Manufacturing outsourcing cost reduction benefits for business

Knowing the cost of manufacturing a product throughout its lifecycle is crucial for understanding the overall financial health of your business. By calculating the exact cost, you can reduce it through various process and technology transformation initiatives. Contract manufacturing or outsourcing non-critical processes helps reduce costs significantly.

Statistics show that businesses outsource 70% - 80% of their manufacturing. Other processes that businesses outsource are finance and accounting, human resource, sales and fulfilment, sourcing and procurement, and customer service.
This article will explain the benefits of outsourcing the manufacturing process.

Top manufacturing costs for businesses

Knowing which costs directly impact the company’s balance sheets is essential. Here is a list of areas to consider when listing down your manufacturing costs –

Material costs

The cost of raw materials directly impacts the cost of the final product. For example, if you are an auto manufacturer, the cost of steel will directly impact the cost of the car.
Indirect costs include transporting and storing the steel sheets in a warehouse. You may require forklifts and shelves to store steel sheet rolls. The material costs also directly tie in with supplier and procurement management.

Labour costs

People who work on your factory floor and the staff that handles back-office jobs contribute significantly to the cost of production. You must consider the salaries and benefits and the infrastructure you provide, such as computers, desks, personal protection equipment, and much more.

Fixed assets

This includes the cost of owning or renting the property where you manufacture the product. You would own machines, office equipment, vehicles, computers, cell phones, furniture, air conditioners, etc. Businesses must have excellent inventory management to keep track of all the assets they own or rent.

Technology costs

Do you own proprietary software controlling those robotic arms on the production floor or the R&D your scientists run? It has a cost of development, testing, maintenance, and hosting. If you host the technology on-site, you need expensive hardware. But if you host it on the cloud, you typically pay a monthly hosting fee.

You should also consider the cost of all the technology you use in the back office for accounting, HR, salary management, marketing, customer relationship management, etc.

Non-core process costs

You may overlook the non-core processes, but they are a bulk of your indirect production costs. From salaries to fixed assets to training and development, businesses spend a huge amount of time on what they can easily outsource to experts –

How manufacturing outsourcing reduces costs?

You do not need a factory to produce, assemble, and ship products. If you have one, you can still outsource non-core processes to those with expertise, experience, and resources. Here are some of the benefits –

Flexible contracts

Negotiate monthly, quarterly, or a percentage of your billing with the contract manufacturer to cut your upfront costs. Make it a variable expense to have more control over your funds.

Insurance coverage

Contract manufacturers provide the necessary insurance coverage while they store your products in their warehouses. This reduces huge fixed and variable costs for your business.

Access to cutting-edge technology and research

Original equipment manufacturers (OEMs) have already invested significantly in the research and development of a product. For example, auto manufacturers procure the vehicle’s tyres from an external supplier that has spent years fine-tuning the technology and can negotiate win-win terms.

Better control over labour costs

Many developed countries outsource to developing countries due to lower costs of labour. Even with maximum automation, you need to build in a certain number of person-hours. Statistics show that outsourcing can cut labour costs by up to 90%.

Economies of scale

Establish robust supply chains with multiple suppliers and outsource to multiple contractors to achieve economies of scale. Contractors often have preferred suppliers that offer great pricing and payment terms, quality materials, and timely delivery.

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How can Infosys BPM help?

Infosys BPM helps your business transform to Industry 4.0 standards with digitisation at its core. This comes with newer technologies, materials, processes, skillsets, and methodologies to radically shift your current level of efficiency.
Read more about manufacturing bpo services to reduce costs.

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