Contract Manufacturing Vs In-House Production

Type the above title in google and you will find no less than a million results relating to the topic. This is a topic which companies need to access if they are looking into having their own brand of lubricants, or already have their own brand of lubricant but looking for expansion into a region where they do not have a manufacturing plant.

Not all products can be outsourced to a Contract Manufacturer (CM) due to the “transaction cost” but Lubricant for sure can be outsourced.

Depending on the various stages when companies made the comparison, they might come to different conclusion. Instead of going into the Pros and Cons of CM vs In-House Production, which you can easily find in the web, let’s talk a bit on what are the considerations for companies who wanted to explore these options.

At the infant stage

When we considered a newbie wanting to venture into the lubricants business without much know-how and expertise, their key considerations would be:

i) Economies of Scales

Without sustainable production volume, you will not be able to negotiate with your supplier for better raw material costing and end up your product would be costly

ii) Production Knowledge

Looks easy, but producing lubricant is a task that required knowledge, from setting up the plant, to monitoring the production, to ensuring the quality. The worst thing that can happen is the tarnish of your brand when an inferior product went into the market

iii) Overhead

Other than the set-up cost and the labor cost can come up to a substantial amount. There is a need to consider the ROI (Return on Investment) and the time frame of return for this investment.

At the Growth Stage

Companies who are growing, be it locally or overseas, might be looking for options to increase their production capacity to cater to the increasing demand. Or they might be looking at producing nearer to their main market to reduce the lead time. In which ever case, some of the key considerations include:

i) Cost of Investment vs Scale of Increase

There is a need to consider whether by setting up a new plant, the capacity can fully utilize. If the surge in demand is cyclical and you are looking to solve the temporary surge, then a CM might be the option.

ii) Trustworthy Partners

Many CM might turn into your competitor, there is a need to evaluate whether the CM that you are going to engage is a trustworthy partner. There are many ways to work around this, such as passing only the “common” product to the CM and keep the high-tech product in house. There are many other ways

In conclusion, as cited by Ben Gomes-Casseres, “The burden of manufacturing maybe shifts to an outside company, but the responsibility for managing the supplier and for ensuring quality doesn’t budge”

Talk to us and let us guide you through this process!