Deciding when outsourcing is right—and when it’s not—can be a major undertaking for technology manufacturing executives. But using a process that models a company’s possible scenarios can help to make even a complex decision simpler. (Additionally, this article explains the four types of manufacturing outsourcing contract agreements and explains the ROIC formula in this article.)
So, whether you’re outsourcing, reshoring or moving your program from one EMS provider to another, read on.
One electronics medical device manufacturer that builds and markets its own radio-frequency (RF) generators and disposable needles for tissue ablation had achieved high profit margins by manufacturing in-house, it was leaving money on the table because its high-cost Silicon Valley facility was operating under low-volume conditions. (Get list of contract electronics services in Silicon Valley/Bay Area)
Volumes were growing, but not fast enough to cover the company’s Silicon Valley overhead.
Eventually, outsourcing became a serious option. Seeking outsourcing partners, the company entertained proposals from several contractors. Proposals received from outsource providers were significantly less expensive than the firm’s loaded unit cost.
As sometimes happens to executives who have not outsourced previously, however, Company management was struck by the amount of infrastructure that would have to be maintained in order to manage an outsourcing strategy effectively if they decided to outsource to medical electronics solutions providers. See impact to ROI below based on keeping plant, property and equipment (P,P&E) in-house.
Yet for this firm, still, even when the cost of internal manufacturing support functions necessary to support an outsourcing infrastructure was added in, outsourcing costs (online calculator) remained a cheaper option than continuing to manufacture in-house.
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Then came along a strategic opportunity to merge with another medical business across the country that was already producing high-volume medical devices. That company had a sales force synergistic with the Company’s, and its location in a rural area in economic decline allowed for low-cost manufacturing. Moreover, the acquisition would provide the Company with a 60,000-sq-ft manufacturing facility in in the Eastern US.
The company ran models in which manufacturing of its RF disposables volume was added into existing production at the Eastern facility along with the necessary increments in direct labor. Unit cost was naturally found to have decreased.
Also, because the two product lines shared overhead, the Company came close to realizing all the cost savings it would have enjoyed if it had outsourced. That made the merger more attractive for the Company.
The do-it-yourself control factor was a premium noted by the Company.
In this scenario, the Company’s go–versus–no-go analysis led to the best solution to its problem. Decision analyses of this type often yield surprising results, whether the company is a start-up or a major manufacturer with sustained product volumes.
Manufacturers seeking to acquire additional manufacturing capacity through joint ventures, partnerships, mergers or acquisitions can read more about Venture Outsource M&A services here. View the full list of our manufacturing consulting services. View examples of some client engagement outcomes.
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