Outsource to InSource. Use of contract manufacturing, in light of traditional make “in house” or buying from suppliers.
How are the terms different and when do they apply? What should operations and sourcing teams consider when deciding to outsource and to which contract manufacturer?
Traditionally, original equipment manufacturers (OEMs) have both bought products from suppliers and made products themselves. The operations function of the OEM decided what to make and what to buy depending on their resources and capabilities.
- OEM is a company that sells products to its’ own specifications and design under its’ own brand.
- Products is products, sub-assemblies, parts, or services to make or buy.
- Make means to produce, fabricate, or assemble a product.
- Buy means to purchase a product.
- Supplier is an entity that sells products, sub-assemblies, or parts which they make or have made to
Global markets and sources of supply along with specialization to meet technical challenges, regulations, and environmental concerns have changed the make or buy picture and introduced some new terms.
- Outsource, a subset or variation of buy, means to purchase products, sub-assemblies, parts, or services (products) that the OEM has been making or could make in order to leverage resources and speed products to the market. The OEM carefully selects the contract manufacturer to make the products to the OEM’s design and specifications.
- A contract manufacturer, a subset or variation of supplier, sells products to the OEM that they make to the OEM’s design and specifications.
The term insource is not so commonly understood. Thinking of it as the opposite of outsource, really doesn’t improve on make to the OEM. Thinking of it as coming “in” to the contract manufacturer as it goes “out” from the OEM gives focus to the contract manufacturer, but doesn’t do much for the OEM. Our founder gave much thought to choosing the name InSource. In the end, InSource was selected based on what the company planned to do. Ken wanted to go farther and give the term “insource” meaning to the customer. This meaning would have two parts – the “in” as we operated seamlessly as though one of their plants and the “source” because we would be free (from their bureaucracy and constraints) to deliver more value (quality, delivery, service, price). Ken wanted to extend this dual meaning to companies outsourcing overseas. “In” would signal local or in-country replacing “Out” meaning farther away or overseas. When he came up with the name InSource, he quit looking for other names. It is no surprise that our vision is Our Customers consider us essential and their most responsive supplier. It’s in our DNA.
When might an OEM decide to outsource a current or new product?
- They don’t make much of that type product and lack capability of equipment and expertise to excel.
- To free up resources and space for other products they make
- To speed to market by launching both products they make and products they outsource.
- To speed to market by concentrating on design, product launch, marketing, and customer service and leveraging contract manufacturing.
- To deal with tight labor markets, relatively high labor costs, and labor disputes.
- To reduce complexity such as sourcing and inventory (fewer part numbers) or regulatory/environmental requirements.
- Reduce overall cost.
- To avoid internal barriers and pitfalls that gum up the OEM’s works (labor rules, pecking orders, redundancies). We’re not saying you have them, but if you do we can help.
An example would be outsourcing wire harnesses rather than making them. The concept of making a wire harness is simple. One buys the wire in spools, the connectors in boxes, and the terminals in reels. One cuts and strips the ends of various sizes, colors, and types of wire. Then, one attaches terminals to the ends of the individual wires, pokes the ends into various connectors to make a wire harness and ties the wires together. The finishing touches include marking the wires for function or connectivity, applying braided or split looming for protection, injection molding plugs for waterproofing, and laser marking connectors to identify the wire harness without using a paper label. Then, each wire harness needs to be tested. The scope of the raw materials is staggering. InSource currently uses 479 bulk wire part numbers, 165 bulk cable part numbers, and 1,289 connector & terminal part numbers. A quick walk through the shop reveals (4) automatic wire processors (cut/strip/mark/crimp), (6) ultrasonic wire splicers, (5) injection molding machines, (10) braiders (looming), (12) bench terminal applicators, and (3) testers. When individual wires were used to connect from point to point, it made sense to cut and strip wires by hand and many OEMs did their own. Wire harnesses are now made with precision and speed while individual harnesses may have hundreds or thousands of chances for error. Many OEMs outsource their wire harnesses.
Other opportunities for outsourcing would include controls (containing printed circuit boards and harnesses) and refrigeration units (evaporator assemblies, condensing units, or complete self-contained units).
When looking to outsource products, OEMs would choose a contract manufacturer based on their capabilities and the value they can deliver to match the OEM’s requirements. Many OEMs are looking for speed to market, shorter lead times, and smaller batch sizes. InSource has adopted quick response manufacturing (QRM) to speed smaller batches through our shop quickly. In sourcing, we push for shorter lead times and smaller batches of custom parts and for supplier stocking of commodity parts (used by many companies in many applications) for immediate shipment to fulfill our needs. Each of our customers benefits from parts usage across our customer base.
In conclusion, many OEMs outsource products to contract manufacturers to leverage resources and to speed to market. The OEM has an opportunity to choose a contract manufacturer based on the capabilities and value they can deliver.