You don’t have to own a factory just because you want to produce, assemble, store, ship and build your product. Contract manufacturers are happy to do all or some of the above for you. Most will work out a deal with you to charge a percentage of your billing, making this a variable expense.
Contract manufacturers also maintain insurance on your goods in their possession. They cover the cost of their employees’ benefits. This represents a huge saving in fixed and operating costs.
A fixed cost is one that your business incurs whether or not it makes any sales. Converting fixed to variable costs is a major way to reduce your need for money. It could also be the difference between success and failure for young companies. Every fixed cost should be scrutinized for conversion to a variable cost. As your company grows and volume increases, there may come a time when the fixed cost is less expensive than a variable one. Before you switch, make sure you can maintain this high volume. Don’t switch on the basis of sales projections or a one-time uptick. As a general rule, investments in overhead should be made only when you have a high degree of certainty about the product, and when customer demand is strong and well understood.
Outsourcing has been the answer to many business owners when it comes to reducing operating costs. Not only is outsourcing manufacturing a matter of convenience for small and mid-size companies; it is a pre-requisite for survival. Without the ability to farm out their manufacturing to contract manufacturers (CMs), companies simply lack the economies of scale that allow them to effectively compete with their larger competitors. Few companies have the ability to invest in — and routinely upgrade — the millions of dollars in equipment, personnel, and process technology required to compete in a market of shrinking product lifecycles and eroding margins. If you are a smaller company, you will likely face more challenges than your larger competitors when it comes to outsourcing. The onus is on you, the original equipment manufacturer (OEM), to make the right CM selection, establish robust business processes, negotiate win/win pricing and contract terms, and invest time and resources in the relationship on an ongoing basis.
Any business can succeed in their manufacturing outsourcing strategy if they choose the right manufacturer, the right broker, and most importantly monitor quality before and after shipment.
An outsourcing model enables many OEMs, primarily those that are small or mid-size, to become more competitive. However, this business model carries risks that, unmitigated, can have a significant impact on a company’s financial performance and long term success. Implementing solutions to these common mistakes is not trivial, cannot be rushed, and must be pursued with a strategy in mind. In the end, outsourcing can be successful if you have the right strategy, processes, people, and tools to maintain control of your business.