Outsourcing manufacturing functions is not a new concept. In the 1950s, companies began looking to outsourcing to diversify and capitalize on economies of scale. The outsourcing trend, however, did not gain full speed until the 1990s, when an increasing number of companies realized that in order to respond more flexibly to an increasingly dynamic and fast-paced global marketplace, companies needed to focus on their core business and outsource comparatively higher cost activities (e.g. manufacturing, IT, finance, and HR) to lower cost markets to remain both profitable and competitive. This adjusted focus has led to numerous Original Equipment Manufacturers (OEMs), Original Design Manufacturers (ODMs) and other third parties setting their eyes on countries with low labor and raw materials sourcing costs, such as China and Taiwan.
For OEMs and ODMs, there are many benefits to outsourcing specific manufacturing functions to outsourced contract manufacturers. According to a 2016 survey by Deloitte, a few of the primary benefits of outsourcing include the following points:
Lower costs – according to a study conducted by the US Bureau of Labor Statistics, average hourly manufacturing compensation costs in Taiwan are approximately 280.4% lower than they are in the United States. In the vast majority of cases, even after considering costs associated with duties and shipping, the cost of outsourcing production to lower cost markets like China and Taiwan are dramatically lower than producing yourself.
Focus on core business activities – through outsourcing manufacturing functions, OEMs and ODMs can focus on what they are really good at and outsource production to a contract manufacturing company that may be better positioned (in terms of ownership of manufacturing equipment, knowledge of production processes, network of raw materials suppliers, etc.) to turn their designs into tangible products.
Solve capacity issues – outsourcing production of products that require a specific production process or equipment and/ or spikes in seasonal demand enables OEMs and ODMs to cost effectively resolve capacity issues without the need to spend substantial sums of money on production equipment, hiring and training new staff, sourcing materials, etc.
Enhance service quality – a good outsourced contract manufacturing partner strives to continuously improve its manufacturing processes, materials management and sourcing capabilities, internal capacity building, and optimization of equipment and production flow. By working with a good contract manufacturing partner, not only can OEMs and ODMs benefit from an agreement that generates quality products at a fraction of the price, but they can focus more on activities that contribute directly to their top line, like sales, service, and new product development.
Critical to business needs – outsourcing all or a portion of your manufacturing needs to an experienced production partner enables OEMs and ODMs to achieve a higher output in a shorter amount of time.
Despite the many benefits associated with outsourcing manufacturing functions, there are a number of complications. Research indicates that the main reasons companies are hesitant to work with outsourced manufacturing facilities are related to the following complications:
Fluency in English – according to a recent article from The Telegraph, approximately 1 in 100 Chinese nationals speak English. Moreover, the differences in structure and syntax between English and Chinese can make it extremely complicated even for experienced business professionals to accurately communicate, which can potentially lead to miscommunications, lost sales, and rework. If you do not speak the local language, consider selecting a contract manufacturing partner that both qualified and fluent in English to avoid miscommunications and rework.
Finding a factory – finding and negotiating terms with a factory that has both open production space and a willingness to prioritize your products can be a daunting task in a new country, particularly if you neither speak the language nor understand the business culture. Companies need to conduct their fair share of due diligence before signing a contract with someone they meet at a tradeshow or on Alibaba, including working with a partner that has sufficient expertise, an established track record of conducting business internationally, and is open to your team conducting site visit and audit of their equipment and production processes.
Shipping and lead time – if you decide to work with an outsourced manufacturing firm in a lower cost market like China or Taiwan, you can expect that your shipping costs will increase. Moreover, the time it takes to ship your finished products will also increase substantially when compared to manufacturing domestically. For example, the time it takes to ship via sea freight can take approximately a month compared to approximately a week when shipped on a truck. Not only do OEMs and ODMs have to calculate the landed costs of their products, but they will also have to figure out how to handle warehousing and inventory management so they can get their products to their customer base on time and in full. The ideal contract manufacturing partner will support your team with warehousing and fulfillment so you can continue to focus on your core business.
Perception of quality – China in particular has a less than stellar reputation for the quality of products manufactured and sold in developed markets. However, certain production processes, especially those associated with casting and CNC machining, do not vary much by country or company. As such, you can expect the quality of such products to be fairly standard, whether produced in a developed market or a lower cost market provided the inputs are of the same material. Before signing a contract with a contract manufacturing facility in China, Taiwan, or another low-cost market, it is recommendable to conduct an audit of their production processes and ensure that the factory’s approach is in line with the precision and technical requirements of your designs. It is also recommendable to request that companies you are considering working with provide evidence that they have the corresponding certifications to produce according to your requirements.
Confidentiality – a nightmare scenario when working with an outsourced manufacturing firm is that the manufacturing partner you work with steals your designs and intellectual property and brings them to competitors. When working with an outsourced manufacturing firm, it is important to make sure the right confidentiality agreements are in place to ensure your designs and intellectual property remain safe throughout the entire business cycle.
If you or your company plan to work with an outsourced manufacturing partner, it is worthwhile to make sure the factories you are considering working with address all of the above-mentioned points when conducting your due diligence. If you have a project that you would like to discuss with a sales representative or would like to request a quotation, give us a call at 1-855-411-0404 or visit us at www.aimcontractmanufacturing.com.