Supply Chain, Operations, & Process Improvement Executive | Educator, Advisor & Podcast Co-Host | Future Doctor of Supply Chain
TLDR: A company had a decision to continue their operations in house or outsource. Outsourcing would save the company $1.4M in savings. I advised them not to outsource. Now, I know some of you short-sighted, quick cash grab folks will stop reading here. But for the rest of you, come find out the appropriate way to approach this situation. On Monday, I shared about a company faced with the decision to keep their operations within the US or outsource to China. The company produced two products at their US facility that were their top selling, but also their more specialized manufacturing processes. The company did identify a $1.4M average saving per year via outsourcing. So how did I get to the decision to keep their US plant? 1️⃣ I evaluated the financial impact of keeping the plant in the US versus outsourcing to China for just the facility comparison. This included all costs of raw material, labor, electricity/utility costs, lease costs, management costs, overhead costs, capital outlays, and start-up costs at each facility over a 10-year period. 2️⃣ I analyzed and forecasted transportation costs for each facility. 3️⃣ I analyzed and forecasted inventory and the costs associated for each facility. 4️⃣ I identified and did a risk assessment on the quality, capital investment, and macro-level risks with transferring operations from the US to China. Why did I advise to not outsource? ❌ Two of their top selling items require a specialized manufacturing and assembly process that is competitive advantage for the company. Duplicating the process would be a high impact risk. ❌ To effectively maintain quality standards and execute the manufacturing and assembly process, labor in China would need to increase (decreasing savings). ❌ Freight costs and transit times would increase, leading to an increase in safety stock (inventory), additional use of warehouses (holding and storage costs), and increase in lead time for product replenishment. ❌ There is risk with price fluctuations related to transportation costs that would diminish potential savings. ❌ Wage increases over time will lead to a diminished return. ❌ US operations created a more responsive and agile supply chain to service US based customers. Are you starting to see how $1.4M in yearly savings doesn’t look as promising? What were the recommendations to reduce costs in other ways? ✅ Renegotiate the lease on the facility to lower operating expenses (~$3M). ✅ Process improvement initiatives including enhancing ERP capabilities to improve forecast accuracy, better production scheduling, and manufacturing processes (this would improve just utility costs by 2% within a year). ✅ Leverage the in-house manufacturing and assembly process that is proprietary as a potential new business unit in itself. Don’t be blinded by a dollar sign! Stay tuned for Friday where I’ll give you tips on how to approach these business impacting decisions. #supplychain #processimprovement #manufacturing