When not to outsource: outsourcing is not always the right business decision.

Periodically, clients ask, "Do you always recommend outsourcing as the manufacturing strategy of choice, or is in-house manufacturing sometimes more advantageous?" The answer to the first half of the question is "no." Most electronic products companies that employ a well-conceived outsourcing strategy are benefiting from this strategy, in terms of improved financial ratios, reduced cost of goods sold, access to international markets and faster time to market. Some current outsourcing practices hinder customers' ability to meet cost-reduction, quality and responsiveness goals, but companies can improve in all three areas by fine-tuning their selection of outsourcing partners, the outsourcing process and the steps and overhead that remain in-house.

The answer to the second half of the question is "yes." In-house manufacturing can be the most advantageous for electronic product companies with the characteristics listed in Table 1. Companies that fit such criteria are consumer electronics and automotive electronics companies, as well as companies with fairly straightforward industrial or other electronics products. For example, Japanese automobile manufacturers assemble cars in North America for the local market, but these companies still manufacture the transmission and engine in Japan for shipment to the U.S. The product and process are inseparable and manufacturing must be maintained in-house.

Many companies feel that outsourcing makes little sense due to partnerships in Asia or other low-cost areas. Some of these partnerships involve majority ownership in overseas facilities--other agreements, however, are slightly more dedicated outsourcing arrangements. Companies whose products are more subsystems, rather than standalone electronic products, find in-house manufacturing to be the most advantageous.

"Forcing" In-House Manufacturing

Labor unions, in the automotive industry and in areas of Japan, can force a company to continue to manufacture in-house--at least for a while longer. Tariffs applied to complete systems shipped from countries outside a free-trade zone often affect portions of the automotive industry. Companies may still outsource, but may be restricted to certain regions in the world, such as members of NAFTA (for U.S.- and Canada-based automakers). (1)

Given the current softness in several electronics sectors, utilization of some electronic product companies' internal manufacturing capacity is close to 50 percent. Until the slump, a sound manufacturing strategy might have been to sell the facility to a contract manufacturer that could raise utilization and, therefore, cost efficiency by manufacturing other customers' products in the same plant. Now, however, large contract manufacturers are not buying new facilities, but closing existing plants.

All or Nothing?

I often recommend a combination of models for manufacturing strategies, such as using an original design manufacturer (ODM) for some product lines, but using electronics manufacturing services (EMS) providers or systems integrators for the printed circuit board (PCB) assembly and complete system build with the remaining lines. Keep in mind that the majority of companies who decide to outsource can reduce costs and improve market timing and reach. Many, who at one time backed 100 percent in-house manufacturing, have now migrated to some form of an outsourcing model.

TABLE 1: Shared characteristics of companies benefiting most from
in-house manufacturing.

Shared Characteristics

1.   The ability to manufacture high-volume products with highly
     automated manufacturing systems.
2.   The ability to manufacture low mix products for which multiple
     line setups, diverse work skills and varied regional differences
     are minimal.
3.   Plants in low-cost regions of the world, such as in China, Eastern
     Europe, Latin America and India.
4.   Plants in areas of the world where manufacturing content is
     required to sell to specific markets important to the company.
5.   Manufacturing efficiency-excellent design for manufacturing and
     test, updated information technology tools for supply chain
     management and shop floor controls, low parts-per-million defects
     and competitive ramp up from design through the production run.
6.   Product design capability, as a competitive differentiator, and
     security procedures to prevent leakage of the design to
     competitors.

Reference

(1.) Quarterly Forum for Electronics Manufacturing Outsourcing and Supply Chain, Technology Forecasters, Inc., Third Quarter 2002.

Pamela Gordon is president of Technology Forecasters, Inc., Alameda, CA: www.techforecasters.com.