Outsourced Manufacturing

Learn how and why we can help your reduce your manufacturing costs :-

Outsource manufacturing consists of hiring people outside of the company to assemble parts of, or build an entire product. The main reason why companies chose to do this is to cut costs. Labor is often among any company’s largest costs. Outsourcing parts of the production line to a third party in a lower cost location leads to a significant decrease in production costs. It is more affordable to outsource production processes to companies that have a comparative advantage in that area than to produce them internally. Many times one of the greatest advantages of outsourcing is to utilize assets (plant, property and equipment) already in place without having to make an investment in fixed costs.

Outsourcing production can have some advantages for a new start-up product provided there are existing suppliers qualified to manufacture the items to your specifications. Control over the new product can be documented in contractual agreements. It is always a good idea to have more than one supplier, if possible, to ensure you can meet your product delivery demands. However, multiple suppliers can create problems with maintaining consistency of quality.

Outsourced Manufacturing also means you would not have to invest heavily in developing your own infrastructure. Your market research and your business plan should give you a basic idea of your potential sales volume and selling price, from which you could calculate a break-even point in terms of recouping your initial investment when you switch to outsourcing.

For many products sold in developed world, the raw materials needed to produce them are difficult to access domestically. Oftentimes, these materials are more abundant and less expensive abroad. If you choose to manufacture at a facility abroad, it will be less expensive to transport the needed materials there.

Emerging markets such as Nigeria, Indonesia, Bangladesh etc are becoming low-cost manufacturing hubs lately.

Some of the advantages of outsourcing are:

  • Financial benefits—Improvement of balance sheet by reducing or eliminating assets and increased cash flow
  • Strategic optimization—Focus on core mission and allocation of operations to more profitable activities
  • Better Supply Chain Management—Ability to select suppliers who are leaders in their specific categories
  • Market discipline—Opportunity to focus company payroll and resources on growing your market share
  • Technology—Gain access to state-of-the-art technologies
  • Flexibility—Resources can be redirected to the company’s core operations and new product development

It is important to evaluate and analyze all costs required to perform the work in-house, including capital investment to acquire new manufacturing technologies, or to build, modify, and expand facilities.

Companies should constantly review key business processes and strategies when making outsourcing decisions.  Activities and processes that are redundant, don’t contribute to profitable growth or are a strain to current operations should be considered for outsourcing thus focusing on higher profit yielding, value-added activities.

Cost advantages from outsourcing can come from following factors:

  • Cheaper labor and lower asset cost—the most common regions for outsourcing manufacturing are Asia, Latin America, and Eastern Europe Additionally, the cost to set up business (land acquisition, construction, etc.) is lower.
  • Economies of scale due to pooling—this effect is most pronounced in manufacturing when fixed costs are high and pooling across organizations result in lower per unit cost for all.
  • Expertise due to learning curve—the idea, also known as experience curve, was examined and popularized by BCG in 1960s. The theory says that an organization reduces its cost by 25% every time it doubles its production. Though the exact figures may not hold for all industries alike, the concept is still valid. As a company increases production, it learns how to better use its equipment, how to standardize and optimize processes and how to better use equipment. Employees gain expertise and become more efficient resulting in higher productive and increased cost savings.
  • Lower fixed cost—in outsourcing, the company only pays for the variable cost of production and does not incur upfront fixed cost for setting up the operations. As a result, the barriers to entry are lowered. Companies that earlier found the business unviable could now enter and also be competitive.

When outsourcing, it is key to identify suppliers who are credible, qualified in their field and compatible with your needs.  This new flexibility allows companies to build strategies with deeper vision and creativity.

Factors to keep in mind when outsourcing:

  • Look for compatibility and management philosophies that align with your own
  • Focus on the best solution, not just lowest price
  • Develop detailed RFPs (Requests for Proposal), contracts that incorporate up-to-date legal caveats
  • Share risks and rewards
  • Involve key players
  • Document the transition phase
  • Communicate clearly from the beginning

If your company produces a product, determining how and where to complete manufacturing operations is very important. While many businesses can thrive by manufacturing domestically, outsourcing may prove to be a better option.

We identify the right manufacturer, qualify the manufacturer, create RFPs, manage samples and product changes, monitor and manage production-quality assurance, and manage project & to-fro communication.

Get in touch with Mittaltiger by using the form below to discuss how we can help you avail outsourced manufacturing facilities or start your own manufacturing facilities in 30+ emerging economies of the world.

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