Product Manufacturing Should YOU Manufacture Your Product? 5 Questions to Ask

Transcription

1 Product Manufacturing Should YOU Manufacture Your Product? 5 Questions to Ask

2 Introduction When deciding whether to manufacture your product in-house or to outsource to a contract manufacturer, the pros and cons must be weighed carefully. Manufacturing something in-house generally costs less than buying a finished product directly from a vendor, but there are other considerations: Are time and other resources potentially wasted in the process? In addition to materials, what is the cost to your business of engineering time, labor, and construction/asset depreciation? What about opportunity costs? While the relentless push to operate more efficiently remains the driving force behind outsourcing, it has also become a competitive, strategic tool. Once focused just on reducing expenses, today s outsourcing initiatives can help companies improve response times and develop new products faster than ever. This paper explores five questions product manufacturers should ask themselves when making the make versus buy decision. Should YOU Manufacture Your Product? 5 Questions to Ask PAGE 2

3 1. Is it a core competency? If the manufacturing process being considered is a differentiator for your business or has high intellectual property value, it may be wise to keep it in-house. On the other hand, if the manufacturing process is not a core competency of your business model today, there is likely no benefit to continue manufacturing in-house. For companies deciding whether or not to bring manufacturing in-house, consider that manufacturing is an entirely unique business that can become a distraction, rather than an asset to your company. In both cases, shifting some or all the manufacturing process to an outside manufacturing partner frees up your resources to focus on those capabilities, such as product development, marketing and customer service, that bring real value to your business. Should YOU Manufacture Your Product? 5 Questions to Ask PAGE 3

4 2. Does it fit with your long-term goals? One benefit of establishing manufacturing in-house is that it allows you to control and enable capability for your business. While this is a clear advantage, there are costs to obtaining this control. You must ask yourself just how strategically valuable to your company is the manufacturing capability you are considering implementing? Some question to ask to determine that value include: Do you make several products that require similar manufacturing capability, or will you be investing in equipment for just one product line? Do your employees have manufacturing expertise, or will you be forced to hire a new workforce? Can you establish and maintain a competitive manufacturing advantage for your product(s)? Is there potential to develop proprietary manufacturing technology? Are there unique or difficult aspects to the manufacturing requirements? Will manufacturing capability help enhance the company s ability to in-license new products? Do you have the space for in-house equipment and production functions? If you determine it will be too costly and difficult to add the necessary capabilities and technology to successfully make your product in-house, you will want to seek an outside manufacturer that has the skills and experience you need. Should YOU Manufacture Your Product? 5 Questions to Ask PAGE 4

5 3. Is it feasible? The make versus buy decision has a significant impact on a company s capital requirements and operating cost structure. While not always the primary consideration, conducting a sound financial analysis is an important part of the decision process if only to clarify the decision s financial ramifications. Equipment Costs Equipment for in-house manufacturing will likely be one of the largest capital expenses for your company? Will the investment in machinery pay off over time? Again, you need to look far down the road to determine if the investment will give you a financial return. To compare costs accurately, all aspects regarding the acquisition and storage of the items must be considered. Expenses related to the purchase and maintenance of any equipment and the cost of materials must be estimated. Additional costs may include labor, storage requirements, and the proper disposal of any remnants or by-products from the production process. Here are four primary costs to consider: Should YOU Manufacture Your Product? 5 Questions to Ask PAGE 5

6 Capacity Costs Do you have the physical space to manufacture inhouse? If not, are you willing to invest in creating the space at your own facility? If the answer is yes, you must also consider future needs. You can make a reasonable projection about the capacity demands for in-house production and the impact it will have on your facility initially; but you will need to think about the future of the space if in time it is no longer needed. Will it be space that can be repurposed or will it become a financial burden over time? company based on your estimated annual production volume and storage capacity. Preparation Costs Do you have the right people and processes to begin manufacturing in-house? If you need to hire new staff to manage and run an in-house manufacturing facility it will take time to recruit, interview, train and incorporate this new team into the organization. By some estimates this process can take up to a year. Raw Materials Costs When it comes to raw materials, the more you buy the more you save. Whether you are working with aluminum, steel or plastics, you are unlikely to get the same volume pricing awarded to a contract manufacturing who buys for hundreds of customers. Investigate the various pricing break points for raw materials and determine what makes sense for your Should YOU Manufacture Your Product? 5 Questions to Ask PAGE 6

7 4. What are the hidden costs? In every endeavor there are hidden costs that should not be ignored. The make versus buy decision is no exception. The often-overlooked costs of setting up an internal manufacturing capability include administrative costs like process set up and inventory management, software costs which may require ongoing programming support and licensing fees, databases set up for document and revision control, retraining of manufacturing employees, and possible certification fees. Non-administrative costs may include shipping or import fees on production materials, applicable sales tax charges, product storage and labor costs associated with receiving raw materials, and set up and optimization of the manufacturing line. Should YOU Manufacture Your Product? 5 Questions to Ask PAGE 7

8 5. What are the risks? Understanding the risk associated with any decision is the first step in managing it. The risks inherent in the make versus buy decision may include risk of product failure or greater than anticipated success, product damage, management of unwanted inventory, delays in production, or overall poor manufacturing execution due to unskilled labor or aged equipment. A thorough analysis can help you discover issues before they happen. If the risks of having an in-house manufacturing operation outweigh the benefits, outsourcing is a logical approach. Invest in a Thorough Analysis Each company and product manufacturing requirement are different, so there is no predetermined correct answer for the make versus buy decision. Investing the time in a thorough analysis of the various options being consider full in-house manufacturing, partial outsourcing, full outsourcing, etc. is an important step that should not be overlooked. Should YOU Manufacture Your Product? 5 Questions to Ask PAGE 8

9 Bottom Line Faced with increased competition and rising customer expectations for faster response times and lower prices, product manufacturers need ways to reduce costs without jeopardizing product quality. By working with a best-in-class manufacturing partner one that can collaborate with your design team, has quality controls and best practices in place, has a reputation for quality work, and can support your additional supply chain needs you can improve your products, your processes and your bottom line. Manufacturing custom extrusions takes years of dedication and experience. You need a combination of talented engineers, tool builders and manufacturing staff to produce consistent quality parts and components every time. Vitex Extrusion has been serving system integrators, OEMs and other manufacturers throughout the U.S. since 1986, helping them improve their process, product and bottom line. Contact us today about your next project. We have the best people, processes and machinery to meet the most demanding industry requirements, while delivering shorter lead-times and consistent quality for even the most complex extruded aluminum shapes. Vitex Extrusion vitexextrusions.com Should YOU Manufacture Your Product? 5 Questions to Ask PAGE 9