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Make or Buy?
By Mark L. Casey | October 31, 2007
Many ideas for new products by would-be entrepreneurs never get off the drawing board because of the real or perceived cost of manufacturing. When we get our new design for a portable battery-powered cheese slicer all fleshed out, we begin thinking about how we will manufacture it and what it will cost.
The fundamental question that all original equipment manufacturers (OEMs) face is will we make our product in-house or will be buy our product from a contract manufacturer? Both entrepreneurs and well-established OEMs with their own manufacturing facilities must answer this question repeatedly.
Make It
The reasons to make it in-house center around security, control and quality. If we manufacture it in our own factory, we can control access to the factory to prevent our designs, recipes, manufacturing techniques, and, to some degree, our components and raw materials from being discovered by our competitors. Our captive factory is staffed by our trained employees and follows our own quality standards. Of course, there is a major capital expenditure for the land, building, utilities, production equipment, test instruments, employees, etc. In addition, as the demand for our product fluctuates, we are going to need production planners who determine when to scale up and down on raw materials and employees.
Buy It
The reasons to buy it center around cost, risk control, and distinctive competencies. Manufacturing is a standalone domain in its own right. Manufacturing engineers and experts focused on the manufacturing process are able to stay current with the state of the art and are able to bring that expertise to all of the products they manufacture. If an OEM has decided that their distinctive competency is in the design of portable battery-powered cheese slicers, not in the manufacturing process, they may decide to outsource the manufacturing (i.e., buy it). Buying the product from a contract manufacturer also allows the OEM to use CMs in lower cost regions of the world. While this is a controversial subject to many people, reducing manufacturing costs allows an OEM to remain competitive and to maintain profit margins.
Regarding risk control, using a contract manufacturer prevents the OEM from managing the fluctuating staff needs of a manufacturing operation. If forecast demand for the cheese slicers drops precipitously next quarter, the OEM does not have to lay off manufacturing employees. Instead, the planners submit a new forecast to the CM for a reduced number of units. The CM, who is the manufacturing expert, has the task of dealing with staff fluctuations.
Each entrepreneur, start-up firm, and established OEM must wrestle with the make or buy question. For those firms that decide to make the product in their own factories, the sourcing issues are different. In those cases the issues involve the supply chain of raw materials, components, and sub-assemblies. For those firms that decide to buy, the sourcing issues inovlve the selection of manufacturers and the management of the relationship between the two firms.
In future articles we will explore related topics:
- Sourcing raw materials, components, and sub-assemblies
- Finding CMs with the proper capabilities
- The Request for Proposal/Quote process
- Factory visits/audits
- Required infrastructure for managing a CM
- How can entrepreneurs convince a CM that they are a worthy customer?
Topics: Contract Manufacturing, Electronics Manufacturing, Global Sourcing, Pharmaceutical Manufacturing, Products, Raw Materials, Services | No Comments »
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