The decision to outsource a part or the assembly is usually based on lack of internal resources; refocus on competencies which are core in the production as well as the cost reduction. The focus of this report is on outsourcing with the objective of lower cost. If someone is attempting to outsource a part or assembly that is custom produced in the house based on the lower cost you must perform an analysis. In many case, cost can only be reduced if the supplier is to use more efficient process or significantly less expensive labor.
One must be very care in the comparison of the prices. This is because the standard cost include the fixed costs, comparing the standard cost with the prices being quoted is not an equal comparison but this is comparison involving two different things altogether. Unless someone wish to eliminate some fixed costs, the only real cost reduction is the variable cost. If the supplier can’t produce the part for a price lower than the variable cost you are offering them, then this means that you are not saving the finances of the company.
If someone is in the process of outsourcing a part or an assembly in an effort to reduce cost, then one should be searching for a supplier who can produce a part using a more efficient technology or methods than the ones you are producing the same products at. This may mean that they will be able to produce the part faster or may be able to produce the product at a low cost of labor than you could. Even after addition of the overheads and the profits. It is possible that the supplier can produce the product at a lesser cost than you could have produced it in your company.
Organizations usually compare the standard cost as determined by the cost accounting with the prices a supplier is quoting in order to make a decision on whether to buy or make the product. This is however mostly a false. The standard cost will is inclusive of the fixed costs that will continue to be part of the operations whether the product is manufactured in the company or bought from other sources.
In many cases the cost of the supplier will be lower than the cost incurred in production of the product locally in the company. The reality is however that the overall costs of the company and the costs will be spread over a smaller number of units after a part is outsourced. This will have an exception in the event when the company shuts down some of the operations it is involved in. this will consider in outsourcing of the entire operations of the manufacturing; in this case a portion of its fixed cost performed to determine if this is a case
A detailed analysis to be conducted if this is really the cost.
To determine if lower cost is are possible by the act of outsourcing the buyer must consider all the relevant costs in detail. The major factors that will have influence on whether or not to lower cost can be achieved by outsourcing processes and the cost of labor.
If the supplier can produce the product with better means it will be most probable that he can as well be able to produce the product at a cheaper cost than your company could. If the supplier can also lower labour cost consequently it will also be possible that he can produce the part at a lower cost.
If none of these possibilities are true, then one should be skeptical that a lower that if lower costs are offered by the outsourcing process. The suppliers must have some benefits which are build in their prices. Given the following facts, if a similar process is been used similar processes in terms of labor pool in where one is in. there is little will to save your company labor pool. This will most unlikely be one will save you individual by outsourcing parts currently manufactured in your company will save the company money.
We consider a company like Firebird that is would like to outsource some its products instead of producing them locally. In order to make an informed decision the company considered its books of accounts and compared the manufacturing cost with that it obtained from the journals for the cost of purchasing the product from other companies.
The companies demand was estimated at 250000 units per year. The cost of purchasing was $790,000 inclusive of all the inspection and processing costs. This cost is far much less than the cost that the company would incur if it was to produce the products within the company.
When producing the products a lot of costs are incurred in terms of overheads which include the labor cost, material costs, transportation cost and the profit margins. It consumes a lot of time as well therefore it is advisable to make use of the outsourcing since it more economical.
When established companies like the Firebird consider outsourcing there are some social costs that will be attached to it this include. Key among the social cost is the lost labor service chances. Outsourcing only requires little labor and therefore many people who could have provided labor in the production are rendered jobless.
This means the money which could have used to pay them is channeled elsewhere and they never benefit from it. It means that they don’t get their living standards will be affected because they do not benefit from the money.
On the other hand the company saves a lot in terms of the money that would have been used to service the process of production and therefore it can invest the money in other projects which can also benefit the people working in the company.Pollution is reduced if the company chooses not to produce the products. This helps the society considerably since pollution from industries has been a major challenge to the environment.
In the selection of the suppliers a good research should be conducted to make sure that one chooses the best supplier. Obviously, the supplier should be able to produce better products than the outsourcing company. The prices should be considerably different. This is because the main aim of outsourcing is to ensure that the companies save money in terms of the spending.
There production should also be very convenient in terms of the time taken to produce the products. It should take reasonable time to produce which should be less than the one taken by the purchasing company, one should select a company that is superior in many ways in the production of the product this to ensure that it feels safe in serving of its clients.