The latest research study indicates that manufacturing competence is significantly important not just because of improvement of efficiency, but also for new product design and customer acquisition. In this scenario, the different ways of integrating supplier functions into the main manufacturing processes can be simply defined as manufacture outsourcing.
It is said, manufacturing strategies should bring competitive advantage to organisations in terms of the desired quality, delivery ability, cost levels and flexibility improvements (Brown, 1996; Hill, 2000). Other important areas may be an efficient supply process and active participation in the new product development process by both manufacturer and supplier (Swink, 1999). Therefore, in manufacturing, it is apparent that products, processes and the supply chain are the three major areas of concern for success and future innovation.
According to Sameer & Kristoffer (2008), outsourcing manufacturing abroad has become general to major world class companies to small businesses at present and this move provides organisations with access to new capacity, capabilities, skills, and technologies.
New product development process (NDP)
Once the business is set up several authors claim it is important to make sure the design and manufacturing integration process is streamlined as planned. It is identified the NPD process generally has two major challenges such as providing new or improved functionality and providing more efficient production of products. Therefore, the manufacturer must make sure the new products to process technology is match and effective. This can be achieved by closely integrating the design and the manufacturing function at an early stage of the new product development process (Brown, 1996).
Because of extremely low labor rates, U.S. and European companies seem eager to move manufacturing and assembly offshore. But the White Paper (Improved Product Design Practices, 2004) argues, many have not understood the significant potential for cost savings during the design phase of their products. It explains best time to find cost reductions is during the design stage, not during manufacturing or assembly. This is because design for manufacture and assembly have shown repeatedly over the years that most of the cost of a product is fixed during design.
The white Paper further mentions, often the cost benefits are calculated solely on the basis of the incredibly low labor cost. The other costs, both tangible and intangible, are rarely taken into consideration because they are not allocated to the actual product but are paid for by the corporation from various other budgets.
However, in outsourcing business, manufacturers may risk overrating the value of wage savings, and underestimating the inventory, obsolescence, intellectual property, and currency risks that may be associated with outsourcing. Therefore, it is advisable for the manufacturer consider the following costs during the planing stage to minimise the risks associated.
- tangible costs: shipping, inventory, exchange rates, tariffs, and taxes;
- intangible costs: political/economic risks, management and control costs, and restrictions in the ability to implement truly lean manufacturing processes throughout the supply chain;
- total cost of ownership: for example repairs, maintenance, warranty, training, operating, inventory carrying, contract administration, and downtime costs associated with equipment. (Disposal and environmental clean-up at the end of product life may also need to be factored in)( Manufacturing Outsourcing, 2011).
Common reasons why outsourcing fails according to Paconsulting include:
- insufficient interface management;
- outsourcing of non-optimised and immature processes;
- poor supply chain risk management in areas such as security of supply, safety and sustainability adherence;
- lack of financial transparency;
- an imbalance in the benefits to the parties involved.
How to overcome
Global access to low-cost manufacturing processes is a complex undertaking, which often requires careful planning, strong partnerships, supply chain integration and challenges of managing operations over great distances. Core competencies give business a value-adding, sustainable and defend-able position in the value chain. The manufacturers must make sure even-though the process is outsourced, the process is carefully managed including branding, sales channel dominance, access to raw materials, technological dominance backed up by intellectual property rights and the ability to coordinate the value network (Paconsulting ,2016).
Businesses often outsource manufacturing processes with the aim of making reducing costs. In fact, it looks, more realistic goals are to secure the ability to:
- offer product variety;
- newer technological capabilities and flexibility;
- manage effectively and reduce complexity;
- reduce costs while enhancing innovation;
- bring further investments.
However, identifying and mitigating key risks in advance will increase the chances of a successful manufacturing outsourcing. It is a strategic decision with long-term implications for any business and should be handled effectively to win.
Brown, S. (1996), Strategic Manufacturing for Competitive Advantage. Prentice Hall Europe, Hertfordshire
Hill, T. (2000), Manufacturing Strategy – Text and Cases. Palgrave, New York.
Swink, M. (1999), Threats to new product manufacturability and the effects of development team integration process,. Journal of Operations Management, Vol. 17, pp. 691-709.