- Outsourcing work is becoming more and more popular in Australia and beyond to due a number of benefits such as outsourcing cost savings and much more.
- When you outsource some work to low cost countries, your cost of production reduces and you gain an advantage in the market.
- But as everything in the business world operates, outsourcing services aren't easy on the implementation either. Find out how to get started on outsourcing.
It is becoming a common fact of many first world countries that domestic manufacture is predominantly an expensive luxury that negatively impacts your product's marketability by creating a sale price that is significantly higher than imported products. This is particularly true in Australia where the minimum wage is rapidly approaching per hour, factory overheads are increasing due to rising electricity and incidental costs, and the cost to import from another country is lower due to the strong Australian dollar. Manufacturing industry and product designers are both faced with the rapid realisation that this situation is not likely to change and survival means that occasionally tough decisions need to be made in order to preserve the future of the company and increase the market segment.
With the exception of a few industries, there is little hope of the consumer or end user supporting a local product when the alternative is significantly less expensive. So we start to look towards outsourcing work models where we send all or portions of our manufacturing to a LCC (Low Cost Country) where the minimum wage is typically less per day than we pay per hour and in many cases there has been significant investment in equipment and processes to ensure repeatable and economical manufacture of outsourced products.
Issues of outsourcing work
The first issue we encounter, if we have reached the decision that outsourcing work is an inevitable requirement, is " What do we select for outsourcing?" Do we send everything en-mass to a LCC manufacturer and remove any domestic contingent to our manufacturing process or do we keep key processes in-house and outsource other processes / sub-components?
The company needs to first look internally before outsourcing work to a LCC manufacturer and consider the following questions:
- What processes are adding value to the end product by retaining these internally?
- Are these processes being completed by the best possible option or is there an alternative that is either less expensive or more efficient that we should be considering?
- Are your customers willing to pay extra for your company to manage these processes internally?
- Are you keeping processes in-house for none other than sentimental reasons?
- Do you know exactly what each process / assembly / sub-assembly costs your company in it's current form? (This needs to include set-up costs, operator costs, rework costs, testing costs, scrap, procurement of external parts, storage and warehousing as a bare minimum and should be subject to a complete and detailed analysis to identify all costs incurred in a particular process)
- Do you know what your target cost for each process / assembly / sub-assembly needs to be in order for you to become competitive with other vendors / gain a larger market share?
- Have you allowed sufficient time and finances to embark on this process (i.e. Are you considering this process as a strategic move to enhance your business / products or is your company at a "do or die" stage)?
What to consider with outsourcing services
Once your company has carefully considered the preceding questions of outsourcing work, then you will need to further consider what you are requiring from a LCC vendor.
- Does the cost offering from a vendor hold the highest weighting in your selection.
- Are you aware of IP risk and have you taken measures to protect your IP prior to providing any commercially sensitive information to vendors.
- Are you aware of the capability differences between LCC countries and have you considered how this will fit with your corporate strategy (There are a lot more potential choices beyond China).
- Do you require other services beyond basic fabrication and assembly (e.g. testing, packaging, warehousing, shipping and distribution)
- Are you looking to deal directly with the manufacturer or do you wish to use a middleman with a corresponding markup / commission per unit produced to handle the process.
Companies should be advised that at times the lowest bid does not necessarily represent the best option for moving forward with your outsource venture. Certain LCC countries may select "grey market" or counterfeit components from unreliable suppliers in order to reduce the bid price. If the vendor has a significantly lower bid price it may also be due to them not fully comprehending the complexity or requirements of the project or only bidding one part of the project with the intention to renegotiate once the contract has been awarded. Either situation causes unnecessary stress and delay to the customer and leaves the customer with a bad impression of the entire process.
If you are outsourcing work as a strategic move and you are not automatically intending to award the contract to the lowest bidder without conducting a full due-diligence on the selected vendor (including site audits), then the process of outsourcing manufacture to a LCC can add significant value to your product offering and your supply chain capability.
The process itself is not as simple as sending a collection of design files and documents to the vendor and waiting for the end product to arrive on your doorstep exactly as you have envisioned. Each product / process needs to be carefully controlled and verified to ensure the lowest level of risk and sources of variation / capability deficiencies are identified with he lowest possible financial risk to the customer, prior to moving into a volume manufacture situation.
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