Outsource manufacturing is not a strange business concept for any entrepreneur. Because this type of manufacturing plays a key part in the production process in any industry and the benefits it brings to the business are a vast number.
This article will provide a deep insight into outsourcing manufacturing, why it’s so crucial for business and reasons why you should take into account working with an outsource manufacturer.
What does outsource manufacturing mean?
Outsource manufacturing helps businesses cut in labor costs
Outsource manufacturing is hiring people outside your company to do parts or build an entire product based on your requirements. The main reason why most companies across the globe choose to outsource their manufacturing needs is due to the cut in labor costs. In addition, when a business outsources a part of its production process to a third-party manufacturing firm in a different location, they often see a significant decrease in production costs.
It’s more affordable to outsource production processes to companies with considerable advantages to produce them internally. The key benefit of outsourcing is to utilize assets already in place without investing in fixed costs.
If you’ve created a new product, outsourcing your products may be the best use of your time and money. Because you will not have to invest heavily in developing your internal infrastructure or related things, a business plan should offer you an idea of your desired sales volume and selling price.
7 reasons for outsourcing manufacturing
There are numerous reasons for outsourcing some parts of the workflow. Business owners and corporations choose this option to save money in company operations, maneuver the company into a more competitive position, and solve many issues without the unexpected cost of hiring more employees.
- Reduce Cost of Operation
The biggest reason for a company to outsource is to save money. However, there are many reasons a company may want to reduce operating costs. For example, there might be a problem with a supplier or a cost increase in sources, and the companies need to reduce costs to stay competitive.
- Free Up Resources
A company needs to outsource a department to free up experts required on other projects
A company needs to outsource a department to free up experts required on other projects. Business expansions often need additional duties for existing personnel, and outsourcing is the best solution for having little personnel to fill the new requirements. In addition, according to Business.com, some companies use outsourcing as a way to free up capital so that it can be invested in other areas of the corporation.
- Company Restructure
The business model may need to be restructured. For example, the duties of existing personnel may have changed to fulfill important positions. Instead of hiring more experts to backfill those jobs, some companies think outsourcing is a better option. Forbes agrees that outsourcing provides companies with more opportunities for experts and other talents.
- Improve Productivity and Efficiency
A company always seeks ways to improve its efficiency with its allotment of the workforce. This could be in production where there is more extraordinary expertise outside the company. For instance, a laptop company might find it more profitable to outsource electronic components to an OEM (Original Equipment Manufacturer) instead of producing in-house.
- Reduce Business Risk
When companies do not need to shoulder the burden of a specific function and find outsourcing it, they can limit the financial risks. This is true when a company turns to an outsource highly experienced within a particular service.
- Meet Compliance Requirements
The Wall Street Journal has said that a company facing compliance requirements will decide to outsource the compliance sector instead of adding stress to their existing workers. However, this requires an overview since handing over this type of responsibility to a third party has risks that may be outweighed by the company’s lack of experience and capability to meet the compliance demands.
- Specialize Functions and Services
Most companies may find that outsourcing specialized functions and services are more cost-effective. For example, a company desire to provide a cafeteria for employees most likely would outsource to a professional catering service. Likewise, companies may choose to outsource their IT needs.
Cost considerations in outsourced manufacturing
General cost
Salary Or The Paycheck
The first and the only cost is the remuneration or salary you pay for the developers or the team you hire
The first and the only cost is the remuneration or salary you pay for the developers or the team you hire for your product development. Based on your project needs, you might need to choose from getting a single developer to work on your project with your in-house, an entire team, or even want the complete product development managed by another firm.
Hiring Single or Independent Developer
You can hire a developer or dedicated programmer who is willing to work on your project on a per-hour, month-to-month, or long-term basis based on your requirements.
When is the right time for you to hire a developer?
- If you need someone to fill specific technology requirements that you are not specialized at
- Expert requirement for a project
Hiring Complete Remote Teams
If you are finding a team to develop or design a particular part of your product, you can hire remote teams. They can be your complete teams with the developer, designer, tester, QA specialists, and the project manager or group for any particular task like designing, development, etc. In addition, you can set up a team for complete work in an offshore location; they are still a part of your in-house workflow, just working in a different area.
When is the right time to hire a whole team for development?
- Need a dedicated team for a complex project.
- Want to onboard an expert team as an extension of your in-house team.
Full Product Development
In the production process, you cooperate with a company that would fully manage your project or product development. The works are from brainstorming around your idea to creating MVP to launching it post-testing through managed projects.
When to get end-to-end product development?
- You have a complicated product or software architecture to build that you are not specialized
- You need a partner from ideation to development, launch, and scaling of the product
Ad-Hoc Costs
These are several direct costs in outsourcing, and there could be many ad-hoc expenses that might crop up during your outsourcing process. Some of these out-of-pocket costs are listed below:
- Cost is getting the SSL Certificate for your product’s security
- Cost in creating the SSL certificate
- Cost in asking the developer to visit on-site or you visiting the company’s office
- Cost in the technical consultant or project architect as a technology partner that you might seek
Hidden cost
Cost of Hiring
This is an essential cost of selecting a remote developer or outsourcing agency in India. The cost of hiring a developer would include:
- Establish Request for proposal
- Screening the applicants
- Negotiating the terms
- Data
Cost of Transitioning Or Knowledge Transfer
When you are outsourcing your products, the costliest term might come out during the transition. This is the phase when you are handing over your work to your outsourcing provider in India.
You are explaining to the developers about your plans. It might be difficult to handle for them, but it’s necessary before they get acquainted with the product idea to initiate work.
Cost of Server Management
In the digital world, it is vital to make sure your product is up and running thoroughly. This could include anything from infrastructure monitoring and health scaling to vulnerability detection and alert generation. In addition, they would be required to make sure your products never experience downtime. This might cost a business around $100-$400 each month for a single server.
Cost of Creating Outsourcing Contract
Forming an outsourcing agreement is crucial for the success of any outsourced manufacturing. Everything required in the outsourcing relation needs to be detailed in the outsourcing agreement so that no space for error, confusion or misunderstanding is left on both ends.
Specific benefits and risks of outsourcing manufacturing
Benefits
Lower Labor Costs
Lower labor costs are the top benefits of outsourcing manufacturing
Lower labor costs are the top benefits of outsourcing manufacturing. Although, there might be broader humanitarian and compliance implications, outsourcing under the right circumstances can be a viable option.
Labor workers can be performed at a fraction of the cost for some manufacturers with the right partnership. Most organizations find that they can achieve actual savings and focus more on their core business when outsourcing manufacturers.
Fuel Innovation
Innovation can come to life much quicker through outsourcing. For example, a company might not have the tools or production schedule to create new pieces. Access to an outsourcing resource can make it possible to quickly schedule prototyping and other production-related functions without reallocating internal resources.
Support Increased Demand
Outsourcing is terrific for addressing an uptick in demand for different types of products. However, companies may experience a sudden surge in orders for a particular product and require additional resources to meet needs.
Short of resources available could affect an organization’s ability to meet fulfillment obligations. An outsource manufacturer can supplement existing in-house manufacturing and make it easier to meet new demands.
Contribute to Efficiency
There may be inefficiencies in the production process. If the organization has decided to handle all of its production needs internally, there may be inefficiencies that go unaddressed.
For instance, a company may not have the capacity to tweak specific processes because of several different product design requirements that must be accommodated within the manufacturing facility. Therefore, it is often much smarter to outsource manufacturing, mainly if the outsourcing company can produce the product with greater efficiency.
The most significant advantages to outsourcing are saving money on production costs and improving efficiency across the board. Hence, it will be much more cost-effective to produce an alternative manufacturing resource in an environment where products can be made with greater efficiency.
Strides in innovation and improved production capacity are additional advantages to working with an outsourced manufacturer.
Risks
Some of the potential risks associated with utilizing manufacturing outsourcing services include:
- Undermine morale because of a premature announcement of outsourcing plans. Sufficient specifics should be determined and a strategic roadmap established before any primary company-wide information is made.
- Fail to adequately calculate outsourcing manufacturing costs and identify processes before deciding to outsource manufacturing. Even the simplest of outsourcing transitions require careful planning and financial calculations to be conducted before coming to a final decision.
- Overlook capacity qualifications. While quality is critical when transferring the manufacturing process to outsource manufacturing companies, choosing a vendor with efficient scale production capability in response to expected demand increases.
- Create a communication gap by providing thoroughly detailed and documented specifications. All product details should be thoroughly documented and communicated to the outsourced manufacturing operation to ensure the quality and accuracy of work.
- Put the production schedule in a bind due to unrealistic timelines. A flexible production timeline that allows for delays is best when working across country lines and time zones.
- Create transition gaps by properly outline a detailed transition plan. The transition steps should be carefully
- identified, detailed, assigned, and scheduled to avoid fumbles.
- Fail to communicate internally. While communication with the outsource manufacturing companies involved is paramount, it is also vital that teams communicate about the outsource project internally.
- Fail to allow for disruptions at the outsourcing site. While careful vendor selection can rule out many problems, significant disruptions are still a genuine possibility. Therefore, the outsourcing company should consider such a risk and prepare contingency plans.
- Lose sight of the project as a result of insufficient touchpoints between company and vendor. Out of sight, out of mind. Any company outsourcing manufacturing should facilitate multiple points of contact and interaction to ensure a teamwork approach.
6 Mistakes to Avoid When Outsourcing
There will be some myths surrounding outsourcing that you need to reveal
Outsource manufacturing is a cost-effective way to get your operations handled by experts to raise efficiency and outcome. But there will be some hitches and glitches that might dissuade you. Also, there will be some myths surrounding outsourcing that you need to reveal. But while these hitches and glitches could be stepping stones to your success, there could be inevitable mistakes that could put you on the list of outsourcing failures. So let’s check out some of them:
1. Coming to The Most Expensive Or Cheapest Developer
In some cases, you might be seduced by the low cost of the developer. Or you might choose the highest bidder or the costliest developer, thinking they’ll deliver the best! These are two big mistakes.
While cheap outsourcing could lead to poor quality of products, paying the highest cost also wouldn’t guarantee quality. You need to evaluate the developers properly before making any commitment.
2. Not Investing In Collaboration Tools
Collaboration issues and communication problems in outsourcing count for around 57% of IT outsourcing failures. For example, working in outsourcing, you cannot go over to your team members at their desks to clear any confusion or discuss your next idea!
Many ideas can be missed out, or essential details of the project are missed out while passing information. With great collaboration tools, you can go through this problem and bring everyone on a single platform. Ensure you have invested in good collaboration tools to avoid unnecessary failures.
While many tools are free of cost, some devices might have a freemium version; in some cases, you might be asked to buy the premium version to unlock their features.
3. Not Interviewing The Remote Developers Properly
Hiring remote developers without navigating them as you would for any in-house candidate could be a big problem. The developer would be working on your idea. Would you like to compromise on it? Of course not!
Thus, make sure you have interviewed the product developer before both of you get into the final contract.
4. Unclear Goals And Unsaid Assumptions
Assumptions in outsourcing could lead to blunders. State and document everything, even though you feel it is obvious. Do you think your developer can complete this task? Do you think they can provide this access? State it when you interview them
State the obvious and leave no space for assumptions. This mistake could be very costly for your outsourcing plan.
Communication is also the key ingredient to succeed in outsourcing or building an offshore development sector. Not all outsource manufacturers would meet your expectations. To achieve what you want, you have to tell what you want.
Be clear in specifying your plan scale and goals. Leave no room for assumptions or misunderstandings.
5. Not Forming The Right Contract
You are not only expected to say everything you want; you are expected to put it all in the outsourcing agreement that both of you will sign. This would assure you that everything in the document needed to be confirmed. Thus, it should be created with complete due diligence.
6. Not Securing Your IP
Another mistake that most organizations, especially start-ups, make is not protecting their IP through legal means. As a start-up, your idea, your intellectual property is your main treasure. So hold on to it tight and secure it through all means possible.
How to outsourcing beverage manufacturing
Create your criteria checklist
Outsourcing agreement is based on your requirements and specifications
Your clear list of requirements and specifications will be based on your product and brand, but here are a few areas to consider.
- Technology & Capabilities
What kind of drinks can the facility bottle?
What type of packaging can they do (PET, aluminum cans, tetra-pack, etc.)? For example, have and what size packaging is (330mL, 355mL, 500mL, 1L)?
What is their policy regarding unique packaging development?
What preservation methods do they provide? For example, do they have an aseptic filling?
- Policies & Terms
What are the MOQs?
What is the time required for an agreement?
Do they offer product liability insurance?
- Flexibility
How tightly do they schedule for the whole project?
Are they incapable of accommodating quick-turn requests?
What is their capacity for taking on short periods?
- Compliance
What are their fields of certification (gluten-free, kosher, etc.)?
What is the procedure to guarantee compliance?
- Communication
How often do they reply to emails or requests? Do they guarantee a response in time?
What is the process for communicating problems or issues proactively?
- Location
Where is the manufacturer located?
What impact will that have on delivery and logistics costs?
Can you afford to visit their site if needed?
Break down costs & compare
The pricing from manufacturers has many elements and can be broken out in several ways. Make sure you understand all of these elements that go into your product costs, including resources, storage, and waste disposal, so you can have a comparison when looking for potential manufacturing partners.
Prepare to partner
Think of your outsource manufacturer as a strategic partner. Imagine what success in a long-term, win-win relationship looks like and work for that. Trust your instincts, communicate directly, and continuously look for ways to enhance the partnership.
Conclusion
Working with an outsourcing manufacturer may confuse you initially; sometimes, it will have some inevitable mistakes. But it’s normal because outsourcing manufacturing is a broad term, and newer businesses need time to go with it.
All the information above is just the essential awareness that every entrepreneur needs to know about outsourcing manufacturing. However, there are still hidden facts that you should take the time to discover. If you find this writing valuable, don’t forget to subscribe to the updated blog weekly.
Tan Do is a global beverage ODM/OEM manufacturer and supplier located in Vietnam. Since 1996, we have built trust and credibility not only throughout Vietnam but also in many parts of the world. Leveraging state-of-the-art technology, we have crafted thousands of products that align with ISO, HACCP, HALAL, FDA, and many other standards.
