In-sourcing vs. Outsourcing: What’s the right option for you?

You may be considering bringing more functions in-house but be sure to consider the actual costs. Historically, companies have made a distinct effort to become increasingly vertically integrated. 

Whether it was injection moulding, sub-assemblies, packaging, machining, or even sterilization, companies are prepared to pay large sums of money to bring these technologies in-house. The rationale for doing so is relatively easy to justify greater perceived control of the supply chain, quality, cost, lead times, etc.

However, over the last number of years, this line of thinking is changing. As companies bring more activities in house, they face new challenges. With each new technology, a new skill set is needed: additional hires, additional training, maybe even additional shop floor square footage. Once in place, each activity needs to justify its existence from a financial standpoint.

 

Potential drawbacks of in-sourcing

Overheads and investment.

Bringing more activity in-house leads to an increase in overhead, in particular your fixed labour costs and potentially energy costs, depending on the activity in question.

Labour force use.

Creating value is the most important aspect of any company. This value is created through having your workforce focused on making your product. In-sourcing an activity such as packaging and fulfilment will inevitably divert a part of your labour force away from this and lower their overall contribution to the bottom line.

Flexibility and Scalability.

Once you take the plunge and in-source a technology such as injection moulding, you are less likely to expose yourself to the limitless offering of the marketplace. R&D decisions around product design can become limited by the capabilities of your newly in-sourced technology.

Benefits of outsourcing

Some of these drawbacks/limitations are what have led companies to explore the option of outsourcing. It’s imperative that you do select the right contract manufacturing or outsource partner. To be a successful relationship, the partner needs to be seen as an extension of your very own production team and perform as such.