Outsourcing Vs. In-house: Which Is More Cost Effective?
If your company has machinery that can be used for a manufacturing project, should you complete the project inhouse or outsource it?
That depends. There’s no black or white answer because there are many factors that can influence your decision. For example, although your company may have the necessary equipment, does it employ workers with updated skills and experience who can perform the job? Is their work accurate or precise? Overall, will the quality be comparable to that of other vendors?
“We’ve got 14 to 15 customers that actually have their own laser cutting machines but outsource jobs to us,” explains Steve Staub, co-owner of Staub Manufacturing Solutions, formerly called Staub Laser Cutting, in Dayton, Ohio. “Their employees lack the needed skills to do the job.”
Other Key Issues That Must Be Addressed:
- Accessibility: Do you have open machine time for the project? If the machinery is only available on certain days or for a limited time, consider outsourcing part of the project to avoid stressing your employees, machinery and company’s budget.
- Reliability: Can your employees meet your deadline? Consider the workers assigned to the project. What is their reputation in regards to observing timelines? What about the quality of their work? Is it consistent?
- Quantity: Can your machines produce the quantity needed within your time frame? If it’s a high volume, what about the toll on your equipment? Will the machinery need to be serviced? Will it require additional parts?
- Cost: Estimate the total cost of the project, including employee labor. Then solicit bids from other vendors and compare. But consider this scenario: a vendor who specializes in the work you need done may have more onsite machinery than your company does and can complete the entire project in half the time. Does outsourcing now make more financial sense since it allows your employees to work on customer projects that bring in revenue? Calculate the expenses and potential lost income related to both options so you can make a fair comparison.
Still, Staub warns companies against making manufacturing decisions based solely on price. While price is an important criterion, he says it can end up costing your company more in the long run when working with vendors who sacrifice quality for lower prices.
If you decide to outsource manufacturing work, there are still other variables to consider.
Before signing any contracts, visit the machine shops you’re interested in doing business with to inspect the quality of their work. Staub says shops should present you with samples of their work or products. Evaluate their edging, welding or machine quality.
Likewise, meet the people you will be working with, ask about the skills and experience of their employees as well as the shop’s performance metrics. Do they track key performance indicators, such as on time delivery rate, customer satisfaction, error rate or product quality?
Many companies, especially those in aerospace, also require their suppliers to have an ISO 9000 certification. Staub says some even use those criteria as part of their vetting process since certificated companies tend to have better manufacturing processes and therefore, products, than those who don’t.
That’s why it’s important to pay attention to warning signs, such as paperwork filled with mistakes, phone calls that never get returned or a sloppy shop with parts lying here, there and everywhere, he says. Flexibility is also critical. How flexible is the vendor? It may be rare, but what if you need to revise dimensions on a purchase order, for instance, or change your delivery date? Will they consider accommodating your request?
At times, you may need a vendor that specializes in just one process. Stub points to some fabricators who outsource their laser cutting and perform the rest of the work inhouse. Or maybe your company is more accustomed to working with thin materials and outsources only projects involving thick materials.
There are both benefits and disadvantages when outsourcing projects to specialty shops. The upside is they are experts at what they do so the quality of their work tends to be high. However, one-stop shops that offer a variety of services offer other advantages. You won’t have to maintain a dozen or more vendors in your database. Establishing relationships with multiple vendors can be very time consuming. You will need to become familiar with each vendor’s personalities, policies and processes, which may differ. Also, the completion of your project may be delayed if it has to be shipped from vendor to vendor.
So whether you choose a specialty vendor or one that offers multiple services depends upon your company’s needs. Some organizations only need vendors who perform a specific function while others need suppliers that can tackle anything you throw at them. Keep this in mind throughout your vendor selection process.
That’s one of the reasons why Staub’s company expanded its services. He says customers repeatedly asked him to expand the company’s service offerings to better accommodate their growing and diverse needs.
One more suggestion: check a company’s references before doing business with them or, if you belong to a trade association, solicit referrals from members.
“By targeting members, you can quickly find out who has a good reputation and who doesn’t,” says Staub. “Make sure the vendor is customer-focused, quality-driven and proven reliable.”
Steve Staub contributed the content for this article. Staub and his sister, Sandy Keplinger, co-own Staub Manufacturing Solutions in Dayton, Ohio, which has recently expanded its services. In the past, it only offered high precision, 3D and 2D laser cutting services. But over the past several years, it has added other services that include forming, welding, complete metal fabrication, CNC machining and assembly work. Likewise, plans are underway to almost double the company’s staff from 16 to 28 within the year, which he says is the result of these additional services. While its customers are predominantly located throughout the Midwest, its customers represent a wide variety of industries, such as automotive, aerospace, locomotive, food equipment, construction, agriculture and technology.