Book Order Form | Table of Contents | Preface | Chapter 1 | Chapter 2 | Chapter 3 | Chapter 4 | | Chapter 5 | Chapter 6 | Chapter 7 | Chapter 8 | Appendix A | Appendix B | Glossary

    The manufacturing process, from formulating the build schedule to shipping the final product, can be a long drawn-out effort, with each step along the way creating pigeon holes into which inventory elements are stuffed, to lay hidden, waiting to surprise the socks off Management. Dealing with hundreds of vendors and numerous steps in assembly requires discipline from the personnel in purchasing, expediting, supervising, assembly, incoming inspection, testing, shipping, receiving and inventory control. It is no wonder that so many companies run aground and flounder on their inventories.

    One of the best methods for controlling inventory is to engage partners to whom various levels of the process can be out-sourced. Of course the practicality of out-sourcing will depend upon time constraints, available cash, the maturity of the design, the volume of product and the amount of assembly control the company desires.

    The ultimate in manufacturing out-sourcing uses a partner to do the manufacturing on a turn-key basis. The partner is given an order for a given quantity of finished product and fulfills all the manufacturing steps, even carrying the financial burden of the inventory until the finished product is delivered.

    A more moderate approach that many manufacturing companies can take is to send the product sub-assemblies to outside assembly houses. This reduces the labor content of the in-house process, but does not reduce the overhead and all the other functions in the process. Parts and components still need to be purchased, received, inspected, inventoried and kitted before being sent out, and then tested and reprocessed when received back in an assembled state. The availability of labor and its reduced cost can make this step economical, and there might actually be a decrease in the processing and control steps. There is always a trade off. There could be an increase in time for the manufacturing cycle and corresponding increases in inventory.

    This first step to out-sourcing makes Max happy because the responsibility remains in the Manufacturing department. Although the material is sent-out-of-house, from an Accounting perspective, it is still counted in the Manufacturing inventory.

    As an additional step saver, the major parts supplier can often send subassembly material in kit form directly to the assembly house. This approach reduces the purchasing effort directly, eliminating the need for receiving and inspecting hundreds of parts. It also eliminates the potential for imbalances in the sets of material type of inventory, since the parts are originally purchased and received as complete sets. In addition, by eliminating the gathering and kitting of material, the purchasing and material control functions needed to process material are lessened, thereby reducing the need for those human and cash resources and improving the cash flow of the company.

    The full-blown partnership of turn-key out-sourcing has definite advantages. Instead of buying hundreds of components and parts, which always requires extensive energy, frequent phone calls and mountains of documents, Purchasing buys one item—the finished product. This eliminates the necessity for in-house personnel for assembly, shipping and receiving, incoming inspection, testing and supervision. Transactions are brought down to a minimum for inventory control as well as throughout the manufacturing process. Capital equipment is no longer needed in the manufacturing process. The entire inventory control process is reduced to storing and staging, which eliminates the problems created by numerous inventory in and out transactions and inventory accountability spread across departments.

    Best of all, the cash flow requirements for manufacturing during the process time are eliminated. A true turn-key partner foots the bill for all the costs and only bills upon delivery of the finished product. It might even be possible to collect payment from the ultimate customer simultaneously with the purchase due date of the out-sourcing partner. This removes the burden of carrying and paying for the inventory during the long assembly cycles. Finally, the inventory risk is considerably reduced by dealing with finished products as a whole rather than all the various components in their many bits and pieces.

Seem simple, easy and profitable?
Sure, but there are always conditions and consequences.

   Such partnerships require mature product designs and a firm commitment to the product volumes requested of the out-sourcing partner. With outsourcing the ability to expedite product delivery becomes more difficult and control over strategic changes of direction is hampered.

     The disadvantages can be more than offset by the advantages and can also force improvements to the manufacturing system:

• Easier Inventory control.
• Requirements for complete and thorough Engineering designs
• Better forecasting from Marketing
• Reduction in indirect labor

    The best advise I can offer regarding out-sourcing is: A company should do what it does best. If a company is strong in Marketing or Engineering, it should not be diluted by trying to keep up with the manufacturing end of the business. Instead, it should concentrate on producing good, detailed designs and good, high probability forecasts, and find an out-sourcing partner to complete the equation for success.