What are the pros and cons of outsourcing vs insourcing manufacturing?
I am advising a start up who currently outsources manufacturing of her hair products and other organic skin care products. She is looking for advice on whether to continue outsourcing or raise capital to build her own manufacturing facility. She currently sells 100% of her products online and is also looking to move into a retail channel. Please can you advise on insource or outsource manufacturing, pros and cons? As well as to continue online versus going direct to retailers?
Outsourcing will swallow up the huge amount, I feel better your client can train few freshers and hire them for her product selling.
Several things to consider are the cost of retailing vs. the supply chain availability, the profit margin vs. the ROI, and the asset proportions of her marketing and branding.
The question is one of control VS cost.
"Insourced" or owned and operated manufacturing requires a completely different and far more complex skill set than purchasing services from an outside contractor. Plant design, engineering, equipment efficiency, maintenance, safety and environmental issues are only a few of the areas of expertise that are required, that likely are not immediately at hand in a sales and marketing operation.
HR demands around training, pay, vacations, sexual harassment, culture conflicts, payroll, benefits are all more complex and can be overwhelming to a management team with inadequate experience.
Once equipment and manufacturing is placed on the P&L scheduling and unit up-time become extremely important. Matching production with inventory, with shipping logistics and sales can be extremely demanding areas of activity that haven't been addressed in the past. Raw materials, quality control, process control, and other seemingly small concerns can become dramatically more important as each area can have a direct or indirect effect on the others.
Just some of the things to consider.
My advice is let her leverage on her strength which is "online sales" and explore pushing more volumes out there to end users. If she feels the need for increased margins she could collaborate in R&D,Design and Quality with her preferred manufacturer and demand better schedule of deliveries to meet her product demand. This will help her both on long term and short term basis skipping the capital outlay headaches and time constraints associated with fund sourcing. Manufacturing takes a long process and getting the right equipment ,training,and the distribution to operate at economy of scale is a long shot. Retailing direct puts a face to the product that customers can relate to on the short term but again this will cut into her margins initially. But as time goes on demand will increase online as well. The bottomline here is cost to benefit of the alternative forgone. Finally she should reduce her commercial risk by sticking to her strength but having more input at production levels,Quality and Delivery schedules optimization
In my opinion, the key questions is: what is your client best at and most comfortable with. I understand she is successful selling on line. She must understand that manufacturing is a very different ball game, requiring substantial funding (and debt!) and a high level of risk. She probably does not have the necessary skill set to be involved in manufacturing and will have to hire somebody or bring in a partner to run that part of the business.
My recommendation is that she puts all her focus and resources in expanding her on line selling business. Remember that Amazon manufactures nothing. P.
If you are satisfying from quality of outsourcing then only problem little-bit of cost,on the behalf of fatigue problem,...,other side in sourcing you secure some extra amount,...on the behalf of manufacturing and management fatigue,...
Insource v outsource
For my way of thinking, this question is a matter of cost and skill.
As most people have advised, outsourcing is the default option becuase the outsourced provider can achieve economies of scale and can pass this benefit to its customers.
Howeverf, if your client possesses a unique skill whereby they can manufacture their product themselves at a lower cost than through outsourcing, then insourcing is worth consideration.
On the question of online versus retailers, why not consider it? Retailers are another distribution channel. Think of them as wholesalers of your client's product. So there are two questions:
1. How can the retail proposition be positioned such that it does not cannibalise the existing offer? and
2. What benefit can your client provide to the retailers that will make it attractive to them?
My bias: channel pays, but infrastructure costs. At high enough volumes you can benefit from the infrastructure and afford its costs; the channel has to deliver the volume to make this happen. It's a pretty simple breakeven analysis. Actually, that's not true - it's a complicated analysis, and it's hard to do it honestly, but it's necessary, even to know how much capital to raise.
Hair and skin products are a face-to-face sale, especially if the brand is unfamiliar to the consumer, so retail makes sense for unit sales growth, despite its radically lower margins. Although I respect it deeply, manufacturing of this type of product is a commodity, so I would run away from it as long as possible. One additional consideration is that if her objective is to exit the business in the relatively near future, an exit might well be easier to accomplish that if she's not manufacturing in house. If, on the other hand, her goal is to build a major international brand, then she will need to bring manufacturing inside at some point. When to do it will fall out of the number crunching.
The question is always about Quality Control and Trusting the process...If she believes her product is being made well overseas then OK...But if she decides to make here there is the cost factors to weigh, manufacturing costs here vs. overseas, shipping costs if made overseas...If she wants to get into retail she should send prototypes out and have a meeting with the retailers with an understanding of how her products will impact the marketplace, understand her costs and the responsibilities of raising capital with a line of credit, long term debt etc...Must have a mission, and vision statement in place as well as business plan as well...
Outsourcing is better in over 90% of situations, especially for premium priced products. Factories consume enormous amounts of time, energy, and capital as well as forcing unwanted production from time to time to avoid unfavorable factory variances.