For technology manufacturing executives, deciding whether to outsource production – or stick with in-house manufacturing – can feel like navigating a maze. The stakes are high, especially in industries like medical electronics, where precision, cost, and scalability are critical. A structured decision-making process, grounded in scenario modeling, can simplify this complex choice, helping leaders weigh trade-offs and uncover unexpected opportunities.
This article explores the nuances of outsourcing, outlines four common contract manufacturing agreements, and explains the return on invested capital (ROIC) formula to guide strategic decisions. Whether you’re considering outsourcing, reshoring, or switching electronics manufacturing services (EMS) providers, read on for actionable insights.
Outsourcing dilemma: A case study
Consider a Silicon Valley-based medical device manufacturer producing radio-frequency (RF) generators and disposable needles for tissue ablation. The company enjoyed strong profit margins by manufacturing in-house but faced a challenge: its high-cost facility was underutilized due to low production volumes. Overhead costs in Silicon Valley were eating into profits, leaving money on the table despite growing demand.
To address this, the company explored outsourcing. Proposals from EMS providers specializing in medical electronics offered unit costs significantly lower than the company’s fully loaded in-house costs. However, management realized they’d need to maintain substantial infrastructure like quality control, supply chain oversight, and vendor coordination…to manage an outsourcing strategy effectively.
These internal support functions, often overlooked by first-time outsourcing, added costs but still kept outsourcing cheaper than in-house production.
Strategic alternative emerges
As the company weighed its outsourcing decision, a game-changing opportunity arose: a merger with a high-volume medical device manufacturer in a low-cost, rural Eastern U.S. region. This company’s sales force complemented the Silicon Valley firm’s offerings, and its 60,000-square-foot facility promised economies of scale. By modeling scenarios, the company found that integrating its RF disposable needle production into the Eastern facility, with incremental direct labor, slashed unit costs. Shared overhead between the two product lines further amplified savings, nearly matching the cost benefits of outsourcing.
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The merger also offered a key control advantage. By keeping manufacturing in-house via the acquisition strategy, the company avoided reliance on external EMS providers, maintaining oversight of quality, intellectual property, and production timeline. This was considered a premium for a medical device firm where precision is non-negotiable.
Why scenario modeling matters
This case illustrates the power of scenario modeling in manufacturing decisions. By comparing outsourcing, in-house production, and the merger, the company uncovered a solution that balanced cost, control, and scalability. Analyses of these types can yield surprising results, whether for startups with limited resources or enterprise manufacturers with steady volumes. Tools like costing modelers or ROIC models help quantify trade-offs, ensuring decisions align with long-term goals, which can also be defensible when presenting to corporate boardrooms.
Four types of manufacturing outsourcing contracts
Outsourcing agreements vary based on scope, risk, and control. Understanding these options is crucial for supply chain executives. Below are some brief thoughts on each.
- Turnkey contracts are when the EMS provider handles everything. From design, procurement, assembly, and testing. Ideal for companies with limited resources but carries risks of dependency and IP exposure.
- Consignment contracts are when manufacturer supplies materials and EMS manufacturers focus on assembly. This offers cost control but requires robust supply chain management.
- Joint development manufacturing (JDM) is collaborative. This model is when the OEM company and EMS (or ODM/JDM) firms co-design products. This balances innovation and cost but demands strong partnership trust.
- Build-to-order (BTO) is when contract electronics providers produce to specific orders, minimizing inventory costs. These model is mostly best for low-volume, high-mix products but may limit scalability.
Each model impacts costs, quality control, and operational flexibility differently. Scenario modeling helps determine which model aligns with your business needs.
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Understanding ROIC in manufacturing decisions
Return on invested capital (ROIC) is a critical metric for evaluating outsourcing or capacity planning and acquisition decisions. ROIC measures how efficiently a company uses capital to generate profits.
