You’re a food processor and the time has come for you to expand your product line. The question you must first address is whether you plan on producing your new product in-house or through a contract manufacturer. Consider the following when addressing this issue, says Jack Podnar, chief executive officer of the Kent, Ohio-based plastic jar manufacturers Rez-Tek Corp.:

• Cost- what will be your cost of manufacture, cost of downtime, cost of rejects, cost of quality control, cost of opportunity lost, cost of shipping?

• Time- will you be quicker to market doing the product in-house or by contracting the work to an outside firm?

• Risk- which option presents the shortest risk list?

• Control- how much control do you have over product quality, time-to-market and other key factors when using a contract manufacturer? How important is over-all control of the manufacturing process to you?.



Outsourcing has started to show up in more and more industries, says Jeffery Ryan, vice president at the Chicago-based supply management consultant firm BravoSolution. Very few companies have the manpower and financial backing, much less the knowledge and skills, to do everything in-house, he says.



Outsourcing

Outsourcing can help you avoid much of the risk involved in manufacturing a product yourself. If your plants already are running at full capacity, then outsourcing allows for a faster start-up for the new product or new line of products than would building more capacity in-house. “In order to be efficient manufacturers and compete on the same playing field as other companies, it makes sense to go to a third party that can handle the capacity your company hopes to output,” Says Ryan.

For instance, earlier this year, Salem, Ore.-based food processor Truitt Brothers entered into an agreement with San Francisco, Calif.-based Del Monte Foods to have DelMonte co-pack its cherries and pears at its Yakima, Wash. factory.

Del Monte’s size and up-to-date machinery means that Truitt, which started as a cannery, will be able to increase its production and reach more consumers faster than if it had done the added production in-house.

In some cases, a contract manufacturer can be used to handle sudden spikes in product demand. This allows production to remain on schedule without having to hire new staff or enlarge your facilities, explains Ryan.

You can look to outsourcing products as a means of creating a competitive advantage as well, says Mike Darland, partner at the New York-based business advisory firm CRG Partners. “Over the last couple of decades, larger companies that decide to outsource have been looking to third party companies for advantages beyond chasing low costs.”

“The manufacturing process is always evolving but can be expensive to keep up with, especially for companies just starting out. By outsourcing, your company can have another company carry the burden of keeping up with new technology,” explains Ryan. Both experts agree that companies must now find ways to adjust to everything from the rising costs of fuel and commodities to increased inflation in many developing countries that have been used for outsourcing in the past.

“It is a sign of the times where leading ‘brands’ like Nike and Apple outsource manufacturing or key components of their product while ensuring the final product meets their standards,” says Neil Stern, senior partner at the Chicago-based research firm McMillianDoolittle, LLP.

Experts agree that outsourcing is a trend that will not only continue but will flourish in the next two to three decades. “Usually they start by contract manufacturing all new packaging and then, as risk versus reward get big enough, they bring everything in house,” says Podnar.

If companies see the value created with external manufacturing partnerships, the decision will virtually always be to outsource because branded companies generally have higher overhead than do contract manufacturers, says Lisa Shambro, executive director of the Oakland, N.J.-based Foundation for Strategic Sourcing (F4SS).

Making the Product

Contract manufacturing isn’t the answer for every company, however. The ability to exert total control over the factors that go into a product’s development is a big attraction that prompts many companies to keep production in house, experts agree.

Keeping control of elements such as cost and intellectual property can be vital to your company’s survival, explains Ryan. “Intellectual property laws around the globe are not consistent and it is easy for sub-contractors to sell knockoffs of products,” he warns.

Quality control can be a deciding factor as well. If the product you intend to produce has very specific tolerances in its production than there is no guarantee that a third party will make the product the way you intended, he says. “A different company could maintain different quality control tolerances than your product allows and outsourcing might end up harming the final product,” he says.

Allowing your company the freedom to choose which materials go into your final product goes all the way down the supply chain, Darland and Ryan agree. While bringing your product to another company can be cost-effective, the materials that go into it while it is in their facility often are under their control.



Who Decides

While there are benefits to both choices, the question becomes, who will ultimately decide whether or not to outsource? It turns out the answer varies depending on whom you ask. If you are a new company, then it is up to the entrepreneurs in charge of the company or project. But for larger companies, a variety of people may take on the role.

Although the head of manufacturing often takes the lead on projects such as this, they can look for consultation with collaborative source firms that will find ways for outsourcing to give both companies a competitive advantage, says Ryan.

In larger companies, the decision will go before an executive committee which will then inform a board to make the final call, explains Darland.

“We are hopeful the industry can evolve to a place where suppliers can communicate and deliver value well beyond price, that suppliers can convey this value to their customers, and, most importantly, that customer colleagues responsible for external manufacturing can convey that value to their internal colleagues so everyone views all the manufacturing options in a purely objective fashion,” says Shambro. ||