The Right Software Can Minimize the Risks of Outsourced Manufacturing

Abby Jenkins, Product Marketing Manager

June 12, 2020

Nearly all manufacturers today rely on a third party to complete a portion of their business processes.

For most, outsourcing provides the ability to focus more time and resources on what they do best and finding a partner who can fill in the gaps.

Outsourcing can include the warehousing and fulfillment of goods to a third party logistics partner, commonly referred to as 3PL; or using a subcontractor for production. Either method enables manufacturers to focus on R&D, new product development and sales distribution, and can decrease costs and increase efficiency. The use of third-party manufacturers varies greatly from industry to industry, and from company to company. A company may choose to outsource all production, to outsource increased demand around peak sales times or contract out SKUs that require a specific piece of equipment or special handling because of the nature of a raw material.

For small and midsized businesses, relying on a third party is often essential. They don’t have the cash flow to invest in additional equipment or maintenance. Without cash tied up in additional overhead costs, businesses are able to put their resources (production floor, equipment and staff) to work where they are most efficient.

Yet, despite all these advantages, outsourcing manufacturing also comes with risks. Manufacturers often own the raw materials, or components, and then send them to the subcontractor to be assembled and returned. Without a system in place to manage the subcontracted manufacturing process, businesses confront limited visibility and face significant liability. To successfully manage a third-party manufacturing process you must have visibility and control from the time the raw materials leave until the finished goods are returned.

Maintain Visibility - Maintaining inventory visibility is crucial for every manufacturing process and gets more difficult as business processes get more complex—you add more manufacturing locations, warehouses and selling channels. Adding in a subcontractor further complicates the process and makes inventory visibility that much more essential to run your business efficiently and effectively. Without inventory visibility, demand planning and forecasting are left to chance, leaving you with too much inventory, or not enough. NetSuite’s new Outsourced Manufacturing functionality enables companies to proactively manage third-party manufacturing, just as they would products being manufactured in house, ensuring visibility and accuracy at each step of the process.

With NetSuite Outsourced Manufacturing, companies can outsource assembly production to a third party from a purchase order (PO) or a work order (WO), along with build instructions and specific attributes, and track it each step of the way. Including detailed build instructions and the BOM within the PO itself helps you better manage the subcontracted manufacturing processes. At the same time this enables NetSuite to automatically consume production components, ensuring you maintain real-time inventory visibility of parts within your warehouse as well as those sent to a third party, and synchronizes procurement and production transactions, ensuring you have the right products available, at the right time, in the right place.

Communicate Build Specifications - Products and production are often changing—whether it be to optimize a process or substitute a component to decrease COGS. It is important these changes are communicated to production clearly so that products are made correctly and products are not being reworked due to version control issues. This is even more important when engaging with a subcontractor for production. Within the standard outsourced purchase order, manufacturers can include additional specifications, attributes and instructions for the build, helping standardize production processes, cost and quality, regardless of whether products are built in-house or out. After receiving an outsourced item on the PO, NetSuite builds the assembly for the outsourced work order. Assemblies ensure the manufacturing processes you define, such as expected completion time and anticipated waste, are clearly documented and accompany the PO to the subcontractor. Within the PO you can define the following outsourcing details:

  • Assemblies
  • Outsourcing Location
  • Production Start Date
  • Production End Date
  • Bill of Materials
  • Bill of Materials Revision

Understand Cost of Goods - When production is outsourced to a third party, the components are often owned by the manufacturer, but the subcontractor is incurring the cost of labor, the assemble location and potentially some components for the build. Combining all these costs to understand a true cost of goods (COGS) is important for establishing a selling price. The cost of the production charge is the actual charge the contract manufacturer is collecting to perform the build. Each production run uses the charge on the purchase order. A bill of materials is then created to capture final assembly costs, inclusive of the required components and the outsourced production charges, in a single document.

With visibility into the outsourced manufacturing process, you have visibility into production so that you can anticipate completion dates and communicate availability to outstanding orders.

Finally, each contract manufacturing supplier has an “outsourced manufacturing” location created for them enabling you to easily filter and report on production being done in-house and out. This also provides visibility of current inventory positions and supports proper planning for inventory transfers, drop shipments and work orders.

Standardizing manufacturing processes, both in-house and outsourced, increases efficiency and reduces overhead costs. With a system in place to manage your third-party manufacturers, you can take advantage of the benefits offered by outsourcing while minimizing your risks.

NetSuite has packaged the experience gained from tens of thousands of worldwide deployments over two decades into a set of leading practices that pave a clear path to success and are proven to deliver rapid business value. With NetSuite, you go live in a predictable timeframe — smart, stepped implementations begin with sales and span the entire customer lifecycle, so there's continuity from sales to services to support.

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