Many OEMs struggle to decide whether to outsource fabricated parts and component manufacturing. There’s a good reason: the choice involves many considerations, including initial capital investment, capacity, engineering resources, quality control, and more.
That’s why the decision-making process must evaluate the full manufacturing and business implications, not unit cost alone.
Here’s a list of what we found to be the most pressing considerations in the “make internally or outsource” issue.
Total Cost of Ownership
The first question in a make-or-buy analysis is often, “Can we make it for less?” Although that is a relevant question, decision-makers need to dig deeper by making a
comparison between separate relevant, avoidable costs and costs that will remain regardless of where the component is manufactured.
For example, internal manufacturing costs may include direct labour, materials, tooling, machine time, maintenance, setup, inspection, waste management, energy, and additional overhead that can actually be eliminated if production is outsourced.
In other words, the decision should not be based solely on a supplier’s purchase price or an internally calculated standard cost, but rather on which option produces the strongest economic outcome.
Capital Equipment Cost
Manufacturing internally carries significant capital costs if you need to procure the machining and fabrication equipment. A new component may require CNC machining capacity, specialized tooling, fixtures, automation, inspection technology, material-handling systems, environmental controls, and available floor space.
If you are building a component with uncertain demand, a short product lifecycle, or highly variable production requirements, the investments needed to build it internally may be hard to justify. In those situations, outsourcing lets OEMs access manufacturing capability without tying up capital in manufacturing equipment that will be underused in the future.
Even if the equipment can support multiple programs over the long term, outsourcing can still be a wise strategy, as it frees capital for other investments, such as research and development or marketing.
Labour Availability And Technical Expertise
Procuring the best manufacturing technology in the world won’t be of any help if you lack the skilled talent required to operate, program, maintain, and inspect it effectively.
Complex precision machining equipment requires experienced machinists, CNC programmers, manufacturing engineers, quality personnel, and metrology specialists to operate it safely and effectively. Recruiting, training, and retaining those skills can be difficult, particularly when production volumes fluctuate.
Outsourcing provides immediate access to specialized expertise in the disciplines required to deliver high-quality parts and components.
However, some OEMs may worry that moving manufacturing capabilities externally could gradually erode knowledge strategically important to product development and process innovation. We recommend finding a supplier who doesn’t just take parts orders, but acts as a partner who collaborates with your R&D team on product quality and innovation.
Production Scalability
Production volumes can be unpredictable at times. If you have internal manufacturing capabilities, can you scale appropriately during peak times, especially if you have multiple projects running at the same time?
External manufacturers often provide greater flexibility when demand changes unexpectedly.
Some OEMs consider a hybrid approach by using external resources to supplement production. However, this can raise concerns about quality consistency, especially if the technologies used internally differ from those used at the supplier. It may be wise to outsource large programs to mitigate this risk.
Another advantage to outsourcing is that the supplier can spread its equipment and overhead costs across multiple customers, reducing the OEM’s investment.
Consistent Quality Standards
Some OEMs assume that manufacturing a component internally automatically provides better quality control. Although internal production does provide direct visibility into processes, inspections, and corrective actions, ownership of the process does not guarantee process capability.
Precision machine suppliers often have more advanced equipment, deeper machining expertise, and more mature quality systems than an OEM can economically maintain internally. However, OEMs should evaluate any prospective supplier’s process capability, inspection technology, quality documentation, traceability, corrective-action systems, and historical performance.
Read More: What Metalworking Companies Can Expect As Part Of The Arrow Family
Supply Chain Risks
Material availability, transportation exposure, available backup capacity, and more can all affect supply chain reliability without sufficient contingency planning. The hard question is whether your internal team has the resources to make contingency plans when supply chain issues arise.
External suppliers can help in these cases, and if they have proven experience in capacity, resilience, and reliability during a break in the chain, it’s worth exploring a partnership with them. Standout suppliers have large networks and vast resources to augment production on demand, making them true partners in keeping production moving under virtually any circumstances.
Read More: How Arrow’s Unique Business Structure Protects Our Customers’ Supply Chain
When Outsourcing Becomes The Stronger Option
While every make-or-buy decision requires a careful evaluation of the component, production requirements, and long-term business strategy, outsourcing is an option worth serious consideration.
It’s important to note that outsourcing does not mean giving up control. The right precision machine partner should function as an extension of the OEM’s operation, providing consistent quality, technical support, and production flexibility while helping manage capacity and supply-chain demands.
As part of the world’s largest metalworking network, Arrow Machine & Fabrication Group can fulfill all of your manufacturing objectives while helping you optimize costs without sacrificing quality. Call us anytime when you’re planning your next manufacturing project.