Manufacturing Outsourcing - Cut Cost And Increase Capital
The outsourcing trend is not new to the manufacturing industry. It is a well known fact that manufacturing outsourcing has been around much longer than IT outsourcing. Manufacturing outsourcing is more of a slower process when compared to the latter. This is because it involves the physical transportation/moving of the products from one place to the other. The common manufacturing outsourcing process involves manufacturers outsourcing different processes from developed countries where the manufacturer is located to the developing nations.
The core aim of manufacturing outsourcing is to make the whole manufacturing process leaner. This trend is more preferred to vertical integration as it reduces the total production cost involved. By outsourcing the various tasks such as assembly, original equipment manufacturers (OEMs) are able to get rid of the numerous plants and equipments while remaining with only a few to handle the tasks that cannot be outsourced. In this way, manufacturing outsourcing helps the OEMs deal with pressures caused by the rising number of competitors in the market as well as dipping profit and rising raw material price concerns.
As technology continues to evolve at a rapidly changing rate, product lifecycles are rapidly shortening. Manufacturing companies are now faced with the dilemma of churning out products that are can meet industry demand while still manufacturing products quickly and economically. Consumers expect quality products that incorporate the latest technology at a reasonable price. Manufacturing outsourcing solves both of these issues. Through this process, the company is able to outsource the various tasks required in creating quality products while still having the time to plan for future products based on expected technological changes.
Companies that offer outsourcing services to their employers are called contract manufacturers. These companies have proven to be so reliable and efficient that most manufacturing companies do not have any manufacturing equipment as they rely solely on the contract manufacturers.
Contract manufacturers have grown since their conception. Initially, the companies used to offer one specialized service such as assembly of one particular part. Now, these companies have evolved into chain manufacturing companies that offer all manufacturing needs including global distribution, supply chain management, logistics in addition to assembly, repair, product design and manufacturing. Statistics estimate that these contractor companies raked in over $60 billion in sales in 2005 alone.
In the past, the main manufacturers were the United States and Europe with Japan as the main supplier of contract manufacturing. Presently, Japan is outsourcing most of its manufacturing requirements to several developing nations.
As stated cost is a major reason as to why most companies engage in manufacturing outsourcing. For instance, an electronics company can save up to 20% in material and labor costs and a cumulative total of about 10% in overhead costs simply through outsourcing. By engaging in this outsourcing process, manufacturing companies are transitioning from fixed cost to variable cost meaning that they are only paying for what they can sell. Moreover, these contract manufacturers enable OEMs to launch products much faster. This is important in markets that have products with short lifecycles.