How To Reduce Manufacturing Costs Through Outsourcing
Outsourcing manufacturing can be a real advantage for manufacturing companies.
If you have the proper management in place, it is possible to substantially reduce manufacturing costs through outsourcing.
Since outsourcing manufacturing to China is now a well-established business practice, China has developed tremendous resources to help companies improve efficiency and increase the productivity of their base operation.
Outsourcing is a practical approach to cost reduction, risk mitigation, and operational optimization.
What Is Outsourcing
Outsourcing is when a company subcontracts part of its operations to an external service provider.
When a company decides to focus its direct resources on core activities, outside companies can provide an efficient way of producing a better quality product with less time and expense.
Manufacturing or business processes can be transferred to a company that has developed economies of scale by providing the same or similar services to several companies.
The Four Main Types Of Outsourcing
- Business Process Outsourcing (BPO) deals with back-office and front-office outsourcing.
- Infrastructure and Technology Outsourcing deals with networking and technology services.
- Software Outsourcing deals with the development of software and software support services.
- Manufacturing Outsourcing deals with manufacturing or assembling parts or components of a line of products.
One of the main goals of outsourcing is to save money by hiring a contract manufacturing company. Contract manufacturing organizations (CMOs) serve many clients and have streamline their processes in order to save money. This cost saving is passed on to their clients, the outsourcing manufacturing company.
Offshoring Vs. Outsourcing
Offshoring can be considered similar to outsourcing since, in both cases, a company begins making products in another country.
However, in the case of offshoring manufacturing, a company hires its own employees rather than subcontract the work to another company.
So, offshoring manufacturing is when a company moves its operation to another country.
Outsourcing manufacturing can happen within the same country.
When To Outsource Your Manufacturing
Historically, the main reason for outsourcing manufacturing has been to reduce costs. But that’s not the only viable reason in today’s marketplace.
Most businesses outsource manufacturing processes so they can make fixed costs fully variable.
If any part of your production line, from the conceptual design to the finished product can be completed faster or at a lower cost somewhere else, it may be best to let a contract manufacturer do that part of the work.
In deciding when to outsource, it is important to do a critical analysis of the business including:
- Analyzing all costs involved in manufacturing a particular part or component in-house.
- Doing a thorough review of your business processes, strategy, and expenses to be sure outsourcing will be of benefit to your company.
- If your business performs activities that are the same as the contract manufacturing company, it may be better to try to improve your in-house efficiency before considering outsourcing.
The three main cost savings come from:
- Cheaper labor
- Lower cost of assets
- Lower fixed costs
Lowest Cost Is Not Always Best
Choosing the contract manufacturer with the lowest price is not always the best way to choose a manufacturing partner.
Take some time to carefully evaluate key suppliers for a good fit and find a company that you can work with for the long term by considering the following:
- Look for a company that has an established, verifiable track record in providing the services you need.
- Find a company that has a management style similar to your own.
- Make sure their business philosophy is in sync with your own.
Benefits Of Outsourcing
The business case for outsourcing varies by situation. Selecting the right contract manufacturer can be a difficult decision.
No one outsourced manufacturer will ever be a perfect fit. There will always be trade-offs. So, you have to figure out if the relationship will be profitable overall before moving forward.
With this in mind, key benefits to consider in any contract manufacturing (CMO) relationship are:
1. Financial benefits – There can be significant financial benefits in many areas of the production process from prototyping to designing, production, warehousing, shipping, and final delivery.
2. Strategic optimization allows a company to focus on its core competency while partnering with another company that has high competency in another area.
In some cases, the partnering manufacturer may be a huge company that can get cheaper pricing on parts and affords better-qualified talent. It can be a very profitable arrangement to let the CMO do what they are good at in support of your goals.
3. Supply chain management – This gives you the opportunity to work with companies that have access to resources you may have difficulty getting. You can leverage the CMOs connections and relationships for your benefit.
4. Flexibility – A good strategic alliance will give you the ability to use your capital, labor and assets more efficiently by bringing in the contract manufacturer on an as-needed basis.
Lower Operating Costs
Companies often choose to outsource part of their operations to reduce costs. For example, a part can be produced by a supplier at a more affordable cost than if the company invested to manufacture it in-house. It can also clean up its balance sheet by eliminating assets and stabilizing cash flow.
If your production volume is too low, it can be advantageous to outsource the operation.
After your production volume has grown you can bring back the manufacturing from the CMO.
Whether or not to outsource production is an ongoing consideration as your business evolves. The beauty of contract manufacturing is the relative ease with which you can engage or disengage their services.
Access To Expertise
Many companies also choose to outsource because it gives them access to expertise or cutting-edge technology that they do not have, or do have but in a limited capacity.
For example, if a company can’t afford to purchase a particular machine, it can still benefit from it by choosing a specialized supplier that uses it.
With this specialized expertise, it’s possible to produce a better-quality product, often at a lower cost.
Strategic Use Of Resources
Outsourcing also allows companies to add resources during peak periods or even reserve them for high-value-added tasks.
To do this, you need to think about your company’s core mission and whether it is relevant to continue certain operations.
This is the case not only for physical resources but also for human resources.
For example, outsourcing can be a helpful tool in a labor shortage. You have to ask yourself if you’re deploying your workforce as strategically as possible at a time when it is difficult to recruit and retain workers.
In addition, outsourcing is a way to help meet one-time or seasonal needs, without the company having to hire employees, along with annual salary and benefits.
Quick Market Adjustment
Companies may also decide to outsource when the market is moving quickly and they do not have the time to familiarize themselves with a new field in the short term.
For example, if you get a sudden surge of demand for a particular product that is greater than your ability to manufacture it, what will you do?
In order to take advantage of this type of situation you can outsource manufacturing temporarily. It can be advantageous to do business with a specialized supplier that can offer a product or service quickly.
Outsourcing will give you time to decide if you should grow your core operation.
If the increased demand is expected to continue it may make sense to hire more in-house employees, increase internal resources and cancel the contract manufacturing arrangement.
Operational benefits of outsourcing
Outsourcing can free up your company’s resources so you can focus on your core competencies.
It allows you to tap into a pool of skilled labor that would otherwise be unavailable and gives you more flexibility to scale your business up or down as needed.
Outsourcing providers usually have state-of-the-art facilities and equipment that would be too expensive for most companies to maintain on their own.
Contract manufacturing companies can have robust processes and procedures in place that improve the quality and consistency of the services they provide.
Outsourcing can help you mitigate risk. When you outsource a business function, you transfer some of the associated risks — like regulatory compliance or data security — to the service provider. This can give you peace of mind and allow you to focus on more important things.
No Training Investment – By investing in a BPO or other outsourcing services, you can remove the need to train employees on non-core functions.
Eliminate Outsourcing Costs – Outsourcing operations and production can eliminate the opportunity cost of having your employees unavailable to work on core tasks
Reduce The Risks Of Making Mistakes made during a quick transition or growth situation that can cause expensive problems down the line.
Lower Turnover is caused by improper or inadequate training in a hurried transition period. If an employee is unhappy with their training, they are more likely to leave. A contract manufacturing company will have the people, processes, and technology already in place to quickly produce your products or components.
Increase Efficiency – Outsourcing can help improve your company’s efficiency in several ways:
- You can focus on your core business functions. The main goal of outsourcing is to help you focus on what you’re good at. When you outsource non-core functions, you can put all of your energy into making sure your company excels in its area(s) of expertise.
- You have access to experts. When you work with an outsourcing provider, you are working with people who have a lot of experience in that particular field. This can help improve your processes and, as a result, make your company more efficient overall.
- You are able to scale quickly. If you need to scale up or down quickly, outsourcing is going to be your best bet. It’s much easier (and less expensive) to add or remove team members when they’re not in-house.
Higher Level Effectiveness – Outsourcing is done with organizations that possess greater knowledge of the work and have vast experience in that field. This raises the standard of the work because decisions can be made faster and more efficiently.
Saves Capital Expenditure And Investment – When you outsource you don’t have to spend extra money on developing the infrastructure. The CMO who takes over the project will make necessary infrastructural changes as required.
Reduce Training And Recruitment Costs – When a particular type of work is outsourced your company does not have to hire new people. You will also save the time and expense of developing and providing training programs. Your work can be fulfilled immediately by people who are already experts in that trade. This will also bring efficiency and quality to the work.
Round-The-Clock Work – Having a functioning team in a different time zone can definitely have its benefits. Your company can continue working in another part of the world while you are sleeping contently. You can assign the work and relax. It will be completed by the time you wake up in the morning.
Faster Results – An outsourcing partner can provide ideas and expertise to improve the speed and quality of the product.
Easily Manage Fluctuations In Work Force – Many times there are fluctuations in the workforce…people leave when you can least afford it. Or, you may have a reduced workforce due to holidays and festive seasons. You can outsource work to another company on an as-needed basis.
Get Access To Specialized Talent – If you need a particular type of skilled worker you can outsource the work to an already established, streamlined team in a CMO.
Finding The Right CMO To Reduce Manufacturing Costs Through Outsourcing
The goal is to find a contract manufacturing organization (CMO) that can provide:
1. The best quality product
2. At the lowest price
3. On-time delivery
4. With the least hassle for you
5. Reliable on subsequent production runs, not just the first one.
6. Knows the legal landscape in China as well as in your country so problems can be ironed out quickly.
7. Easy to work with when there are problems and issues in the manufacturing or delivery process.
Other Things You Will Want To Know
- What are their technical capabilities?
- What is the capacity of their facility?
- How well maintained is their facility?
- Are they willing and able to modify their current systems, processes, and procedures to meet your product requirements?
- Does the CMO hold the necessary manufacturing authorizations needed to conduct business?
- Can the manufacturer also test and pack the products?
- Does the CMO meet or exceed your quality and production standards?
- Can the CMO supply the product cheaper than in-house production?
- Does the CMO deliver orders on time and in full?
- Does the CMO have an infrastructure that is capable of providing you with accurate, comprehensive, and timely information?
So, the trick to being successful with outsourcing manufacturing is to find a good contract manufacturer to partner with.
This may not be easy. If you go to any of the big trade shows in China you will see tens of thousands of booths. Each booth represents at least one manufacturer. Some represent pools of manufacturers.
Where would you start?
Obviously, it would be impossible to know all these things in just one meeting with a rep in a booth at a trade show.
This is where you will need some help from a company located in China that specializes in finding and managing projects on behalf of outsourcing manufacturers. Companies like this are known as sourcing companies, sourcing agents, manufacturer’s agents, and more.
How To Find A Reliable, Trustworthy Factory
Sourcing agents are third-party services that you can hire to find high-quality manufacturers and suppliers in China on your behalf. They speak the language and are familiar with the customs.
A good China sourcing agent will cut out all the legwork that you would have to do and negate a lot of the risk involved in dealing with a factory.
The sourcing company will source products for you if you want to sell a product that already exists.
But where a good sourcing company really shines is when you want to manufacture a new product or outsource something you are already producing in your facility.
A sourcing company will help you qualify, audit, and find the best factory based on your needs at your quality/price range.
This process may seem simple but it takes deep expertise in the industry and well-established networks and references to ensure you are working with a factory that is reliable and trustworthy.
When you hire the right sourcing agency, an experienced sourcing agent will do all the work for you. He or she will save you huge amounts of time and money by making a short list of companies you can talk to.
Project Management On Your Behalf
- A China sourcing agent will monitor orders on your behalf as if you were actually supervising the project.
- This includes making personal visits, doing regular, in-person inspections and audits of factories they work with, and making decisions on your behalf.
- The reason the sourcing agency would be qualified to make on-the-spot decisions is that the person doing the in-person visit will be an engineer who is frequently in touch with your company. They will have a clear picture of what you want through the person you have assigned to manage the project at your company.
- Your sourcing company makes sure your product deadline goal is met. If there are any delays, it quickly and clearly communicates them with you.
You’re not left in the lurch wondering when or if your product will be delivered. - You will have peace of mind knowing a team of experts from the sourcing agency is making sure your product is delivered on time.
Quality Control
An experienced sourcing company will make sure your quality standards are going to be met. You can rest assured your product will have the exact quality you want, not just the first time, but every time!
Logistics Management
A sourcing company will make the flow of the process from start to finish a smooth one. It will:
• Make sure all products are packed correctly,
• Review logistics documents and make sure they are all in order
• Ensure shipping happens with the most effective mode of transportation.
You can simply sit back and trust your sourcing company to look into all of these factors.
Post Delivery Service
After delivery of the product is completed, a sourcing company will always check in with you to ensure complete satisfaction.
They will review the process with you and make changes, as needed, to take into account changes in your company.
One-Stop Solution To Make Manufacturing Easy
Arcadia Sourcing is your one-stop solution. We are your eyes and ears on the ground, even if you are thousands of miles away.
As “your man” in China we take care of all your needs and carry out on-the-ground investigations.
We find the best-suited manufacturer for each and every client, then make sure they deliver quality products on time!
Arcadia Sourcing will help you bring your creation to life in a transparent, secure, quality-assured, and affordable manner, without hassle or headache.
Give us a call to discuss your project.
We’ll make manufacturing in China a simple, profitable, hassle-free experience for you.
Call 1-888-659-1018 or Email: rbpande@arcadiasourcing.net
