Outsourcing can be a cost-effective way to focus your efforts on what you do best as a business. But whether you choose to outsource logistics, accounting, payroll, public relations or IT, it's vital to first grasp what drives costs and profits in your company.
You need to know exactly which core functions increase revenues and which non-core functions increase your expenses and affect your productivity. For example, if your company's income is derived from furniture design, then you could consider outsourcing the manufacturing process.
Many entrepreneurs don't tap into outsourcing opportunities because they fear they might lose control of their business or are concerned about expenses. And although these may be valid concerns, you can make outsourcing work if you take the right steps.
Determine costs of outsourcing vs. doing it in-house
Before you get started, it's vital to assess your current production and costs such as location, shipment and client proximity.
Generally speaking, if the cost of production is competitive, you should manufacture products as close to your customer as possible. This minimizes the time you need from order to cash. If this isn't the case, consider lower-wage production in other countries, such as Mexico for customers in the North American region.
For each potential candidate, ensure you do a cost analysis. This should include the cost of production, materials, transportation, inventory and quality. Consider the currency, political and economic stability of the country within your calculations. This will enable you to compare outsourcing partners based on both your criteria and costs of doing business.
Screen your potential partners
One of the most important steps is to make sure you have a ranking criteria in place. Much like hiring an employee, you should interview all of your prospective partners and screen them. Begin by collecting as much background material about the company as possible:
- Strengths and weaknesses
- Alliance objectives and past alliances
- Organizational structure and corporate culture
- State of finances
- HR policies
Where to look for outsourcing possibilities?
Here are a few suggestions to find outsourcing partners:
- Franchise filings
- Industry & trade publications
- Internet searches
- Professionals such as lawyers and accountants
- Market research reports
- Government business centres
- Trade associations
Set a clear agenda for your first meeting
Don't assume anything and make sure there is two-way communication. Here's what your discussion with a potential outsourcing partner should include:
- Ask about the company
- Determine if they have a track record for success
- Get a feel for their corporate culture; for example, are they team players?
- Ensure they can provide scalability, for example, in terms of production volume
- Confirm the commitment from senior management
- Tell them about your company
- Introduce your company and its needs
- Set clear terms, ideally for one or two years
- Be open about the resources required
- Express your key competitive advantage and inquire about theirs
- Discuss how you will generate revenues
- Make your expectations clear about what type of relationship you want
- Negotiate terms
- Establish performance goals such as volume of work and response time
- Determine the required key technical competencies
- Look at future planning and regular review process
Develop a harmonious business relationship
Here are a few important pointers to develop a strong business relationship with your outsourcing partner:
Pave the way for cooperation as early as possible in the relationship
For example, if you're developing a new product, consider involving your partner in order to better assess costs, needs and delays. As a principal contractor, you could also assist suppliers in adopting new manufacturing methods that will enhance their productivity and quality control.
Agree on prices and terms of payment
If you are working together on a product concept, a joint system for cost planning and control can help you negotiate the value of their contribution. When negotiating the price for production of an already established product, both parties need to take into account elements such as quantities, schedule, terms of delivery (just-in-time or not), taxes, security, logistics and insurance.
Agree on quality standards
Aim for total quality at all levels. Quality assurance systems that comply with international standards like ISO 9000 or HACCP are a requirement in several industries. If your partner is certified, you may only need to conduct audits at reasonably spaced intervals.
Clarify intellectual property rights
More and more agreements within the manufacturing sector are based on the development of a new kind of industrial know-how. It is important for both parties to reach an agreement from the outset regarding their respective intellectual property rights, i.e. who can patent what. This should all remain strictly confidential.
Optimize the logistics
One of your selection criterion may be to choose suppliers according to their ability to make just-in-time deliveries. Reducing the inventory is an objective pursued by all links in the production chain, in all industries. Keep in mind today that logistics can be more complex and involve various technology platforms and the Internet.
Share costs
If the contract calls for the acquisition, use, or maintenance of special production equipment, both parties can draw up an agreement to share the resulting costs. The supplier's share of the costs can be reimbursed either as a single payment at a mutually agreed upon date, or as a series of payments spread out over a period of time. Make sure you stipulate responsibilities with regards to maintenance, repairs, insurance, and the replacement of equipment.
Seeking outside help such as BDC Consulting could provide you some direction in determining your best outsourcing strategy.
