Own production vs. outsourcing – when to commission contract production
Own production versus outsourcing – is for a longer time one of the main duels in the manufacturing industry arena. In certain rounds, questions about labor costs, specialty equipment, logistics services or knowledge of the supplier’s markets are multiplied. We start our professional response and the final verdict from the analysis in which we compare the in-house production and the one focused on targeting external entities in the form of production outsourcing.
Group I – staff, materials, equipment
Regardless the economic sector, the first group of expenses and components necessary for efficient production are labor costs per human, fees related to the materials price and the amounts spend on specialty equipment.
Salary makes over half of the expenses that make up an employee. Social and health insurance premiums that go up along with the increase in rates and minimum wages should be added to it. Currently, for people working in Poland under employment contract, it is 2,100 PLN gross or about 1,530 PLN net. In comparison to 2017, the value of the lowest salary increased by 100 PLN. We add a number of own cost related to vacations, employee’s diseases, fees for staff training or total financial outlays, which should be spend on computer system, IT and accounting. The simplest, but effective way to assess the profitability of investments is to conduct a standard financial analysis, which will show whether a decision to purchase outsourcing services is worth making. In order to compare the costs of both solutions, the sum of all elements of the employment should be calculated and non-standard costs such as the employee’s illness or maternity leave added to it.
Prices of materials and specialty equipment – these are further production components that generate high financial expenses on entrepreneur’s part. In this case, everything depends on the company’s size and the size of production needs. The owner should focus on them by conducting costs analysis. The main issue to pay attention to is the economics of scale. A large order equals a higher discount on materials. The greater the number of manufactured and sold goods, the lower the price of particular unit production.
Manufacturing vs outsourcing – Analysis of logistics costs
We have already written about issues related to logistics in the previous article. However, this is an area that cannot be forgotten in conducting a reliable financial analysis. Lack of professional approach in this case absorbs the owner ‘s attention, does not allow to focus on the company’s strategic goals and, as a result, leads to significant inhibition of the company’s development. When determining the costs, one should remember first of all about blocked capital, operating fees of the logistics fleet or popular leasing. Transporting products on your own also means employing additional people, couriers, insurance costs and all this, on both – home and foreign market.
Toyota creates a new quality
Sudden and drastic changes in the business environment mean that the traditional approach to the business will not guarantee sustainable development. We are at a turning point that requires the creation of a new business model
from these Akio Toyoda’s words, President of Toyota Motor Corporation, the company started focusing on a new Global Vision. The goal is simple: production of better vehicles, improvement of production process and maximum use of existing factories. As part of the project, Toyota decided to temporarily suspend new investments in production plants, fully focusing on currently operating factories and innovative elements grouping in manufacturing process inside them. Effect? The indicator of assembly line average use increased from 70 percent in 2009 to over 90 percent at present.
Group II – knowledge of suppliers’ markets
Staying in the global markets climate, one must mention about basic difficulties of own production. It is about the knowledge of supplier economies and often limited ability to negotiate prices with distributors of services and components.
Globalization seeks to unify all areas of life around the world, including the manufacturing industry. Still, it did not eliminate all the differences between the Polish market and the economy of other European countries, Asia or America. Each of them has characteristic elements, without knowing them, one can pay through the nose and lose a lot. It’s like learning a foreign language. We may know the vastness of specialist vocabulary or grammatical principles, but individual idioms or phrases will remain alien to us and can boldly lead to whole context distortion. The analysis should therefore focus also on the costs of gaining trusted contacts among our suppliers, regardless of whether we decide to produce on our own or by outsourcing companies.
You can find more about outsourcing in electronics products here.
Financial analysis or the basis for a good choice
The whole analysis consists of thorough assessment of the company’s own potential and estimation of the potential profit from the production transfer to external entities. The analysis is complemented by two issues – the ability to carry out the mentioned process in a repetitive manner and the ability to professionally control quality in accordance with the legislation. In return, we will get a proven way to maximize the company’s profit. The intended effect is to streamline the production process, take full advantage of the company’s potential, reduce unit costs in the contract manufacturer’s production and finally – to reduce the risk for the end-user to a minimum.
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Tech2U
27 August 2022production outsourcing is a good alternative when we take into account costs. However, perhaps the biggest problem worth mentioning is intellectual property, and thus trust in your partner. From what I have seen about production outsourcing and the problem of intellectual property, there is a separate article. thx anyway
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19 December 2022Hi,i,m medical assistant for a BPO provider. I like your site very much! Your production outsourcing point of view is correct and widely applicable. Often, own production is not a good commitment, and outsourcing production can save the business.
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21 December 2022Hello, I adore your blog! I tend to agree with your point as I am currently employed as a medical assistant for an outsourcing company.
Charmain
22 March 2023Thx for the post. The decision to choose between own production and outsourcing contract production depends on various factors, including the company’s size, industry, resources, strategic goals, and market conditions. It requires careful evaluation of the pros and cons, and a thorough analysis of the specific needs and capabilities of the business.
Ultimately, there is no one-size-fits-all answer, and each business needs to carefully assess its unique circumstances and objectives to determine the most suitable approach. It may also be beneficial to seek expert advice and consider a hybrid approach that combines in-house production with strategic outsourcing to leverage the strengths of both options.