3 Factors That Determine the Cost-effectiveness of Outsourcing
For you as a procurement manager of a high-tech OEM, minimizing purchasing and inventory costs and decreasing lead times are your most meaningful goals. You may achieve these goals in various ways; outsourcing of manufacturing is an excellent opportunity to take multiple steps at once.
Outsourcing the manufacturing of mechatronic systems comes with several advantages, as I described earlier in this blog post . This strategy is not only advantageous for you as a procurement manager, it benefits the entire organization.
The question is, when is outsourcing a cost-effective strategy? When does outsourcing the assembly of mechatronic modules or systems result in a positive business case? Find the answers in this blog post.
1. the Geographical purchasing region
The area in which you spend at least 50% of your entire procurement budget is an essential factor in determining whether outsourcing your production is a cost-effective strategy. Especially when you buy locally, you can exploit a saving potential by replacing your current supply chain with the supply chain of a system supplier.
Through modular outsourcing, you place production in the hands of a well-managed supply chain with carefully selected suppliers and production partners with in-depth technical knowledge who are located in the right region. As a result, you are provided with a competitive cost price.
When the supply chain is already set up internationally, opportunities to outsource your manufacturing remain present. However, this requires additional coordination. For example, consider optimizing the product architecture through value engineering. This strategy often results in a positive business case, especially in combination with carefully selected production partners.
2. The complexity of a module or system
Whether value engineering is profitable depends on the complexity of a module or system. If it is highly complex, it may be possible to turn the design into a more straightforward concept without compromising functionality and quality, hereby reducing the overall cost price as well.
When looking at the complexity of a module or system, added value can also be provided through outsourcing of manufacturing. In case there are insufficient options to reduce the complexity of a product, there is a good chance you can optimize the production process.
When you want to bring a new mechatronic product to the market, production is probably just a part of the entire process; it is not your core activity. Opting for outsourcing means choosing for a partner of which production is the core activity. They focus entirely on the creation of a production process that is as lean as possible, resulting in the best cost price.
3. The structure of a module or system
When is a module complex? Its complexity is determined by the architecture of a module or system. The choices that are made in the conceptual design stage are the basis for the total production costs. These costs can generally be attributed to:
A module or system generally contains the following components:
- Standard components such as motors, conductors, etc.
- Electrical components such as control elements and wiring
- Machining or sheet metal parts, i.e., the mechanical parts
You can achieve considerable cost savings in the latter category, since it includes customization. These savings are twofold. On the one hand, you can save money by selecting an alternative supplier within a well-managed supply chain, as described earlier in this blog post. On the other hand, you can employ value engineering to optimize the design within its configuration, fit and function.
Clearly, the size of this group of components must be significant to turn value engineering into a cost-effective solution. Our experience is that value engineering on a functional level helps you to get the most out of it. In this case, our industrialization specialist and lead engineer consider the function of a subgroup on the one hand and the commercial value on the other. By creating a function/costs matrix, a clear picture emerges of possible savings, including the efforts and risks that come with these cost reductions.
The more hours you need to assemble a module or system relative to the hours spend on the entire project, the greater the chances you can optimize the design and save costs.
When you are producing your products locally, the hourly rates for assembly are comparable to those of a production partner in America or Europe. These are therefore not the discriminant factor. The efficiency of your assembly process, however, can be a discriminant factor and this is where opportunities for optimizations can be found.
The last significant factor that determines whether outsourcing is a cost-effective strategy is testing. You want to be sure every single function of your module or system has been checked before you bring it to the market.
When you choose to outsource the production of a mechatronic module or system, your partner tests it according to a specific, agreed protocol. These tests ensure that you receive a product that meets the required specifications and quality standards. The results are documented in a test report. In other words: quality is guaranteed.
In short, when you purchase locally and produce highly complex modules or systems with customized components and many assembly hours, outsourcing of your manufacturing activities results in a positive business case.
If you want to gain more insight into this strategy, we may have something interesting for you: the Outsourcing Scan. In 14 short questions, you will discover the degree of cost-effectiveness of outsourcing for your business. This scan assesses — amongst other aspects —geographical purchasing region, complexity, lead times, lifecycle stages and production capacity.