In-House Production vs. Outsourcing: Weighing the Pros and Cons

Production sourcing is an important strategic decision that influences nearly every aspect of business performance. Organizations have three main options: They can keep production in-house, controlling the process from start to finish; they can contract with one or multiple external partners to produce their goods and meet stipulated service levels for product quality, delivery, and other factors; or they can opt for a combination of the two.

Each method offers benefits but also carries some risks that will need to be managed. Over time, selection may need to change as business needs and marketplace conditions evolve. Leaders should prioritize making informed decisions that keep manufacturing goals in mind before determining whether in-house, outsourcing, or a hybrid approach is best suited to their aims.

What Is In-House Production?

In-house production is an approach in which a company fully operates and controls production. The company uses its own facilities, machinery, and personnel for all facets of manufacturing, including sourcing raw materials and parts, product assembly, quality control, and packaging.

In-house production—also referred to as internal production or insourcing—can shorten lead times and boost market responsiveness, as compared to the results of outsourcing manufacturing to third parties. However, it can also be more expensive in multiple cost categories, which is why companies rarely practice 100% in-house production. Automotive, aerospace, and semiconductor manufacturers typically maintain significant in-house production to exert greater control over their supply chain and manufacturing processes.

What Is Outsourcing?

Outsourcing refers to the offloading of some or all aspects of a company’s manufacturing to a third party. Reasons for doing so include labor arbitrage, on-demand scalability, and the opportunity to focus on other aspects of the business. However, it also means the company has less control over its production processes.

Certain manufacturing sectors, including electronics, technology, and apparel, are known for outsourcing significant portions of their production processes to reduce costs, take advantage of specific manufacturing capabilities, and focus on other facets of their business.

Key Takeaways

• Companies have a trio of production options: Keep it in-house, outsource to third parties, or take a hybrid approach.
• Each method has inherent pros and cons that depend on available time, money, and resources a company.
• Leaders must consider the benefits and risks of each approach in relation to company goals and marketplace trends.
• The resulting insights can also help the company mitigate associated risks, set up good relationships, maintain ongoing quality, protect their brand, and preserve customer trust.

In-House Production vs. Outsourcing Explained

In the early days of manufacturing, companies typically produced everything internally; the infrastructure or technology advancements needed to support outsourcing simply didn’t exist. However, as transportation and communications technologies advanced, outsourcing some or all of a company’s production to third parties became a viable option. By the latter half of the 20th century, Western companies were also outsourcing manufacturing to companies in developing nations with available production facilities offering the same or a better level of manufacturing prowess at much lower costs than in-house efforts.

Today, the choice between in-house production and manufacturing outsourcing is more a matter of what makes more sense for the business. Some companies prefer keeping production in-house to limit their reliance on third parties to meet their customers’ needs. Doing so can shorten production and shipping timelines and allow for higher levels of customization. Conversely, other companies see significant benefits in outsourcing some or all of their manufacturing processes to other entities offering more advanced capabilities, cost-efficient processes, or both. They may also opt to offload production to focus their own efforts on other business priorities, such as strategy or customer experience.

The ultimate decision will vary by industry and company—and it can change over time, depending on market conditions, business strategy, geopolitical issues, and other factors. But what doesn’t shift is the significance that the outsourcing versus insourcing decision can have on a company’s performance.

Pros of In-House Production

Seventy percent of organizations have brought previously outsourced work back under their own roof, even those that were highly satisfied with their outsourcing relationships, according to Deloitte’s “Global Outsourcing Survey 2024.” The following benefits, partially reflected by the survey, highlight key advantages of in-house production.

Tighter Control Over Production Process and Quality

In-house production lets companies directly manage every stage of manufacturing. If a manufacturer wants to change a product or production process or needs to troubleshoot a sudden issue, it can do so right away. In-house production also makes it easier to manage product quality and quickly intervene with immediate adjustments.

Greater Protection of IP

Maintaining production in-house keeps valuable intellectual property (IP), such as product designs or production processes, close to the vest, thereby reducing the risk of IP theft or misuse. This benefit is particularly important for companies whose proprietary technologies and trade secrets are central to their competitive advantage in the marketplace.

Increased Innovation

Keeping production in-house can foster greater collaboration among R&D, manufacturing, and marketing teams, paving the way for more frequent experimentation, faster product iterations and development, and more efficient problem-solving. Having this kind of synergy and collaboration in one place can also promote a culture of continuous manufacturing innovation, in terms of both products and processes, which can yield better goods and faster time to market, bolstering a company’s competitive stance.

Enhanced Reputational Control

Opting for internal production helps companies develop and maintain high standards for product quality, reliability, and even security and confidentiality, which can elevate its brand’s reputation. It also builds trust among customers and partners. In-house production means that the company never has to cede reputational control to third parties or suffer the brand consequences if their outsourcing partners fail to perform.

Improved Employee Morale

When production is insourced, manufacturing employees often feel more ownership in the process. Seeing how their hard work has a direct impact on company success can boost their engagement and morale Manufacturers can underscore this benefit by recognizing employee contributions and offering them opportunities for skill development and growth, which can result in lower turnover and greater productivity at a time when skilled manufacturing workers are in short supply.

Cons of In-House Production

The negative aspects of internal production may not be a reason to rule out insourcing. But the drawbacks should be understood—with plans in place to minimize them—should a company decide that the ends justify the means.

High Investment Costs

One of the most obvious—and often off-putting—downsides of in-house production is the up-front investments required for infrastructure, equipment, and skilled labor. These capital expenditures can be significant and even out of range for startups and small businesses. The ongoing costs of internal manufacturing, including expenses related to maintenance, energy, IT services, cybersecurity protection, and regulatory compliance, must also be considered.

Scaling Limitations

Expanding or contracting capacity to meet changes in demand can be expensive, complex, and time-consuming when production is handled in-house. For example, scaling up might require leasing more space, buying additional equipment, and hiring or scheduling more workers, which takes both money and time. Responding rapidly to market changes or demand shifts also becomes more challenging, causing companies to either miss out on new opportunities and top-line revenue or to overspend on unneeded production capabilities, hurting the bottom line.

Specialized Talent Requirements

More than 40% of US manufacturers anticipate an increase in full-time hiring over the next year, according to the National Association of Manufacturers’ fourth-quarter “2024 Manufacturers’ Outlook Survey,” and attracting and retaining a quality workforce remains a top-four concern. Indeed, in-house production necessitates a skilled workforce trained in specialized processes and advanced technology. These workers can be hard to recruit and retain, and they require ongoing training and development. As such, companies that plan to perform their own manufacturing must devote the resources necessary to meet these conditions for retaining specialized talent.

Pros of Outsourcing

Despite the recent surge in insourcing, investment in third-party outsourcing continues to grow, or at least remain the same, among 80% of companies, according to Deloitte’s global survey. Outsourcing offers a handful of significant business advantages.

Access to Specialized Talent

Outsourcing production can provide manufacturers with access to a broader, global source of skilled workers with deep expertise in particular production methods, technical capabilities, quality assurance, or compliance standards. This mastery can result in fewer cost-draining errors, higher-quality outputs, and increased manufacturing innovation. It also frees the manufacturer from the time-intensive responsibilities of having to recruit, hire, train, and retain talent for their production lines.

Lower Investment Costs

As mentioned earlier, building or expanding production facilities, buying machinery and other equipment, and hiring full-time staff involve significant capital expenses—not to mention the ongoing expense of maintaining facilities and equipment, paying for energy costs, and other recurring costs. By outsourcing, companies avoid these financial outlays by paying outsourcers for the production capacity they require, thereby transforming what would be significant fixed operating costs into variable costs. Taking the outsourcing route also frees up capital to invest in other areas of the business that may hold more strategic value, such as R&D or market expansion.

Easier to Scale

Seasonal dips or spikes, expansion into new markets, the introduction of new products, and other dynamic issues can create shifts in demand. Outsourcing companies are often better able to scale up or down to handle these changes than in-house manufacturing teams. That’s because outsourcing businesses usually maintain flexible infrastructure specifically designed for variable workloads, allowing them to adjust production volumes as needed. They can also leverage economies of scale, broader supplier networks, and specialized expertise without incurring significant new investments.

Smarter Resource Allocation

Keeping production in-house can be a competitive differentiator for some businesses. But it’s not necessarily a core competency for others. For the latter, outsourcing can free up internal resources, such as time, money, and attention; those resources can then be used for more strategic functions, like product development, customer experience, strategy setting, and brand building. Handing off production challenges to a better-suited partner not only improves production efficiency, but it also empowers companies to channel efforts behind greater strengths.

Cons of Outsourcing

Outsourcing the complexities of production can be alluring. Lower costs, better quality, increased focus—what’s not to love? But there are drawbacks to this type of outsourcing that companies must consider before contracting out.

Risk of IP Theft

When a company outsources production, it will need to share its proprietary product designs, processes, and technologies with third parties. The risk is that these partners may not have appropriate IP protections in place, thereby increasing the chances of IP leakage or theft, especially if they operate in a country with weak IP laws and enforcement. In worst-case scenarios, it can lead to the creation of similar products by the outsourcer, its employees, or whoever else gets their hands on the IP. So it’s essential to conduct due diligence and put appropriate guardrails in place regarding IP protection.

Weaker Quality Control

Ceding control of manufacturing processes to outside providers can be a particular challenge with regard to managing production quality. External manufacturers may not meet the quality standards desired for the project or be as invested in the details as an in-house production team. This can result in product defects, increased costs associated with rework or recalls, and unhappy customers. When they lack the advantage of direct visibility into day-to-day quality management, companies must seek out reliable partners that can meet their expectations, conduct regular audits of third-party processes, and establish clear remediation processes.

Reputation Vulnerabilities

A company may be able to outsource production to a contract manufacturer, but it never outsources responsibility for poor product quality, unsafe or unethical labor practices, or sustainability issues. Customers, investors, and strategic partners alike will hold the product company accountable for such lapses, which may land a direct hit in the form of reputational damage and loss of trust. Some companies, for example, have had to face costly product recalls when outsourced manufacturing resulted in safety hazards. Similarly, businesses have suffered significant public backlash when their manufacturing partners were found to employ unfair labor practices.

Communication Limitations

Working with third parties on production can be stymied by a variety of communication issues caused by language, cultural, and time-zone barriers. These issues can lead to misunderstandings, inefficiencies, and delays that can impact product quality and lead times, eroding the outsourcing relationship. Even in nearshore and onshore arrangements that keep production closer to home, issue resolution still requires additional effort and communication.

Considerations for Picking a Production Method

The choice between in-house production and outsourcing to a third party involves careful review of both their pros and cons but also the weight of that choice within the contexts of the company, industry, and marketplace trends. Business should address the following key questions during the decision-making process:

• Will production operations need to rapidly scale or adapt to market conditions? The ability to alter production volumes is important in volatile or growing markets. In-house production may offer better control when making rapid changes, provided a company has the capacity to accommodate those changes. If not, a third party with flexible, scalable production facilities and processes may be the answer for a swift and more cost-effective response to shifts in demand.
• Will this production method allow my business to focus more on achieving our goals? As with most significant business decisions, production strategies should be rooted in the company’s strategic goals. If any aspect of strategy relies on manufacturing as a core internal competency—say, if close collaboration between R&D and in-house production teams is required—then in-house production may be the right option. On the other hand, companies that don’t view manufacturing as a core competency find that outsourcing enables smarter allocation of time, talent, and money to more strategic functions.
• Will I need access to specialized machinery or experience to create my product? This is an important question for any company, particularly resource-constrained startups or small businesses. Third-party manufacturers combine the latest equipment with specialized expertise to handle complex or precise manufacturing requirements. And as manufacturers become increasingly reliant on AI and robotics for a competitive edge, companies without in-house adequate expertise may find themselves at a disadvantage. Indeed, “AI/machine learning” and “robotics/automated” were cited as the top two technologies that would have the most significant immediate impact on manufacturing, according to West Monroe’s “Future of Manufacturing: 2025 Outlook” report.
• Would this production method sufficiently protect my company from IP theft or security breaches? In-house production offers strong intellectual property protection through limited access and direct cybersecurity oversight. But this advantage alone may not be enough to rule out contract manufacturing, especially since reputable third-party manufacturers often invest heavily in security protocols and IP protection to maintain customer trust and competitive positioning.
• How frequently will I need to iterate on my product? If a company anticipates making frequent design changes to its products, then having direct in-house control of production methods may make more sense as a way to eliminate lag time. Outsourcing’s inherent communications issues may also come into play. That said, if a company anticipates ongoing product iterations and is leaning toward outsourcing, it should seek a provider that can work closely and collaboratively on R&D.
• What kind of technology would this production method use? The technologies involved in production—such as AI, automation, robotics, Internet of Things, and advanced analytics—directly affect quality control, adaptability, integration with other parts of the business, and cost structure. For manufacturers seeking to drive innovation through rapidly evolving or leading-edge technology, in-house production may facilitate quicker or easier implementation and more direct oversight during new technology integration. On the other hand, working with an external provider opens access to more specialized technology infrastructure and expertise without a significant upfront investment. This particularly helps when the required technology is not core to the business or is prohibitively expensive to develop internally.
• Am I satisfied with the quality control of this production method? When a company outsources production to a contracted manufacturer, it loses direct oversight over quality-control methods. And if the provider operates halfway around the globe, the ability to conduct frequent audits is also limited. Therefore, it’s important to assess an outsourcing provider’s quality-control methods and integrate adequate product-quality service levels into the contract. If a company wants more direct control over product quality methods, internal production would be the better choice.
• Are there any risks associated with moving forward with a production method? As previously noted, internal production often requires hefty up-front investments. Should the business need capital for other needs down the road, its hands may be tied. But outsourcing manufacturing to a third party also carries risks, outlined in previous sections, as well as ongoing peripheral concerns such as problems at the provider’s facilities or geopolitical disruptions. Taking a clear-eyed look at the likelihood of risks and developing contingency plans can help clarify which production method will work best.
• Are there cost benefits to going with one production method over the other? Profit margins in the manufacturing industry are often slim; therefore, costs are a significant factor in decision-making. Bearing in mind the limitations of a manufacturer’s budget, leaders should analyze the total costs involved in each production method to determine how they compare. They should also assess where costs fall in relation to the company’s strategic priorities.
• Does this production method work with my production timeline? An effective in-house production approach can shorten production timelines and get products to market faster—assuming that internal facilities and processes are up to the task. An outsourcing partner also may be able to meet production turnaround requirements, but it’s a good idea to confirm its adaptability for schedule or demand changes.
• Is this production method aligned with my company’s vision? Production performance has a huge impact on nearly every aspect of a business from financial health and market positioning to customer experience and regulatory compliance, so it’s critical that the selected production method aligns with the business’s overarching strategy and vision. The manufacturing approach (and, if used, third-party providers) should support or advance long-term goals, short-term needs, product-quality expectations, and brand values.

Hybrid Approaches to Production

Selecting a production method does not have to be an either-or affair. Companies may utilize a hybrid production strategy that combines some in-house manufacturing processes with outsourcing. This model lets companies enjoy the best of both worlds in ways that add value, align with overall strategy, and flex with demand. Scenarios might include:

• Outsourcing complex or highly specialized facets of production to third-party experts, while keeping core or proprietary processes in-house for increased control or better quality.
• Using in-house production for day-to-day, stable manufacturing output, but outsourcing to scale during peak production periods or sudden bursts of demand.
• Maintaining business-critical or sensitive operations internally for greater IP protection, while outsourcing the more standardized aspects of production that don’t involve sensitive data or valuable IP.
• Outsourcing labor-intensive or non-core activities for greater cost savings so that in-house manufacturing capabilities can be devoted to areas that promote competitive advantage.
• Keeping direct oversight of elements that impact product quality by performing them internally while outsourcing more routine or high-volume work to reliable external partners.

NetSuite for Manufacturing Enhances Production Control

NetSuite for Manufacturing ERP provides a centralized system for coordinating, controlling, and optimizing all facets of production. The cloud-based platform has features that support all possible production methods, including multi-lingual and multi-currency support. NetSuite’s robust supply chain management capabilities also enables monitoring and managing outsourced manufacturing processes as if they were their own. Companies preferring in-house production can take advantage of procurement, planning and scheduling, shop floor control, and quality management modules. Order management—including intelligent automation of order processing, allocation, orchestration, and execution—and CRM/marketing capabilities round out the platform, helping manufacturers anticipate demand, fulfill orders, and keep customers satisfied.

As with many major decisions, choosing between in-house manufacturing and outsourcing comes down to weighing the pros and cons of each approach, viewed within the context of what makes sense for the company. It’s also about reevaluating whether the chosen method will still work as a business grows or the marketplace changes. By asking purposeful questions about production flexibility, cost structures, and quality-control needs, companies can identify the approach that best aligns with both their operational capabilities and their long-term business vision.

In-House Production vs. Outsourcing FAQs

What is the difference between in-house and outsourcing?

In-house and outsourcing are two different approaches to manufacturing. With in-house production, a company makes its own products, which offers greater control but also requires significant up-front and ongoing investment. Outsourcing means offloading some or all aspects of manufacturing to an external provider, which may afford less control but can cost less, provide access to specific expertise, and offer on-demand scalability.

When should a firm outsource instead of making the items in-house?

A company might choose to outsource manufacturing rather than keep production in-house for several reasons. Doing so may be more cost-effective, offer more specialized capabilities (facilities, machinery, or skills), free a company to focus on other core capabilities, or improve quality or efficiency. Ultimately, the decision depends on the overarching strategy of the company and its priorities for manufacturing.

When shouldn’t you outsource?

While it’s hard to make blanket statements about when to outsource production, certain scenarios might suggest situations where contracting out manufacturing would not make sense. These include the company’s desire for direct control over production processes, stringent product-quality standards, the involvement of sensitive IP, the desire for tight R&D/production integration, or the need to meet strict ethical, environmental, or labor standards.