Benefits of outsourcing manufacturing
Statistics show that 68% of companies in the US outsource their processes to countries across Asia and Eastern Europe. Manufacturing forms a major chunk of this outsourcing, most of which goes to China. India and other southeast Asian countries follow next.
So, why do companies choose to outsource manufacturing?
While the lower cost of labour was the primary factor initially, other reasons, such as speciality manufacturers and Industry 4.0, are taking outsourcing to higher levels. Let's look at the top advantages of outsourcing the manufacturing process.
Top advantages of outsourcing manufacturing
In today's globalised economy, outsourcing has become a popular strategy for companies looking to optimise their operations and stay competitive. Whether you are a startup, SMB, or a large business, outsourcing your manufacturing has many advantages, from significant cost savings to increased efficiency, flexibility, access to technology, and risk management. Here are a few:
Lower cost of production
This is one of the primary reasons for businesses to outsource their manufacturing. It depends on the size of the manufacturing unit and the labour wages in the country. Often, large manufacturing units serving multiple clients can significantly lower the costs of production using economies of scale.
Large manufacturers can obtain raw materials, floor space, and utilities at a lower price. They pass on the benefits to their clients, thus reducing the cost of the final product.
Highly skilled labour
It is difficult for every manufacturer to find affordable and highly skilled labour in their region. Manufacturing in-house is not only expensive, but without the right expertise, there may be a lack of producing high-quality products. Outsourcing manufacturing can reduce the number of workers they need and access a better-skilled market. For example, car manufacturers often source the engine from another supplier. This gives them access to specialists heavily invested in R&D, have highly skilled labour, and who can quickly configure the engine according to the client's needs.
Less capital expense
Manufacturing is capital intensive, and if you are an SMB, you need significant funds or investor money to do production at scale. Investors want returns on their capital in a given time, which can put considerable pressure on the manufacturing business.
Outsourcing manufacturing allows you to leverage a supplier's existing infrastructure and skilled labour and avoid large investments.
High production capacity and capability
If the supply does not match the demand, the price of the product can go high. This can make your clients choose your competitor for the lower price they provide. By outsourcing manufacturing, you can match or even beat the cost of your competitors. For example, many fashion labels in Europe and the US choose to manufacture their clothing in India and SE Asia due to lower cost of production and higher capacity.
If your business is seasonal, increasing the production in-house does not make business sense. This will not only lead to higher expenses but also a longer lead time.
Successful businesses identify the areas where they lack the expertise. For example, they may be good at marketing but not manufacturing. In such a case, it is better to focus on the business' core strength and outsource manufacturing to an expert company. Building and sustaining a production line is a different ballgame, and with increasing globalisation, it is easy to outsource.
If you work with speciality products, it is better to outsource. For example, prosthetics in the medical industry are a speciality product, and it is best to source from a manufacturer that can build high-quality customised products.
Manufacturing comes with a risk of labour unavailability, disrupted supply chains, long-lasting changes in the process, and even bankruptcy. The best way to bypass these risks is to outsource to a manufacturer with robust supply chains, a good market reputation, high-quality clients, and surplus cash flow.
You can also diversify the risk by onboarding multiple manufacturers in different geographical locations.
Transition to Industry 4.0
Businesses can get access to Industry 4.0 standards by outsourcing to experts. The fourth industrial revolution is about analytics, hyper-automation, the Internet of Things (IoT), artificial intelligence (AI), and cloud computing. Having these technologies in-house is a significant investment requiring a highly skilled workforce.
By outsourcing manufacturing to third parties, businesses can access the benefits of Industry 4.0 without the investment in building and maintaining the infrastructure.
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How can Infosys BPM help?
The manufacturing processes are at the centre of the fourth revolution. Industry 4.0 has great potential in terms of new technologies, skillset requirements, and planning processes to radically upscale the quality and scale of products. Infosys BPM helps businesses transition to Industry 4.0 in business strategy, technology strategy, and organisational change management. If your organisation seeks a solution beyond standardised operating models and benchmarks, explore our manufacturing bpo services to transform your business.