Subcontracting (Offloading or Outsourcing)
In the current industrial world, subcontracting (Outsourcing and offshoring) is common. We can see that industries are subcontracting their work for one or more reasons.Obstacles in manufacturing lead to subcontracting manufacturing. This post is covering the subcontracting and outsourcing benefits.
First, those are not aware of subcontracting concept, I am quickly explaining the subcontracting services process. In the subcontracting process, we offload or ask somebody to do our work and in return we pay him. It means we buy or purchase the services from others for which we pay them. A day to day life example is we give clothes for iron and ironing the done by some other person for us and in return we pay him. As said earlier we buy services so someone might get confused purchasing process with the subcontracting process. Purchasing process and Subcontracting process are different. In purchase process, we buy the material which is owned by the supplier and we pay for that upon purchase. In subcontracting material ownership is ours and services (Like processing our material) are provided by the subcontractor.
For better understanding, I have given a below examples -
Purchasing - Buying a ready made clothes like shirts, pants etc
Subcontracting- Getting stitching done from a tailor for your own clothes.
You can subcontract complete manufacturing process or part of it.
Capacity constraint is one of the reasons for subcontracting. When additional demand (which is generally seasonal or unpredictable) can not be fulfilled with currently available resources, then industries choose the option of subcontracting to fulfill extra demand. It is not affordable to increase the capacity just to meet the seasonal or unpredictable demand.The capacity constraint also can be because of the breakdown of resources. Expansion of facilities can be considered when the unpredictable demand becomes a part of regular demand.
Nowadays, manufacturers are facing stiff competition in the market for their survival. Making product or services available at affordable and less than competitors price is key to have major market share in the competitive market. To keep the product prices low we need to reduce the manufacturing cost. As the labor cost is the major contributor to product cost, we have to make effort to minimize the same. It may not be always possible to control the labor cost because of higher wages in some countries like the US. In such situation, the option is to outsource the operations or processes to the facilities or countries at acceptable quality levels where labor cost is low like in India. This will reduce the manufacturing cost of the product and reduces overall product cost. The best example is the IT sector where IT firm based in United states outsource their IT operations to India because labor cost is less in India than the US.
To retain a customer in the current competitive world, we need to provide better services and products. To stay in the competition and retain a customer one has to focus on the quality of the services and product. Also, some components of product might be of high quality from product function point of view which requires high precision manufacturing .(e.g.Automotive sector).This kind of manufacturing also requires a highly skilled manpower.
In some cases, we may not have facilities or set up to produce components at required quality benchmark.In such case, the manufacturer may have to subcontract to get desired level of quality.
Technical Feasibility or Compatibility -
There are a number of scenarios where components need to subcontract because of technical incompatibility or non-feasibility.In some cases, a component may require a high technical skill and sophisticated process to produce it. Also, resources required for manufacturing can be costly and.requires special skills to handle. In such cases, it may not be feasible to produce a component with available resources and need an offshoring. Some industries which are new and not having enough technical capabilities may need to outsource the component which requires high technical skills and resources to manufacture.Also, there could be a case that product which slightly differs in specification than current products and can not be produced with an available set of resources and needs a subcontracting.
Apart from another major reason, there could be other reasons for subcontracting like localization, organization strategy, etc.
Benefits of Subcontracting -
Obstacle free production - Subcontracting done because of obstacles like space constraints, technical incompatibility etc. So we can overcome these obstacles using subcontracting.
Reduced Cost -Someone may think that it's costly because subcontractors profit is added to the cost. But it's not true in most of the cases because we are paying for services or products which are as per our expectation. Production of a certain item can not be done without rejection or deviation and in subcontracting, we will not pay for it. Even though we are owning a product and rejection by subcontractor will be charged with material cost.
Time Saving and High Productivity - Because of the expertise of subcontractor in the carrying out the offloaded work, manufacturing time will be reduced and will have a increased productivity. Also,time that would have required to manage the offloaded work, can be effectively use for trying out new things and for improvement.
Better and flexible use of resources - As you will be offloading the work in which you are not good at, resources can be used in flexible and better way.
Over to you-
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