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When does outsourcing make sense? 10578

July 25, 2002

5 Min Read
When does outsourcing make sense?


In the outsourcing matrix, the lower the strategic value and criticality of the part being molded, the better candidate it is for outsourcing. The reverse is also true: Unique or proprietary processes tend to be more profitable and should be kept in-house.

At a time when slashing costs and speeding up lead times is paramount to gaining and maintaining business, molders and moldmakers often outsource some components of the work. However, many do this in a haphazard way, outsourcing a specific task when their own shops get into a time crunch or some other "emergency" situation.

That's the wrong reason, says Jeff Mengel, CPA and consultant with Plante & Moran LLP (Auburn Hills, MI). "Outsourcing is a strategy," says Mengel. "Outsourcing should be the result of proactive planning, not reactive to a specific situation."

Reactive outsourcing often happens when a molder or moldmaker takes on a job for which it lacks skills, capabilities, or machine time. Sometimes it's a moldmaker taking a mold job for a cheaper price, and then deciding there's absolutely no way he can do it for that and subs it to a smaller shop down the street. However, says Mengel, "If it's a question of keeping people busy, I won't outsource."

Proactive outsourcing as a long-term strategy is done as a way to expand business, reduce personnel, or acquire new technology or skill sets that a molder or moldmaker doesn't have in-house. "You can't have all the skill sets necessary," says Mengel. "Do what you do best, then outsource the rest."

Kiran M. Gandhi, senior manager of operations management consulting for Blackman Kallick Bartelstein LLP (Chicago, IL), notes that a successful working relationship with an outsource supplier requires treating that company as an extension of your own manufacturing facilities. That means developing a clear communications channel to maintain quality. Other tips Gandhi offers include the following:

  • Define and document your requirements for quality, packaging, and delivery.

  • Work with its staff to develop a complete understanding of your requirements in all key areas.

  • Have it develop an internal quality plan and work flow procedures, and make sure it meets your standards. It's critical that the company you choose to perform outsourcing functions has a similar quality program so that it can provide products that meet your requirements.

  • Be present during the first production run. Don't assume your supplier knows what you want. Be there to help clarify any issues from the beginning, and get the job started off right.

  • Establish reporting procedures and a lot traceability system for problem reporting and taking corrective action. "This allows you to track any defective merchandise, identify the problem, and take the necessary corrective action," says Gandhi.

  • Monitor performance and establish a feedback system.

    "Outsourcing frees your time to concentrate on developing innovative new products and services, and becoming more proactive to the needs of your customers and marketplace," Gandhi adds.

    For more information, contact Blackman Kallick Bartelstein LLP, Chicago, IL, Kiran M. Gandhi, (312) 980-2963, www.bkadvice.com.

Current outsourcing strategies fall into three primary categories. The first covers some types of commodity activities that are best outsourced. For example, many mold shops outsource their mold base requirements. Which is the better use of machine time—cutting details or hogging out steel for a mold base? If your machine utilization is low, and Mengel says some shops have been hovering around 30 percent utilization, then it might make sense to make mold bases. However, if a shop is busy, it makes more sense to buy a mold base from a company that specializes in it.

There are also unique activities that can be outsourced. For molders, this might include services such as EMI/RFI shielding, painting, coatings, or even silk screening or other decorative processes. For moldmakers, a unique activity would be texturing or etching cores and cavities, or electroless nickel or teflon plating.

Third, there are what Mengel calls "unique assets." These are processes more difficult to duplicate than machining or molding. "Anyone can buy a machine, but some processes require an expertise," he says, "such as rapid prototyping."

Outsourcing Issues
There are several things to consider when developing an outsourcing strategy:

  • Return on assets. This is a major consideration, says Mengel. Currently, machine assets aren't worth much due to a general overcapacity. That means it might be better to outsource specific tasks to avoid buying equipment.

  • Sunk costs. "Utilize what you have," advises Mengel. "If you have to hire talent to run the machines, that's not good. Idle machines don't cost much, but idle people do. In this economy, manage people rather than machines."

  • Reallocation and allocation of resources. "Ask yourself where you want to be in the food chain of manufacturing," says Mengel. Commodity manufacturing tends to be price sensitive because it's easy and requires no special skill sets, so this type of work is best to outsource. Then there's the "utility" category. The strategy for outsourcing utility work is different because it involves components that are difficult to make and usually requires some skill sets. Moldmaking falls into the utility category.

    Mengel says that Plante & Moran's recent surveys reveal that 40 percent of molders say they have moldmaking capabilities. However, many molders outsource much of their mold requirements to mold shops. "Saying they do it and actually doing it are two different things," he adds. "For molders, building molds internally did not correlate with financial success."

    Unique activities for which you already have equipment and the skill set to do in-house are probably best kept in-house, Mengel notes. Typically, unique or proprietary processes tend to be more profitable because they require higher levels of expertise and specialty equipment.

    "Figure out where it makes sense to outsource based on this matrix [p. 11]," says Mengel. "Keep the unique and proprietary processes in-house and then have a strategy in place to outsource work as it moves into the commodity quadrant."

    Contact information
    Plante & Moran LLP, Auburn Hills, MI
    Jeff Mengel; (248) 375-7334
    [email protected]

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