contract manufacturing provider.
For your operations team to reap the full benefit of such relationships, you must set out clear objectives for what needs to be accomplished, and define precise metrics against which performance will be measured. Additionally, you must build one thing that many partnerships fail to put in place: Dispute resolution processes.
While partnerships may be built on trust and expectation of mutual benefit, disputes will arise at some point. When they do, your operations team will be well served if a reliable dispute resolution mechanism is already in place.