Tony Hague, managing director of PP Electrical Systems, explains why an increasing number of OEMs are choosing to outsource some of their operations and why it’s not always plain sailing.
The vast majority of OEMs (Original Equipment Manufacturers) see some form of outsourcing as a key, fundamental part of their overall production strategy.
The days of companies being completely vertically integrated where they build every single part of the machine in-house are in the majority of cases, long gone.
Why? Simple economics born from a marketplace where competition has become global not local, ensuring costs associated with 100% vertical integration have become unbearable. In fact, it is sad to see housing estates and supermarkets springing up on the once factory sites of UK OEMs that reacted too slowly to change.
Looking at it positively, what benefits can outsourcing bring to an OEM? They are many and varied but the obvious drivers are:
- Reduced operating costs
- Elimination of unnecessary stock and reductions in work in progress (WIP) – improved cash flow
- Improved manufacturing lead times, which in turn can lead to securing more orders
- Flexible capacity, up and down, reducing the need for costly sub-contract labour as a reaction to increase in build requirements. Equally not having to manage redundancy or some form of “lay offs” when demand decreases
- Ultimately, you should benefit by managing risk in a way that creates a competitive advantage for your organisation
Most OEMs fully understand where their core competence lies and invest in those processes that add the most value to their organisation. By sub-contracting non-core competencies to organisations that specialise in those processes, an OEM can in effect have the best of both worlds.
Whilst the benefits of outsourcing can be significant, equally the cost of getting it wrong can be damaging. The biggest danger is selecting either the wrong processes to outsource, or indeed the wrong outsourcing partner.
Depending on volume and complexity of the product and process to outsource, you need to consider what you want from an outsourcing partner:
- Size. Are they matched to your needs? Too small – can they cope with your demand and growth, too large – would you be a customer that lacked importance?
- Location. UK, Europe, Asia – consider lead times, logistics, communication, degree of management and potential issues surrounding local legislation.
- Skillset. Can the outsourcing company demonstrate beyond any doubt that it has the skills necessary to provide you with consistent quality for the required product/process – or does it just ‘think’ it can do it?
- Experience. Can they demonstrate a proven track record ? Ask for details of their key customers, ask for testimonials, and then ask to be put in direct contact with their clients so you can talk to them directly. They should be happy to oblige.
- Ownership and financial stability. In the same way you would look at the credit worthiness and structure of a potentially strategic customer…do the same checks on the sub-contracting company.
To get the maximum benefit from outsourcing, you should look for your chosen partner to add maximum value as possible by supplying the “product/assembly” at the highest quality level. The ‘biggest bang for your buck’ approach!
At PP Electrical Systems we have worked with our customers to identify innovative ways in which we can create solutions that have control and automation at their ‘heart’, whether that be electrical, electronic, mechanical, hydraulic or pneumatic.
It is the ability to combine these skillsets that allows more complex, and ultimately far more valuable solutions, to be delivered to the customer.
PP Electrical Systems are an acknowledged leader in the provision of control and automation solutions to a wide number of OEMs in a diverse range of industry sectors, including machine tool, food processing, packaging, printing, scientific equipment and semiconductor processing.