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When Outsourcing Goes Bad

By Anita LaFond, News Editor, Manufacturing.netBringing back to your facility a process that you have already outsourced is no picnic. More importantly, it often suggests it never should have been outsourced in the first place. Before you take the outsourcing leap, make sure you've covered all the bases.

What happens when you want to bring back a process that you have outsourced?
Jim Tompkins, CEO of Tompkins Associates, is not sure he coined the word “backsourcing,” but it is what he thought of when a client asked, “I need help to bring back a service that I outsourced because I did it wrong in the first place.”
Yes, you can bring back a service into your company, but the procedure is much more painful than outsourcing, and suggests there might have been a problem with the original outsourcing decision.
“One of the biggest problems companies have with outsourcing is that they don’t realize the differences between outsourcing and contracting,” said Tompkins.
For example, most people are familiar with hiring others to do a service for them – such as landscaping. They find three or four landscaping companies, tell them what they want them to do, get proposals, and go with the best one.
“But this is not outsourcing,” notes Tompkins, “it’s contracting.”
So when a manufacturer decides it wants to outsource production of a product because it costings $1.50 per item to make the product in-house vs. $1.00 per item if outsourced, it writes up a contract with the outsourcing provider and leaves it at that.
“But they’ve made two mistakes here,” Tompkins said. “First, the outsourcing contract does not stipulate exactly what the customer expects and what the outsourcer can provide, and outsourcing decisions should not be based solely on the need to save money.”
According to Tompkins, outsourcing is a very serious business and a very involved process. The manufacturer must get requests for proposals; performance measurements; agreements on volume, productivity and materials from the outsourcing provider.
“Both parties can be well intentioned,” cautioned Tompkins, “but the outsourcing contract can still come out wrong.”
What's the “number one” reason why a manufacturer should outsource? When there's too much work to do and it is not getting done, answers Tompkins.
In this case, the ideal outsourcing situation would be taking non-core functions out of the company to utilize the efficiencies of an expert provider. This allows a manufacturer to concentrate time and resources on its core competencies back at the plant.
But this is also the time to “lay the foundation for doing backsourcing, as well,” notes Tompkins.
Market conditions can and do change, and an upsurge in sales, new product innovations or models, and the need to improve customer relations, could warrant the return of an outsourced function.
“And this is where companies get into trouble when backsourcing,” Tompkins said, “especially if the outsourcing wasn’t done properly in the first place. What most companies don’t realize is that they are not in the same position as when the outsourcing was originally done, so you can’t just bring the function back in-house and expect everything to run smoothly.”
The typical company that outsources a function will usually get rid of the machinery that was being used to make the product, throw out the product design specifications and plans, and re-assign or terminate employees.
“Now, if that company wants to backsource the function, it really becomes a problem. They need to buy new machines, get new designs specs, rehire employees, and spend more money to backsource,” Tompkins explained.
Are there any situations when backsourcing makes sense? “Yes,” said Tompkins, “when what comes back to the plant is different from what went out.”
As an example, suppose a manufacturer is making 200,000 widgets per year, but they cannot make them competitively along with their other product lines. This could be because the machinery is too expensive, too labor-intensive, or they cannot afford to hire the skilled workers needed – and the volume of work is too small to justify the in-house expense. So the manufacturer decides to outsource the production work.
“Business is good and now the company has demand for two-million widgets per year,” Tompkins continued. “The manufacturer can afford to buy the expensive machinery and hire the labor needed. So it makes sense for this company to backsource, because what they outsourced is not what is being brought back into the company.”
According to Tompkins, outsourcing is a business practice that has to be continually reviewed and challenged.
“Is it still working for you? Does it still make business sense? Has anything in the market changed to warrant reworking the outsourcing contract – or even backsourcing the outsourced service,” Tompkins said.