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?
1.) If manufacturing learned anything for the triple disaster in Japan, its that a manufacturer needs a vast supplier chain. Whether that is raw materials or finished goods. Therefore, I'd recommend that your client expand her supply chain. She needs to "Think globally produce locally."
2.) Here's a link to a Google search with pros and cons (http://bit.ly/1wDKVTt).
3.) A big con is causing a disconnect between her and her current supplier potentially creating a major hole in production that can't be filled because the current supplier may stop producing her product once they learn she is going to move manufacturing in-house.
4.) There will be a large lead time to get manufacturing plant up and running beyond raising capital. She's not going to find a plant overnight nor is she going to obtain equipment immediately and finding employees and training them is time consuming as well. It could be 6-12 months, if not longer, to set up a manufacturing facility specific to her needs. We're talking millions of dollars in capital needed.
She'll need to analyse current manufacturing costs and compare that to estimated wages, benefits and other fixed and variable costs of manufacturing in-house.
5.) It doesn't have to be a us versus them relationship between selling online or into retailers. She could use both, but she is going to did a wholesaler/distributor/dealer of her product to get into retail because she is going to need follow up and support. It's up to the product manufacturer to do the merchandising of the shelves.
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.
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...
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.
Several episodes of shark tank and some success stories deal with these issues.
I would say increase volumes of sales and negotiate lower costs per unit.
Leave the headaches of running a production plant up to others.
Unless it's really simple packaging.
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.
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 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.
It all depends upon how much you have outsourced for manufacturing..
In case, you have only given them production and retained the R& D or Design or Vendor development with you, then it is better to outsource the manufacturing.. since it takes away the burden of Capital investment and Labour management. and further you can focus on retail channel and other distributing system.
outsourcing means she has to rely on other people and their schedules, which can conflict with the needs of her clients and herself. Insourcing allows her to control the process but also involves an investment in materials and space which can be cost prohibitive initially.
If she insources she should look into retailers as well as direct sales to support the change in business.
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,...
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.
Outsourcing will swallow up the huge amount, I feel better your client can train few freshers and hire them for her product selling.