Tony Hague, managing director of PP Electrical Systems, examines the benefits of strategic outsourcing for Original Equipment Manufacturers (OEMs).
The ‘make versus buy’ decision can often be a complex and indeed an emotional one for a manufacturing business.
Historically, many UK companies have had a large degree of vertical integration and enjoyed the perceived benefits of in-house capability, deeming it more flexible, less risky and more cost effective than ‘paying someone else’ to do what they believed they could do better.
However, this attitude has changed significantly over the years, with manufacturers realising that they cannot be ‘masters’ of all disciplines; indeed such levels of high vertical integration and the associated overheads became ‘crippling’ and some manufacturers slow to change, rapidly became uncompetitive, particularly in the face of a changing and global market.
Now, where their factories once stood, we have another supermarket!
There is now a major shift towards OEMs considering exactly what is their ‘core competence’, in which areas should they invest and which processes add true value?
No-one would suggest that strategic outsourcing is a ‘silver bullet’ for increasing profitability for a business, but, used correctly, it can have a significant impact.
PP Electrical Systems works with many of the world’s leading machinery builders in a range of industry sectors, including machine tool; food processing; packaging; scientific equipment, and printing.
Our customers have taken the decision to outsource the electrical and often mechanical processes associated with the control and automation elements of their machinery, allowing them to focus and invest in other areas of design and production that is critical to their success.
Benefits of strategic outsourcing are many, but the common benefits that can be realised are:
- A reduction in total manufacturing costs.
- Opportunity cost – often underestimated and hard to define. How could you redeploy your valuable internal resource on other areas of the business that have great potential significance, ‘if’ they were not tied up on activities and processes associated with areas of the business that could be outsourced?
- A reduction in production throughput times, which in turn leads to the creation of additional capacity, without the need for more space or people.
- A reduction of associated customer lead times, often the difference between an order being won or lost.
- A reduction in the associated stock and work in progress (WIP).
- Cash flow is improved.
- Production agility – in an age where customers desire quicker delivery, often with increased configuration, an outsourcing strategy can assist greatly.
- Managing risk – this is a major consideration and almost a sum total of other benefits. We live in turbulent times and the manufacturing community has to find ways of mitigating risks associated with markets that can grow and decline, often swiftly and without warning. Managing growth is a nice problem to have in theory, but recruiting additional skilled resource can be a constraint, bringing in expensive and often unreliable sub-contract labour carries its own risk.
We constantly hear on the news that the UK has problems with poor productivity. Strategic outsourcing is without doubt a method that, when utilised correctly, can significantly improve the productivity (£ sales per capita) of an organisation.
So having spoken about the potential benefits of outsourcing, it would be wrong to ignore the potential risks.
Assuming the manufacturer in question has correctly identified the areas suitable for outsourcing, the single biggest threat is selecting the wrong partner.
Sometimes the appeal of ‘lowest cost’ is strong, but this can be a huge error if other considerations are ignored, such as:
• Capability – can the outsourcing partner do a better job than you can? Do they have the expertise, people, skills and plant/automation to improve the production process, boost quality and help develop designs in the future?
• Security – the last thing you want to do is develop a strategic partnership with a company that is financially weak. Do credit checks, look at accounts and ownership.
• Size – consider the complexity and scale of your outsourcing needs, not just for today but for the mid to longer term. Ensure that you would not represent either too large or too small a part of that company’s sales revenue.
• Supply Chain Skills – for outsourcing to deliver the maximum benefit, then the activities associated with purchasing and supply chain management should be included. The outsourcing partner should have the capabilities and skills to inherit, manage and develop the associated supply chain. If you still have to manage parts of it and the associated costs of purchasing/logistics that go with it, then you are not going to see the true benefits.
• Experience – look at who they are working with now and which manufacturers and markets they are involved in. You can tell a lot, very quickly, from the quality and standing of existing customers.
• Approvals – outside of the obvious ISO approvals, do you require any specific approvals relevant to an industry sector or for a given export geography, such as UL/CSA for the US or Canadian markets?
• Innovation – does the outsourcing partner have the types of engineering skills and innovation to help you develop your products and services? Skills, such as design for manufacture, should be strong and you should expect them to play a big part in improving the product from a technical and commercial perspective.
• Location – Asia and Eastern Europe, as well as other low cost geographies, have held significant appeal for certain outsourcing services, particularly those that are labour intensive such as machining and casting. Again, consider the true cost of the relationship, including lead times, agility and risk, including the need to retain design IP (a particular problem we have seen in Asia over the years). The current trend in the UK, as well as the USA, has been reshoring of outsourcing activities. Many companies have recognised the escalating costs, political unrest and other risks associated with managing a long distance supply chain, resulting in identifying partners that are more local to them.
PP Electrical Systems, as an acknowledged world leader of control and automation solutions, provides strategic outsourcing to many of the leading machinery builders in the UK, Europe, Asia and the US.