Tony Hague, CEO of PP Control & Automation, delves into one of industry’s hottest topics and explains why investing the right amount of time and money is crucial to coming up with the right answer to the ‘make vs buy’ outsourcing debate.
Take a snapshot of manufacturing 50 years ago. Organisations were large, geographically concentrated and horizontal integration was ‘king’, with multiple activities in place across the entire value chain. Business models, nine times out of ten, were focused on volumes and efficiencies.
These companies thrived for many years until the impact of globalisation took hold and was exacerbated even further with the growing desire from clients for customisation of both parts and processes.
Some met the new challenge with vigour and innovation, resulting in rapid growth and success, whereas others decided to continue to fight a losing battle focused on annual cost reductions until the thin end of the wedge was duly reached. Where these proud businesses once stood, you will now sadly find a retail park or housing estate.
Manufacturing now comprises complex ecosystems and specialisms and vertical integration has taken its place at the top table, rewarding agility and responsiveness in place of ‘lean at all costs’. As a result, businesses are often smaller in size, albeit with multiple locations domestically and around the globe.
This paradigm shift has completely changed supply chain models within these ecosystems. The focus is now based around solutions not products, relationships are strategic, not transactional and suppliers are now partners sharing in the same outcomes, whether they are positive or negative.
With this in mind, the requirement for outsourcing and how businesses approach the ‘make vs buy’ decision has become of massive strategic importance, but what factors drive such decisions?
- Lead time reduction
- Total cost reduction
- The need for additional capacity
- New skills or capabilities
- Logistics and carbon footprint reduction
- Business interruption/risk planning
- Tacit knowledge, intellectual property and patents
Whilst these are many of the common drivers, each business, within their own market, faces different challenges and opportunities and will need to carefully consider the ‘make vs buy’ decision against their own individual situation. They will no doubt have unique problems and questions pertinent to just them.
A number of tools and techniques are readily available to help support the decision-making process, the majority of which will focus on the strategic importance of a process, the suitability and effectiveness of a supplier (based on available supply chain) and the overall management of risk.
Ultimately, all models will point in the same general direction…organisations should invest, indeed invest significantly, in areas of competences/processes that absolutely ‘need’ to be at the centre of the business, where risks are too high to consider outsourcing.
Equally, competences and processes where supply chain effectiveness and capability are good, often better than what you have in-house, can make perfect operational and financial sense.
So, let’s assume that an organisation has identified a need to outsource a particular process or service. Two obvious questions then arise.
- At what level do we outsource – component level, sub-assembly or total assembly?
- How do I select the right outsourcing partner?
The first question again will have multiple factors associated with it. Often the level of risk is key, alongside required timelines for the desired outcome. On many occasions, the journey may commence at a perceived lower risk level (component supply only) whilst relationships are cultivated and trust is instilled between both parties. Then you can start moving up the value chain, but only if the right outsourcing partner is found.
If the optimum solution for outsourcing is at a high value add level, there is little point in spending time and effort bringing a new outsourcing partner on board that is limited to only ‘component level’. You need to look at the bigger picture.
Clearly many other factors affect partner selection, including:
- Experience in the chosen field – can they demonstrate historical competence?
- Current customer base – can you talk to other clients for references, do they work with your ‘sworn’ rival, are positive case studies available that you can relate to?
- Financial standing – it’s amazing how often we do rigorous financial checks on customers and yet fail to appreciate the financial credibility of a potential strategic supplier
- Investment – track record and forward plans. How does this investment (or lack of) affect the ability to offer you something different or better than you could do yourself?
- Location – becoming ever more important is the need to be close to the customer. The move towards reshoring has been accelerated by Brexit, Covid-19 and freight & logistics trends built around reducing carbon footprint and environmental impact
- Ownership – how will this drive different behaviours and approaches to investment?
- Culture – get out of the boardroom and walk around a factory shopfloor. You will learn more in 10 minutes about a business, their people and their levels of engagement than sitting through hour-long polished presentations from the sales team
- Supply chain capabilities – often complex and always critical. Can the potential partner bring new ideas and sub-suppliers into the mix that could positively effect quality and cost?
- Design and engineering capabilities – do the skills possessed by the partner complement your own? Are you are looking for something different, whether that is value engineering, design for manufacture, support around design for cost, perhaps specific certifications and approvals?
Time spent in the rigorous selection of a new strategic supplier is always time well spent and should be so much more than the quality team going in and performing an audit. The costs of getting it wrong can be ‘eye-watering’ and, in some circumstances, could stop a business ’stone dead’.
Certainly, from a UK contract manufacturing perspective, the outlook is largely positive, but not without its challenges.
You cannot fail to notice that we have lost certain skill sets and capabilities that are not returning to our shores any time soon.
A good example is certain types of casting services, where a combination of legislation and energy prices have resulted in us simply not being competitive and hence a lot of this specialism being off-shored ‘East’.
Thankfully this is the minority. We are blessed with some remarkable, innovative and exceptionally competent contract manufacturers that span multiple disciplines. At times they may have been overlooked with the focus purely on the desire to source from low-cost countries, but the mood is changing and companies are seeing the real benefit of working with and investing in each other, developing agile, creative UK-centric supply chains.
This can only benefit us in the longer-term, help drive sustainable GDP growth, rebalance our trade deficit and improve productivity levels that have never recovered from the 2008 recession.
Not for one moment am I suggesting that mass reshoring is the only answer. That would be both one dimensional and naïve – global supply chains are just that, we need partners around the world that are agile and fluid.
So, in summary, the importance surrounding the ‘make vs buy’ decision has never been greater than it is currently.
We live in a post pandemic recovery economy that is balancing climate and sustainability pressures with the opportunities associated with digitalisation, Artificial Intelligence (AI) and robotics. Then you can throw into the mix, rising political tensions between the East and the West, which is increasing the risks of trade barriers and further nationalisation.
As history demonstrates, businesses that adapt successfully will thrive and prosper. Sadly. companies that don’t react, could become the next drive-thru fast food outlet.