Marketing Weblog: SHALL WE OUTSOURCE THE MANUFACTURING OF OUR PRODUCTS?

One quick response would be that it depends on the Industry you are in. So if you are in the IT or electronic one, you would say yes for cost reasons; and if you are in the FMCG you would say no for it is not usual to do so and savings are discussable.

Whichever the Industry, the reality is that the economic globalization is pushing more and more companies to outsource production for they do not have a real chance. Prices are going so low in some countries like India or China, that there is no point producing in our own countries. So, what shall we do in these cases? Do we have a real chance to survive in the mid and long term?

As some smart companies have shown, the answer is yes if you are able to comply with two things:

1. Keep product quality under control.
2. Not outsourcing your competitive advantages.

Let me share some some real examples that will bring some light into the discussion:

1. Mattel: We have already written and discussed about it. They outsourced manufacturing in China, but have suffered dramatically for not implementing quality control measures. Both the financials and the brand image suffered due to this flaw.

2. HP: One the smartest companies that I know, I have to admit. They outsource most of the production to OEMs, but have been able to keep in most of the markets where they compete. Reasons for this? They have kept for themselves key sources of competitive advantages such as Design + R&D in new technologies + software.

3. Nokia: Hybrid production. They outsource of low end models where they do not have a chance to be competitive, and reserve for themselves the production, design and R&D for mid and high-end companies.

4. Samung + LG: For many years they have been unknown manufacturers of tvs, video and camcorders for well-known Japanese companies. The latter gave them too much control (including design + R&D), that ended Samsung + LG competing successfully with their old Japanese customers.

5. Verizon (and most of the leading telecom companies). They outsource non strategic processes and services (such as Telesales and systems mantainment), but keep for itself the key ones.

You will agree with me that globalization is strongly leading to be specialized in key things and outsourcing the rest of them. However, we have to be careful for we might ask others to do for us something that is making the difference in the end of the day.

PS: Special thanks to my Global MBA Group from Sept 08. They have driven a Product Management discussion very far and have led to this posting. Some of ideas + points are from them.

PS2: Video one is telling a real outsourcing done in Springfield. Video 2, what we will be up to if the American Studios outsource their series to India 

Comments

Some industries, very intensive in labour and where technology is not really involved may need to outsource to survive.
On the other hand the cost of outsourcing are not always taken into consideration, some companies I know first relocated production in the chinese seaside, as wage went up to the amazing figure of 300USD/Month they relocated agqain again in rural China. I guess the next step will be to relocate to Mongolia...
Each time they need to build an industrial complex with different providers and more and more difficult logistic operation.
Taken all these costs into account, together with efficency of EU plants, was it worth it?
I personally do not think so.

Finally, as we can not compete on cost with developing countries, why do not we try to relocate trade unions, workers right and often human right together with our plants in these countries?

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