James (Jim) Dent, LSSBB, DTMx2 There are many reasons for outsourcing vs insourcing:
'-- internal capacity
'-- critical part vs non-critical part
'-- specialized processing
'-- supplier is more an expert on the parts & processing than you
'-- supplier is already producing very similar parts
'-- you may required to purchase machinery and allocate floor to produce internally
'-- your internal core competencies don't match that of your supplier for the product

Karl Schulmeisters The ROI depends on far to many variables to have an answer to your question Ms Olson. Jim's list is just part of it. And your ROI depends a lot on the quality of work you get from the vendor and the amount of rework necessary Neither of which is particularly predictable

Jerry Robinson Karl is absolutely right here....

There are lot of unkowns - that are beyond the simple $$ answer, too.. Regulatory, where your market is located... and more..

Gordon Millar All of the above are true. Why invest eg £100k on a machine and have to employ an operator if the component only costs buttons to produce, however critical it may be.

James (Jim) Dent, LSSBB, DTMx2 What is beneficial for one company to outsource or insource; is not the same for all companies. There is no one cookie-cutter ROI calculation. in many companies the decision is made by Manufacturing/Production Operations because they are who know their capabilities, capacities, and core competencies.

Some companies will decide to only keep in-house their highly proprietary patented items to protect the intellectual property; and outsource nearly everything else. Often, you competitors may be using the same suppliers as yourself, so you may not want your highly proprietary patented item at that supplier where your competitors might see them being manufactured, or where the supplier can pass on new advanced manufacturing knowledge to your competitors.

no email I must say, quite a few great comments to think about! One that particularly stands out to me, would be "get rid of the dogs ", that are extremely wasting your labor work force, outsource those types of products, so that your machinery isn't just sitting idle, especially if the quantity is not largely produced! First do the math, see if you want to buy the components to ship to your supplier or just make it a turnkey operation.

no email Also, keep your inventory low, by shipping any components to hold at the suppliers of your choice. Then, make an unannounced visit to the supplier to make certain that your parts are all there!

James (Jim) Dent, LSSBB, DTMx2 @joan: I know one aerospace company that designs and manufactures aircraft systems. These systems comprise of aluminum, titanium, and stainless electro-mechanical systems, it also includes electronic control systems. The company designs nearly all of the custom components (mechanical, electrical, and software) in-house; however, their core competency of their machine shop is the fabrication of precision complex aluminum parts. Therefore, although they design all the systems in-house, they outsource the fabrication of titanium and SS parts, any coatings or forgings, any welding or plating, and any fabrication of electronic boards.

Some companies don't do any fabrication in-house; their expertise is in the design and testing of products; and so they outsource all fabrication whether simple or complex. They develop strategic alliances with key suppliers.

From a different perspective: In a startup, you want to (re)design a product so you need as little and as non-critical, non-complicated parts and machinery possible so you get your needed result with minimum time and capital equipment expense, all things considered.

I said it vaguely, but the essence of DFM, Design for Manufacturing, is to get the needed job done without over specifying what you need, and thus causing extra time and money before you get your parts.

I have seen many over-designed parts such that the "process" was so touchy that the manufacturing cost went way up when it did not have to do so for the intended application.

Another example is just picking a more expensive "material" than needed as in a Stainless Steel washer in a room temperature corrosive environment where an UHMW PE washer not only does better on corrosion but has less friction.

Good designers wrestle with these issues all the time.

Gordon Millar If you look at say the automotive and aerospace industries, consider how many components are outsourced. It works. I've been doing "Virtual Manufacturing" for several years, selecting the right people and companies with the right kit to produce what I want. It works too.

Ee Bin Liew if outsourcing transforms your supply base significantly (i.e. 50% reduction), then it would be a good idea to find some way to make outsourcing work because that's up to 30% of your COG. Reducing headcount and thus overheads aren't always as effective (at best 15% of COG) because in fact taking out just a few h/c will mean a lot of the 'glue' work that needs to be done to keep a company healthy would take a hit, and indirectly impact efficiencies. So in my opinion this decision has much to do with the impact to the supply base (where all your raw materials and components come from).

in your question we have to assume that the necessary business due diligence is done, and supply controls processes are already in place.

Cheers,
Ee Bin

no email Gordon,
I, too worked in Aerospace and the automotive fields, and we actually held our suppliers inventory, in which was proprietary. I, do agree with you, we outsourced for various reasons as Jim stated. The particular suppliers we used were definitely "almost like an extension of the company", with daily interaction, and many visits by both to maintain the status quo of an excellent supplier relationship! This was a necessity for both companies.
I had a case once at a medical device company, where our design team along with New Product Development, made tubing at our sister plant. The idea was to bring the tubing in house for manufacturing and get rid of outsourcing it globally. The packaging Director along with NPD, had our sister plant manufacture over $500,000 worth of tubing and package it for sale. Well, long story short, I think I was on this job for approximately 2 months at the time. I was still buying the tubing globally and managing to use up the inventory we had at the supplier, when I noticed on their packaging that "their tubing" had a patent already on it! For the life of me, to this day, I don't understand why nobody caught this, prior to manufacturing all of these same exact tubing we were buying. We had to negotiate and buy up the rest of the tubing and negotiate the contract we had with this particular commodity. Eventually, our company tweaked a few things around the diaphragm and were able to patent and sell the new tubing made by our sister plant, but we also had to write off over $500,000! The best part is that the Packaging Director got promoted! I'm convinced that this company (that I no longer worked for) believed in The Peter Principle!
And, Bo, I agree as I too have to deal with these issues. Engineers always wants a Rolls Royce, when all the capital equipment that is needed to make the parts is a Chevy!
All great things to think about.
Thank you all, Joan

no email Another subject came to mind when I read Eu Bin's reply. Remember when mostly all companies were downsizing and found out that they still could make their numbers with fewer people! Plus the fact, that these companies have to pay only approximately 9% in taxes. Combined with the amount of money that these companies are just "sitting" on and are not investing it in the market, I can't figure out why they are waiting to invest?

Karl Schulmeisters investment is driven by expected demand. And we are coming out of the greatest GDP drop in human history along with the attendent demand drop. Add in the uncertainty driven by political attempts to repeal the ACA (50+ legislative attempts in part or in whole, + 2 SCOTUS challenges ) and you have an environment in which the demand signal is muted.
.
some companies with higher tolerance for risk are investing: seeing the investment slump as an opportunity to gain a tactical or strategic edge. But most are just starting to come back to new device investment. At least that is what we are seeing in our business

Jerry Robinson I don't believe in a future great "GDP drop". No basis for it...

the 2007-2008 crash was avoided - almost at the last instant - for full collapse.. I think medical expenditures are rising..

For sure.... the NATURE of the demand is changing.. radically so.. the pressure to automate and incorporate wireless communications seems to be increasing - daily...

--jr

Joan Olson noted "I can't figure out why they (companies) are waiting to invest?" What I've seen is that the managers who are the "survivors" of the 'great crash' are still nervous as can be. They survived the downturn, the layoffs and the ongoing mergers (2 in one company I'm working with) and now even though they see opportunity to get more efficient, they believe if they make one misstep, they will be in line for the guillotine. Hence, feet locked in concrete, even when I can show a couple million in saved expenses per year (after paying off the capital equipment.)

These managers are scared sick.

The CEOs job is to give confidence to his managers and assure them that they must be willing to take small risks in order to advance their business.