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Five Questions to Consider When Evaluating Whether You Should Bring Your Manufacturing In-House

Written by: Matthew C. Vaughn, CPA

You have built an empire (or maybe you are well on your way!). You have a product base that the market likes and solid customer support; so now what do you do? Consider these five factors when deciding if bringing manufacturing in-house is the next step to grow your business.

1. Are Your Outsourcers Helping You to Actively Improve the Manufacturing Process?
Having your own people review and tweak your manufacturing processes and designs can lead to massive new efficiencies. Outsourcers will build the product that you give them to the specifications you ask for, but will they be as committed to making the process more efficient or less costly? Most likely not.  Additionally, bringing manufacturing in-house will allow you to hire, train and retain employees who share your company’s culture and vision.

2. Is Your Vendor Practicing Appropriate Vendor Management?   
Part of finding a good supplier for your company is finding a vendor you trust. If there are distinguishing features for your products that are considered to be proprietary or sensitive, it may not be worth the risk to put that information in the hands of a third party. As new ideas are cultivated, will they only be supplied to you or could that information be disseminated to your competitors too? 

3. Do You have the Ability to Outsource Manufacturing to Multiple Suppliers?
Are you too reliant on one manufacturer to keep your product flowing? Can the manufacturer expand with you both in volume and geography? Only having one or two supply sources can lead to decreased negotiating leverage for your company and increase your exposure to supply chain risk.  Consider whether bringing this manufacturing in-house now will provide you with long-term flexibility, cost savings and lower risk.

4. Do R&D and Innovation Provide You with a Competitive Advantage? 
Bringing manufacturing in-house can provide you with many advantages in research and development (R&D) and innovation. For instance, having your R&D employees witness and work with the direct producers can lead to more innovation and changes because of their closer interaction. Additionally, if being first to market is important, then being able to change something instantly instead of waiting for a new work order and approvals may be vital to the success of your next product. 

5. Is Outsourcing Costing You More?
When your business was less complex, outsourcing may have had its financial advantages (and it still might).  Have you assessed these costs now that your business has matured?  Bringing manufacturing in-house is a significant investment and a strategic decision.  You should have experts provide you with accurate budgeting and estimated costs for key expenses such as these: facility costs (to rent versus buy), human resources (new laborers and supervisors on staff), equipment, legal costs, and finally, financial reporting (segmenting out the manufacturing department to monitor the true cost).

This is not a one-size-fits-all decision; there is no magical revenue target that tells you that you’re ready, or in fact if you ever will be. Many $100M companies would not benefit from in-house production, while the competitive advantage of some $10M companies is sustained only through in-house production. To determine if you are ready to continue down this decision path, start by performing an analysis of these five key questions, then begin to assess which method for moving production in-house makes the most sense, buying or building? 

For more information on this topic or a deeper conversation on manufacturing decisions, contact Matthew C. Vaughn, CPA, Audit Senior Manager, at 617-933-3352 or mvaughn@wolfandco.com