Executing the successful outsourcing of a manufacturing operation is not as easy as blindly pointing to a low-cost geographical location on a map and stating, “we will outsource here”, as there are a virtually infinite number of variables that must be factored into the equation if it is to truly be a success. We understand this dilemma and want to make the decision process as easy and assuring as possible for all of our clients.
The first step in successfully outsourcing a manufacturing operation is to clearly understand what the term "outsourcing" means and to understand the general reasons why a company would choose this approach (click here for an in-depth discussion).
In addition to the general reasons referenced in the article above, here are a few of the reasons why companies have chosen to specifically outsource their manufacturing with CaliBaja:
Cost Savings – Outsourcing your manufacturing to a low-cost labor market will drastically lower the “labor” cost associated with your products. Depending on the ratio of “labor” to the other cost of goods sold expenses in the products you sell, this reduction in labor costs has the potential to exponentially increase your profit margins.
Cost Restructuring – Outsourcing your manufacturing drastically reduces your operating leverage by decreasing the ratio of fixed to variable expenses. Essentially, your fixed manufacturing costs are almost completely replaced with predictable variable costs.
Improved Quality – Superior quality control can be obtained with outsourcing if you choose the right provider and setup the relationship correctly. To choose the right provider: make sure that they registered with at least one internationally recognized organization that is focused on quality – such as ISO or FDA. To setup the relationship correctly, make sure that you have thoroughly documented quality specifications and that your provider is willing and able to accept responsibility for manufacturing the products in compliance with those specifications.
Access to Operational Expertise – Outsourcing your manufacturing to a competent provider allows you easy and inexpensive access to operational best practices that would be too difficult or time consuming to develop in-house. Our core competency has always been manufacturing and over the years we have correspondingly developed an unprecedented level of experience and knowledge that we can easily apply to manufacturing your products – outsourcing your manufacturing with CaliBaja can save you the hassle of re-engineering the wheel.
Reduced Liability – In-house production entails many of types of risk. Quality, on-time delivery, employee safety; the list goes on and on. Anytime you perform a function internally – you are liable for the outcome. With CaliBaja, the extensive liabilities associated with in-house production are no longer your concern. If we agree to deliver something, we are responsible for making it happen.
Reduced Time to Market – The amount of time it takes to bring a new product to market can be substantially reduced with outsourcing as you are able to greatly accelerate production ramp-up through the additional capability brought by the supplier. An operation that would take you months to develop in- house, can be started up in a matter of days with outsourcing – this has enabled numerous clients of ours to enter new markets and offer products that never would have been possible with in-house production.
Access to New Markets – Working with an offshore supplier gives you the ability to access foreign markets that were once unobtainable due to the lack of physical proximity to your manufacturing operation.
Ability to Focus on Your Core Competencies – One of the greatest advantages to outsourcing your production is the ability to focus on your core competencies. Without the constant demands of managing production, you will have more resources to allocate to growing your business.
What to Expect
Knowing what to expect before making the commitment to outsource your manufacturing is of utmost importance. If you blindly outsource your manufacturing without a realistic understanding of what you are getting into, you are starting off on the wrong foot.
With outsourcing, you can expect a long list of benefits such as those listed above. However, this is not to say that you can just outsource your manufacturing and then walk away from it. Think of outsourcing as a tool that will greatly facilitate the manufacturing of your product. Just as with any tool, the tool itself will not perform the desired function without input from the user. That being said, you should be prepared to have a very close relationship with your outsource provider as there are many in’s and outs of outsourcing that will need to be addressed on a case by case basis throughout the relationship.
Essentially just like embarking on any other endeavor, the more realistic your expectations are before you begin – the smoother your journey will inevitably be.
The decision to outsource manufacturing to Mexico is usually primarily driven by a desire to reduce operational costs – which is easily achievable once low-cost Mexican labor is utilized. However, it is very important to understand that just like any other investment that will eventually save you money, there will be an upfront demand for capital before you realize a return on your investment.
The following are a few upfront expenses that should be budgeted for:
Freight – all of the equipment, tooling, fixtures, raw material, and any other tangible items needed to run the operation will need to be shipped from its current location to the new location in Mexico.
Engineering support – during the initial phases of the project there will be an increased need for engineering support to ensure that everything is setup properly and producing according to your specifications.
Travel / Training – should be taken into consideration if your project requires travel of either our personnel to your facility or your personnel to ours for training purposes.
Please be aware that this is not an exhaustive list of all of the upfront costs that you should take into consideration when determining if outsourcing your manufacturing is right for you as every project is unique. The best way to plan for the initial costs of outsourcing your operation is to take advantage of our many years of experience and schedule a free consultation today – we can help.
Are You Ready?
Before you commit to outsourcing your manufacturing, there are some important questions to ask yourself:
Do you fully understand the outsourcing process?
Have you thought about how this will this affect all aspects of your company?
Do you have a detailed and accurate understanding of your existing costs?
Are you ready to invest what it takes to outsource?
Do you have a product with significant / consistent requirements?
If you cannot emphatically answer “yes” to all of these questions, you are not yet ready to begin the outsourcing process. Please feel free to take advantage of our many years of experience by scheduling a free consultation with one of our outsourcing experts and we will help you determine if outsourcing is right for you.
Signing the Contract
If you have done your homework and are ready to outsource your manufacturing, then the next step is signing the contract.
While the act of actually signing on the dotted line just takes a couple of seconds, there is a lot of work that needs to go into getting the contract ready. The contract is essentially the one document that will govern the entire relationship for many years to come and therefore should always contain the following points – regardless of who you outsource with:
Quality Specifications – make sure that the contract is very clear in defining / quantifying what critical specifications exist for your product so that there is absolutely no doubt regarding whether a part passes inspection or not. This is the most important part of the entire contract!
Volume Expectations – pricing is always based on volume – the more you produce the lower the price. That being said it is of paramount importance that your contract clearly addresses how increased volume will result in additional savings.
Who Provides What – being that every manufacturing operation is unique, it is impossible to have a rigid contract that adequately spells out who will be responsible for what. You should always make sure that you are actively involved in the contract drafting process and fully understand where your responsibilities end and the outsource supplier’s responsibilities begin.
Clarity – if an outsource supplier’s contract is unclear, it is probably on purpose. Make absolutely sure that you are dealing with an outsource company that speaks your language so that you fully understand what you are getting into before signing the contract. When it comes to contracts, the old cliché “an ounce of prevention is better than a pound of cure” definitely holds true. It is imperative that you have a clear and detailed contract with an established US-based company with the experience to back up their claims.
The Transition Period
Once the decision has been made to outsource and the contract is signed, the next step is the transition of production from the existing location to CaliBaja. This is the most complicated step in the outsourcing process and depending on the complexity of the operation, may require a significant dedication of resources from both ends:
Inventory needs to be built to cover demand during the downtime associated with the transfer
The new workforce must be trained and certified
The supply chain needs to be redirected to the new location
All equipment and tooling must be setup and calibrated Any requisite facility improvements must be completed
Once your manufacturing has been completely transferred to CaliBaja, the most difficult part of the outsourcing process will be behind you – but your relationship with us will have just begun.
Manufacturing exists in a constantly evolving environment in which one must be able to continuously improve in order to remain competitive. We understand the importance of continuous improvement and develop our entire business model around it. This is especially evident in the business relationships that we have with our customers.
We strive for open, honest, mutually-beneficial, long-term, business partnerships with all of our customers so as to be able to fully understand the ever-changing myriad of challenges that our customers face on a day to day basis. Once we understand the production-based challenges that exist with your operation, we will be by your side to you to help overcome them.
The most common mistake that companies make with outsourcing is thinking that you can outsource your problems - if you currently have issues with your supply chain, quality problems caused inherent process limitations, or any other reoccurring problems with production that you have not addressed in-house, do not simply assume that they will be fixed by outsourcing. In many cases we do improve existing processes and eliminate waste; however, this should not be the primary reason for outsourcing production.
Having unrealistic savings expectations is another common mistake. For example, expecting that you will be able to cut 95% of your total production cost by moving your operation just south of the border is simply unreasonable. You should expect to cut the labor cost of your product in half – the other costs (material, distribution, etc.) will probably remain approximately the same.
Thinking that you can operate in Mexico with less resources / support then you would need in-house. If through years of experience you have found that your particular operation requires 1 supervisor for every 5 direct laborers, there is no reason why that ratio would be any different when manufacturing in Mexico – the only difference would be that each of those positions would cost you less in Mexico.
Overlooking the support functions required to properly run the operation. You need to have a plan to continue all of the support functions of the operation either in-house or outsource them to Mexico as well. For example, if your in-house operation requires a dedicated purchasing agent for streamlined material acquisition, the Mexico operation will need the exact same level of support – the only question is whether or not you want to continue performing that function in-house or outsource it as well.
Overlooking the new functions that will need to be performed as a result of manufacturing in a remote location. For example, if your main customer has always been located right next door to your manufacturing facility, you probably have not spent much time thinking about the logistics of delivering your product to them. Once you outsource your operation, on-time delivery of your product now becomes slightly more complicated.
The underlying cause of the overwhelming majority of the problems that companies encounter when outsourcing production is a simple lack of preparation. The outsourcing of a manufacturing operation to Mexico (or anywhere in the world for that matter) is a major undertaking that should be planned for accordingly.