We’ve heard it a thousand times on the news: Companies must outsource manufacturing to save on the costs of production. But behind the scenes there are a lot of factors at play that can actually make outsourcing a costly and risky decision. If you work for a company that’s thinking about outsourcing, do your due diligence to make sure you’ve uncovered all potential or hidden costs.
Companies that outsource manufacturing could lose control over the quality of the products they’re selling. Outsourced vendors might try to cut corners without first getting approval. By using inferior raw materials and production practices, they could reduce their operating costs and improve their profit margins. An inferior end product is the inevitable result. But the vendors won’t have to field customer complaints -- that’s the job of the company whose brand name is on the end product.
Outsourcing takes control of demand planning and delivery timing out of the hands of the product seller. Planning production to meet forecasted demands is a complex and involved process. If done incorrectly or ineffectively, lack of appropriate raw materials can stop production. When production stops, delivery stops. No delivery means no sales, so your vendor’s problem becomes your problem. This scenario is particularly troubling if the products you’re outsourcing become components for another manufacturer’s products. Your vendor’s stopped production becomes your customer’s stopped production -- and your company is the one that pays the price.
Depending on the products and where they’re manufactured, the logistics of getting them from the outsourced vendor to your customers can present significant challenges. Transport by sea is time-consuming and can result in your products ending up on the bottom of the ocean, damaged by sea water or even confiscated by pirates. Transport by air is fast but costly. Importing products presents another set of challenges and can subject your products to expensive fines if you haven’t done your homework to understand customs regulations.
The cost of labor is a major factor in outsourcing decisions, but it might not be a stable cost. Countries with low labor costs today could experience economic shifts, causing those costs to escalate. If your manufacturing operations are outsourced and suddenly labor costs skyrocket, you can’t just pack up and leave to go to the next best labor market -- you have a contract to meet. Indirect labor costs associated with poor working conditions also can be a problem. Your company can’t control how the outsourced company treats its employees, but once the media gets involved, it’s your company that will lose public trust.
Outsourcing manufacturing to low-cost labor markets in third-world countries could put your supply chain at risk, due to political instability. Civil unrest, changes in government and other socio-political factors can halt manufacturing or result in problems with receiving raw materials or shipping finished products. You might even lose the ability to communicate with the outsourced vendor. If you can’t get manufacturing and shipping updates, not only can’t you deliver your customers’ orders on time, you also can’t give any guarantees that they’ll get their orders at all.
Safety and Security
Outsourcing to politically unstable countries can pose safety risks for your company’s employees every time they need to travel to the manufacturing location. Security also presents a problem with regard to protecting your company’s intellectual property. In order to manufacture your products, you must provide the vendor with confidential design data that could find its way into a competitor’s hands or a counterfeit operation.
- Economy in Crisis: Outsourcing Does More Harm Than Good
- The New York Times: How Outsourcing Production Can Mean Trouble in the Supply Chain
- Center for American Progress: 5 Facts about Overseas Outsourcing -- Trend Continues to Grow as American Workers Suffer
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