When small-business owners who outsource their production start reaching high enough sales levels, they need to start weighing the benefits of bringing their manufacturing processes in-house. While cutting out a middleman might seem like an effective way to cut costs and increase profits, there are many other factors to consider before taking this big step.
One of the benefits of bringing your manufacturing in-house is that you’ll have more control over the production process. When you outsource, you can’t keep an eye on your supplier unless you hire an on-site manager. One of the advantages of outsourcing your production is the quality-control experience longtime manufacturing facilities offer, including managing materials suppliers, production managers and line workers. Suppliers also routinely perform quality checks on finished products before shipping them to ensure they don’t lose customers.
Cutting out the profit charged by a supplier can save you considerable money. When you make your own products, you not only eliminate the supplier profit upcharge, delivery expenses and credit fees a supplier charges, but you also reduce your production costs by purchasing materials directly from manufacturers. The downside to bringing your manufacturing in-house is that you’ll have to produce enough units to generate enough profit to pay for the cost of your manufacturing facility, equipment, labor, insurance, property taxes, utilities and other production costs. Suppliers often make product for more than one company, allowing them to spread overhead costs among multiple customers. Compare the government rules and regulations of any place you’re considering manufacturing to determine their affect on your production processes and costs. Some states have no inventory tax, making your location a significant cost-saving consideration. Local and state government often offer tax credits for companies that create new jobs.
Outsourcing your production can lead to increased management expenses, depending on whether you need on-site managers or an office to handle some aspects of your business in a foreign country. Bringing your manufacturing in-house can decrease your management costs because you have more control over your production processes and won’t need as much oversight or the expense of having managers outside your headquarters. If you take on warehousing and distribution when you manufacture in-house, your management costs can rise.
The cost of manufacturing using a supplier can rise dramatically depending on your storage and shipping needs. If you can’t ship directly from your supplier to customers, you’ll have the added expense of shipping to a warehouse, then to your customers. Suppliers who offer warehousing and distribution can greatly cut your costs. If you can manufacture, warehouse and ship in-house, you can streamline your management operations, ship product to customers faster and reduce your logistics costs.
Public Relations Considerations
When you manufacturer outside the country, your labor costs can shrink dramatically, but you might irritate patriotic consumers and give your competitors a marketing tool to use against you. Look at the PR benefits of producing locally versus out of the country.
Sam Ashe-Edmunds has been writing and lecturing for decades. He has worked in the corporate and nonprofit arenas as a C-Suite executive, serving on several nonprofit boards. He is an internationally traveled sport science writer and lecturer. He has been published in print publications such as Entrepreneur, Tennis, SI for Kids, Chicago Tribune, Sacramento Bee, and on websites such Smart-Healthy-Living.net, SmartyCents and Youthletic. Edmunds has a bachelor's degree in journalism.