Saturday, February 16, 2019

Outsourcing Manufacturing

At times, companies may not have in house capacity to meet 100% of demand of certain aggregates or complete end products of specific model or in specific market segment or geographical location. 
Decision to outsource is governed by many considerations such as:-
1.  In-house capacity constraints
2.  Financial constraints to invest in capacity expansion 
3.  High Cost of shipping & transportation
4.  Product contributions being low in case produced in house
5.  Inability to consistently produce  inhouse high quality products
6.  Better know how & design options available  outside
7.  Economical advantage 

Once decision has been taken to outsource aggregates or complete end product either under company know how or outsourced manufacturer- vendor is to be  identified, technically evaluated, price negotiated and order placed for commencing supplies from out sourced manufacturing facility.

Potential unethical or fraud prone &  suboptimal activities 

1.  Performing Improper evaluation for make inhouse or out source decision vis a vis cost benefit analysis, merit of quality, economies of production, existing  capacity at company end, and recommend out sourcing by suppressing important /material information considering personal interests of inhouse team 
2.  Colluding and making compromise in evaluating target  vendor  vis a vis alternate options w.r.t. following key parameters
a.  manufacturing technology (vis a vis company design & drawings for end product-chosen models) 
b.  bill of materials  
c.  manufacturing capability
d.  quality assurance systems
e.  IT infrastructure 
f.   financial strength 
g.   competency assessment of work men & supervisory team 



3.  Colluding and negotiating  rates with outsourced vendor not at arms length ie neither  at competitive rates wrt other bids nor in cost comparison to similar inhouse  products costs. 
4.  Making non-comprehensive quality assurance agreement (so important for company's brand image) with outsourced manufacturer- vendor, besides commercial term 
5.  Colluding and granting periodic price increases / amendments to out sourced vendor towards his input costs / overheads / fixed costs without detailed costing analysis & supportings
6.  Colluding and making compromises during  quality audits by the company QC team  at various stages of manufacturing at out outsourced  vendor.
7.  Receiving and accepting end product  at  company or company’s warehouse and accepting deviations or at channel partner end directly without conducting inspection.
8.   Delaying timely communication of quality issues, design changes to outsourced manufacturer - vendor vis a vis similar changes at company’s end in case same product is manufactured at company end.
9.  Demanding favours at time of bill passing and payment releases towards end product supplied to company by the  out sourced vendor .