The ultimate guide on how to outsource manufacturing
Explore how to outsource manufacturing, the risks of outsourcing, and the tools that can help growing manufacturers keep their production under control.
Last updated: 30.03.2022
You had that nightmare again.
The nightmare where you’re hidden away in your workshop because there’s an angry mob gathered outside and you were unable to fulfill their orders on time. You tried, you really did, but you’re just one person, how is it even possible to leave every customer satisfied when your business is quickly outgrowing you. Finally, the windows and doors of your business can’t hold off the negative feedback of your customers, and they break open, while your company begins to crumble.
This nightmare doesn’t have to be a reality.
All you need to know is how to outsource manufacturing and make it work for your business.
There are several reasons a manufacturer should consider outsource manufacturing:
You need to redistribute resources to free up time;
You’re a designer, but don’t actually know how to build the product and need a partner; or
You’re not equipped to build a specific component needed to finish your product.
Maybe a reason to outsource could be beyond your control.
Currently, many places are experiencing a drought of skilled workers to choose from in the talent pool. Worst of all, this is an issue that isn’t going away anytime soon. And that’s not including any of the other manufacturing challenges your business might encounter.
You might be able to handle manufacturing and running your business all by yourself now, but eventually, to scale you’re going to need to find the extra resources elsewhere to be able to handle the increase in sales and mass production.
This is where outsource manufacturing comes into play.
In this article, we look at what is outsource manufacturing, how to make outsource manufacturing make sense, the risks associated, and how to get the ultimate set-up whilst you outsource your production.
PRO TIP: As a maker using outsource manufacturing, you don’t have to relinquish complete control of production. You can order and set up deliveries of raw material for your contracts to get more control over production times. However, this will require you to know how to calculate raw materials, and luckily for you, there are tools on the market built to do exactly that.
What is outsource manufacturing?
Outsource manufacturing, or contract manufacturing, is contracting with a third party to produce goods or services. This can be done domestically or internationally, saving businesses time and money — outsourcing can also help businesses stay competitive by focusing on their core competencies.
How much does it cost to outsource manufacturing depends on the company you start a contract with, the political atmosphere, the demand of the manufacturing company, and the cost of transportation.
Outsource manufacturing is the process of one business hiring a third-party company to perform the services which a company’s employees traditionally carry out. The majority of outsource manufacturing usually occurs in foreign countries with the main goal of lowering costs, particularly minimizing labor costs and manufacturing overheads. This is because it can be cheaper for a business to hire the services of a third-party company instead of hiring their own employees.
One factor to consider when looking into how much does it cost to outsource manufacturing.
However, even though reducing costs is the most common reason for a business to start using outsource manufacturing, you need to figure out reasons for outsourcing manufacturing:
Are you looking to reduce costs
Supporters of outsource manufacturing believe that implementing this tactic into a business gives incentive for the company to allocate resources to where they would be most effective, and outsourcing even helps maintain a healthy free market on a global scale.
There are many benefits to outsourcing manufacturing.
When you outsource, you can save money on labor costs since the manufacturer will likely be able to produce products at a lower cost than you could. You also don’t have to worry about setting up and maintaining your own manufacturing facility. Additionally, outsourcing can focus on your core business and leave the manufacturing process to the experts.
This can help you save time and reduce your risk of mistakes.
Finally, the other benefit of outsourcing is that it allows you to scale up or down your production easily.
If demand for your product increases, you can quickly ramp up production; if demand drops, you can easily reduce your output without laying off workers or closing down a factory. All in all, there are many reasons to outsource manufacturing. If you’re considering it, do your homework and find a manufacturer that can meet your needs.
Critics believe the cons of outsourcing take away domestic job opportunities for local workers, especially within the manufacturing and textile industries. However, we’ll investigate this more when discussing the risks facing outsourcing manufacturing companies. For now, let’s look into how to outsource manufacturing.
How to outsource manufacturing
Companies looking to outsource manufacturing should avoid the grave mistakes of bigger companies like Boeing and Apple by following Dr. Hart-Smith advice. Read on to know more.
At a 2001 conference, Dr. L. J. Hart-Smith, an aerospace engineer, presented a memo explaining the huge risks airplane manufacturer Boeing was taking when subcontracting 30% of the manufacturing on the Boeing 787 Dreamliner’s. A plane that would later be plagued with embarrassing safety issues, forcing governments worldwide to ground the aircraft. Unfortunately for Boeing, they didn’t heed Dr. Hart-Smith’s warnings. Not only can we learn from their mistakes, but Dr. Hart-Smith also put together a set of ten rules manufacturers should follow when deciding to outsource manufacturing.
1. Monitor production
You need to have a hawk’s eye and be vigilant over your outsource manufacturing. You should effectively minimize costs; meaning don’t isolate a certain part of production (especially if dealing with sub-assemblies) as one cost reduction, but keep in mind of a products entire workflow.Meaning it can be more cost-effective to strategically outsource production if the entire workflow has been taking into consideration as opposed to minimizing costs in one area.
2. Nothing is perfect
Perfect efficiency isn’t achievable for companies looking to outsource manufacturing. Don’t waste time making it perfect.
3. Don’t go all in
Figure out the minimum amount of production that needs to be retained in-house to help you generate enough cash flow for developing future products.
Try to keep some production in-house. Better yet, outsource some production but bring in people with the knowledge, or workers you can train, to make your products so you have the internal expertise to keep fulfilling orders should something go wrong.
5. Don’t be greedy
Your primary goal shouldn’t be to just reduce costs. Yeah, it can certainly be an objective, when looking to outsource manufacturing, but the main reason you should be doing it is that the contractor has a better facility than you have access to.
6. Other costs increase
Always remember, companies looking to outsource manufacturing will face higher manufacturing lead times, and other costs will increase such as transportation. Be wary of this when you begin to outsource.
7. Importance of precision in early tasks
Finesse the initial stages of production of a product to reduce the larger subsequent tasks.
8. Avoid emulating other companies
Understand that cost-saving techniques that work for other manufacturing companies that outsource may not work for your business. Examine and develop a model that works for you.
9. Don’t replace all your production capacity with outsource manufacturing
Don’t scale down your business to save more or have outsource manufacturing at 100%. You’ll sacrifice irreplaceable critical skills making you dependent on manufacturing companies that outsource.
10. Learn to listen, listen to learn
If you get advice from employees or other manufacturers in your market on how to reduce costs, take it.
They’re going to have more insight into how your business will perform better than an outside consultant. You might be thinking, “This is all very well and good. But, how do I go about choosing a manufacturer?” There can be consequences to choosing the wrong one, and you will always need to research before you start to outsource manufacturing.
But, as a rule of thumb always:
Try to visit
You can determine for yourself if a company is worthy of handling your product. You can do this by assessing their employees’ skills and verifying with your own eyes the quality of their equipment.
Check experience and certificates
If a company has just started up and you’re going to be their first contract, be selfish, and move on. Their inexperience could lead to costly errors for you, and not them.
Research where they’re located
For example, outsourcing manufacturing to China to different regions, you can benefit from different tax rates for different industries, so you’ll find it’s cheaper for tech companies to outsource to the South. At the same time, it’s more advantageous for manufacturing companies to go North. Also, check the regulations of the country you’re based, as they might have tariffs on another country which could affect you.
Obviously, depending on which point you are at in your business’s growth, most of these rules might not apply to you… for now.
Being aware of these ten commandments if you join one of the many companies looking to outsource manufacturing will help you in the long run. All seems good, right? If you follow Dr. Hart-Smith, you should be okay, but there are risks you need to understand about outsourcing company contracts.
The risks for manufacturing companies that outsource
Manufacturing companies that outsource have some risks that they have to take on when doing business this way, mainly having to take responsibility should your partner(s) cut corners.
As mentioned earlier in the article, and we even touched on with an example, how much does it cost to outsource manufacturing might not be as simple as how much capital will it take to work, but what will it do to your brand’s reputation? The current trends and predictions for consumer spending habits suggest that people want to know exactly how and where their products are produced, meaning that people are more likely to purchase from companies who manufacture goods in-house. When you outsource manufacturing, you should make sure to get to know your contractors to avoid being subject to criticism if it’s discovered that those contractors mistreat their staff.
Be sure to keep up to date with world politics. To use a recent event as an example, America and China are engaged in a tariff war, is this something that would affect your business if you’re in a contract with a foreign company?
If outsource manufacturing is necessary, try to limit the amount of production that goes to contractors. The more production you outsource, it becomes increasingly difficult to ensure quality control on your products before selling them. Then there comes the issue of trust, as in the past, there have been cases of espionage, where outsource manufacturing companies have stolen product designs and ideas, to produce them independently.
The short video below, even though it demonizes outsource manufacturing, gives a very nice breakdown of the risks one could face:
However, don’t be scared, knowing these risks now means you can have solutions put in place now, should they occur.
What about us ambitious manufacturers?
If you’re a manufacturer struggling to keep up with orders all by yourself, you’re probably screaming at this article, “This doesn’t apply to me, it only concerns large scale corporations.”
But you’d be wrong to shout that.
You don’t have to be searching for manufacturing companies that outsource on a large scale. Heck, you don’t even have to look outside of your country’s borders. As mentioned earlier, it all depends on what your goals are when deciding to outsource manufacturing.
For example, let’s say you’re looking to outsource jewelry manufacturing because you’re a designer, but don’t have the capabilities of producing your products.
Outsource manufacturing is certainly an appropriate tactic to take, and you can still even have control of production. But that means teaming up with a manufacturer, purchasing material and arranging the supply chain requirements. But, to be able to pull off this type of outsource manufacturing you’re going to need to find a tool which can handle supply chain management for makers.
How to outsource manufacturing with ERP manufacturing software
How to outsource manufacturing doesn’t have to be difficult, by finding the right tool can make the entire process a breeze.
Manufacturing businesses that take advantage of using outsource manufacturing will need to consider adopting ERP manufacturing software, like Katana, to be able to stay on top of the complexity of running your business this way. Katana, using the above example of an artist using outsource jewelry manufacturing to create their product, allows the designer and the manufacturer to see the status of delivery of materials or the status of production, offering a clear channel of communication and a way to handle project management with ease. Or perhaps you’re a jewelry maker who produces some products in-house, but uses outsource manufacturing to keep up with fulfilling orders on-time.
Katana allows a manufacturing business to track the status of manufacturing orders at multiple locations and track the inventory levels at different warehouses.
Better yet, the contractors can get access to Katana at their end, so they can update production progress as work in progress (WIP) or mark as completed, so you know exactly, in-house or at a contracts workshop, at what stage a project is at.
These functionalities allow entrepreneurs, regardless of if they manufacture some of their products in-house or not, to retain complete control of their manufacturing business processes.
How does Katana ERP help you with outsource manufacturing
Even though you use outsource manufacturing entirely, keep in mind that you are still responsible for purchasing raw materials and ordering a certain amount of products from your outsource partners, based on your sales orders — you have to manage your production and inventory, even though somebody else is physically building your product.
With Katana, you are able to track your raw materials, understand when and how much you need to purchase, set tasks, oversee production at various locations, and handle sales — all from the comfort of your home and from a single visual dashboard.
Let’s take an example. You sell silver and gold jewelry via your US-based Shopify store. You are a passionate jewelry artisan and have various designs ready to be brought to life. You outsource manufacturing to two local partners.
When logged into Katana, go into “Settings” and open “Locations”.
With Katana, you can add and manage all your sales and manufacturing locations. Considering our example, you’ll have one main warehouse, which is your Shopify store in Pennsylvania, one manufacturing location in Virginia, and another manufacturing location in New Jersey.
Based on your sales orders, you can create manufacturing orders (MOs) for your outsource partners. You’ll see your finished goods and raw materials inventory and create purchase orders for missing materials.” screen.
Another way of using Katana for outsource manufacturing is by implementing the software at your manufacturing locations. This way, your manufacturing partners will use Katana to make all the necessary updates and you will use it to monitor your production statuses, finished goods, material availability and much more.
It’s that simple.
This allows you to organize your entire business and keep you in the loop during the manufacturing stages. However, Katana goes beyond being able to just monitor and manage manufacturing operations at different locations. By adopting Katana into your business you can expect to find:
1. Finished good & raw material inventory levels
Not only can you track your inventory at different manufacturing locations, Katana automatically takes available finished products or raw materials and allocates them to orders.
These real-time updates of your inventory movements and production operations gives you complete control of your outsource manufacturing from one easy to understand, visual dashboard.
2. Your bill of materials (or product recipes)
You can create and save your bill of materials (BOMs) on Katana, which will then make automatic inventory adjustments, calculate manufacturing costs, and check availability of materials as soon as a manufacturing order is generated.
3. Priority-based production planning
Katana’s innovative drag-and-drop feature allows you to easily prioritize your operations workflow, allowing you and your contractors to keep on top of the deadlines. Gotta push that VIP order? Just drag-and-drop it at the top of your priority list, and Katana will not only prioritize it first for production, but allocate the necessary raw materials for it, too.
Katana, like managing manufacturing operations at different locations, allows you to manage various sales channels and separate your inventory levels for different sale locations.
Katana is also able to integrate with your accounting software such as QuickBooks, meaning you can centralize your entire business to one dashboard.
5. Manufacturing floor-level control
Whilst using outsource manufacturing, Katana offers a task list for everyone in your business and any partners who also have access to the software. This allows you to set tasks for your contracts and they can update the status of a project based on “start – in progress – complete”
6. Manufacturing cost calculations
Finally, if you’re concerned about how much does it cost to outsource manufacturing, Katana automatically calculates the manufacturing costs of your products, all based on your BOM’s and production operations defined for specific products.
Below you can find a detailed video on how Katana functions if you’d like to know more:
And that’s it.
Outsource manufacturing is certainly a smart tactic to implement, especially if you follow Dr. Hart-Smith’s advice and find a production scheduling software that can support a business that uses outsource manufacturing like Katana. Why not see for yourself? Katana offers a 14-day free trial, so you can have a look around the dashboard and see how it’s a match made in heaven for any entrepreneur looking to outsource manufacturing. We hope you found this article on how to outsource manufacturing useful, and if you have any questions, please don’t hesitate to get in touch.
Until next time, happy manufacturing.
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