Most manufacturers have relied on third-party vendors to make parts that are then incorporated into the final product. From automakers sourcing stereos and aircraft makers contracting for jet engines to a small bakery ordering plastic bags or a woodshop buying nails, producers of all types have supplemented their internal capabilities through a painstakingly developed supply chain of external vendors. By choosing to focus on their own production strengths and capabilities, these firms have benefitted from outsourcing to others that specialize in the production of the necessary part.
Indeed, much of the global manufacturing ecosystem is characterized by an intricate web of interconnected relationships between value-adding specialists, outsourcing OEMs and component makers that comprise a product’s supply chain.
But over the last decade, we have experienced the development, market acceptance and falling costs of a wide range of transformative automated technologies, such as design software, 3D printing, and other computer-driven production equipment. These innovations dramatically reduce costs, as well as the level of expertise needed to produce what used to require expensive equipment and unique specialization. As a result, more and more manufacturers are justifiably reexamining the necessity and value proposition of continuing to outsource certain parts and components instead of taking advantage of these rapidly mainstreaming “in-housing”solutions.
Each company engaging in the component outsourcing vs. self-manufacturing calculation has its own set of variables that factor into its decision on each part: in-house skill sets, capital and production costs, customer requirements and the impact on existing processes, lead times and flexibility.
To effectively analyze these factors, manufacturers must fully understand the nature and accuracy of their existing advance production planning processes to determine with a substantial level of certainty the impact of “in-housing” any parts or services.
A company like mine, which makes multiple products, each of which is customizable by size, color, shape, and strength, requires an extensive variety of components at the ready. We are continually analyzing and weighing the cost of on-demand in-house component production against the lead times, quality control, costs, and inventory requirements that are among the issues we face when purchasing parts from outside vendors.
Manufacturers who engage in this type of analysis must also gauge the risks of adding to or altering their processes, including understanding the impact of bringing in-house what was previously outsourced. Vertical integration can be a differentiating factor when competing in the marketplace by yielding reductions in cost and increases in speed-to-customer and manufacturing flexibility. Another important consideration is often the value of self-reliance, which can be critical when a firm’s ability to grow or simply deliver on time is at the mercy of a vendor’s production schedule.
But adding seemingly easy or turnkey technology is rarely as easy as it seems. Stumbling blocks abound, from learning curves and integration complexity to quality and scalability issues. Understanding the entirety of the impact “in-sourcing” on everything both within the company and beyond, including its effects on customers, employees and vendors, is critical to accurately projecting the ROI and ultimate potential benefit.
Manufacturers succeed because they take pride in making things. Their tendency to want to produce as many components as possible by themselves is natural. Technological innovations bring more and more potentially within their reach. The challenge is to accurately analyze everything associated with the implementation of these technologies—and to do so in as complete and unbiased a manner as possible.
With all this data in hand, management must be able to honestly assess the firm’s ability to execute its desired component “in-housing” because, as Warren Buffett said, “predicting rain doesn’t count… building arks does.”