Outsource manufacturing or produce on-site? You'll need to give this question some thought as you decide how and where you’ll ramp up operations.
Other factories may have the capacity and skill to build pieces—or the entirety—of your business’s products. They can often do so more affordably than you might in-house, freeing resources such as time and capital to focus on other business tasks.
There are benefits to keeping production in-house, too. Control over quality, priorities, and output are some of the most important advantages.
Before pursuing either option, you should weigh the pros and cons of opting to outsource manufacturing versus producing products in-house.
What are the benefits of outsourced production?
Idea in brief
Outsourced production may benefit your business by:
- Helping you avoid additional real estate costs.
- Eliminating the need for specialized equipment.
- Helping you avoid high labor costs.
- Creating the potential for lower prices.
- Providing savings that can be reinvested in your business.
- Granting you access to top-of-the-line technologies without the headaches of implementing them.
- Helping you ramp up production without major investments.
Cost is one of the biggest drivers for owners who outsource manufacturing. When you work with an outside manufacturer, you could avoid investing in a production site, specialized equipment, and storage facilities. These costs can be substantial for any new or growing business, as are the maintenance costs, insurance premiums, taxes, and operating expenses that come along with them.
Opting to outsource might help you save on labor costs, too, especially if you move production to a rural area or another country. Production outside the US might trigger tariffs and duties, but lower wages—and the possibility to avoid payroll taxes and benefits—often offset this cost.
In some cases, cost savings from outsourcing can be so significant that you could set and sustain lower prices than your competitors. This move can position you as a low-cost leader and help you win market share among price-conscious consumers.
At the same time, you can use the cost savings to reinvest in your business, ramp up marketing efforts, develop new product lines, and increase the wages of the staff you keep on site.
Unrelated to cost, outsourcing can help you access technology you can’t afford to bring in-house. Many factories accepting outsourced work have competencies for design and prototyping that are too costly for many smaller businesses to absorb.
Plus, a large factory's capacity may allow you to scale your production and cover changes in demand without investing in more machinery, equipment, or labor.
Finally, production can sometimes be completed more quickly offsite than in-house. This can be the case with factories that have a large labor pool, specialized knowledge, advanced machinery, and built-in efficiencies in their production plans.
What might convince me to produce in-house?
Idea in brief
In-house production may also offer benefits. These may include:
- Retaining control over production
- The ability to spot and quickly fix quality issues
- Avoiding exposing your business to unethical labor practices
- Avoiding connecting your business with a manufacturer that engages in poor health, environmental, or safety practices
- The ability to build a competitive advantage through manufacturing processes
- Avoiding sharing practices with a manufacturer that might use them to help your competitors
Moves to outsource or offshore—a term that describes outsourcing to a company located outside the US—are controversial. This is often because they cancel the need for labor-based jobs.
But no matter where the factory you choose to work with is based, there is another important drawback to consider. Outsourcing means ceding some control over production. You may—and certain should—have contracts in place that set quality standards, order processing times, and speed of delivery. But when you outsource, you may not be able to quickly start or stop product lines or prioritize your needs over others’. And further, you may not spot quality issues until large volumes of your products have been produced. This sometimes happens when teams can’t visit the production site frequently.
Offshoring introduces other concerns. By choosing plants in less economically secure countries, you risk crime, corruption, and instability that could cause damaging blows to your operations. You could also risk involving workers who are unpaid, poorly treated, or forced to work in unsafe environments to produce your product. Further, the factory you select may not follow the health, environmental, or safety practices you expect.
There are three other reasons you might choose to produce in-house over opting to outsource:
- Your approach to manufacturing is an advantage you want to retain.
- You don’t want to risk sharing your practices with a factory that'll use them on a competing product.
- You won't achieve enough cost savings or efficiencies by outsourcing your production.
Which path is right for my business?
You’ll need to weigh the pros and cons of both options. But if you find the cost, efficiency, and skill advantages tip this option toward outsourcing, talk with some manufacturers. This article provides some tips for getting started:
Decide to produce in-house? Check out these articles:
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