The Outsourcing Of An Entire UK Manufacturing Operation To Low
Cost Countries
Background
A UK manufacturer of branded goods for the building products retail market was experiencing
significant erosion of the price that was being paid for their product as well as their market share
was coming under attack from cheap imports from deep water sources.
The company was the clear branded market leader with a premium priced product portfolio and a
market share of around 93%.
Although they held a significant market share and commanded a premium price, the product
offering was manufactured to a poor standard and was aesthetical unpleasing, prone to rusting and
with an unacceptable returns rate. These problems were predominantly related to poor and
outdated production practices, the tooling and machinery being poorly maintained and a process
that require a high level of manual intervention that attracted an unsustainably high production
costs. They were also experiencing increases in labour and overhead costs, rising raw material
pricing and the expiry of their patent design.
The company was PE backed and the investors were unwilling to invest in new capital equipment as
they were actively looking to sell the business.
The Scale of the problem
Highly seasonal product – 75-80% of sales were typically within a 4 month window, dependant on
weather
In excess of 7,000,000 items sold per annum
15 Staff
60 Production operatives – including a level of temporary/seasonal resource
No outsourcing experience or expertise
Poor tooling and equipment
Patent expiry
Increased competition from imported products
Downward price pressure from major customers
The Solution
The business engaged with Outsource Reality’s Purchasing and Manufacturing consultant to manage
the total process and to deliver a robust and cost effective solution that met the needs of the
business and its customer base. He embarked on a ‘Make or Buy’ project to assess the potential of
the existing manufacturing operation and to investigate an option for outsourcing some or all of the
production to low cost countries.
The existing manufacturing operation was found to be poor, with machinery and tooling in a badly
maintained condition which in turn led to poor product build and quality. The coating process was
inade
quate, with little or no pre-treatment and substandard coating finish. Process flow within the plant
could be markedly improved and inventory levels could be better managed to reflect the seasonality
of the sales cycle.
However, even if all the areas for improvement were addressed, the financial benefit would have
been minimal when compared to outsourcing to China and India. Therefore it was accepted at an
early stage that the focus would be on an outsourcing option.
The profit improvement opportunities of outsourcing can be significant, however the key to success
is always to balance any profit improvement opportunities against the risk involved.
The simplified outline of the process for the project was:
Initial review of Business requirements – The intention was decided to eventually outsource all
manufacturing to at least two supply partners in different territories with an aim of reducing the
inherent risk. This was planned to take around 2 years and the UK operation would stay operable
throughout this period.
Initial review of potential suppliers – it was decided to focus on suppliers who had already had
knowledge of manufacturing this type of product, so a selection of suppliers was drawn up from
China, India, Ukraine and Slovakia. The process also allowed for the business to partner with
companies that were actively targeting their market share, thus eliminating much of the
competition.
Send out RFI, RFP and RFQ – the selected suppliers were sent a RFI and then a subsequent RFP. A
first cut was made against the information provided and the remaining six suppliers were asked to
provide a quotation for a mixed basket of products. From this initial selection process two Indian
and two Chinese emerged as the main potential supply partners and they were asked to quote on a
much larger basket of products.
Initial Supplier Visits – both potential suppliers in both India and China were visited to assess their
capability to become a long term supplier. Detailed visit reports and appraisal/assessment
documents were drawn up and presented to the Board for approval.
Commercial review – Following the site visits pricing was submitted and a comparison was
produced. One Chinese supplier was discounted due to large discrepancies in the pricing and a
reluctance to provide a detailed cost breakdown. A full commercial analysis was conducted, using
the in house production costs as a baseline comparator.
Second review – in country - The initial finding were encouraging so a second round of visits took
place to extract maximum value and to finalise pricing for a fixed period of time. The finalised
pricing delivered annualised savings of £1.1m which were made up of:
Manufacturing Savings
£794k
Product Cost
£250k
Depreciation
£179k
Transport
(£204k)
Insurance
£50k
Other Overhead
£99k
Agree contracts & place Orders – Robust and meaningful contracts were established with all parties
that reflected the intended trading relationship and that clearly defined how the parties would
conduct business. All commodity pricing was tracked and agreed trigger points were established to
review any significant fluctuations. This open and honest approach led to all suppliers agreeing to
trade on open term rather than the traditional letter of credit method of payment; this approach
was almost unheard of and benefited the cash flow of the business tremendously. A level of risk
mitigation was also built in so that no supplier had access to the production drawing and tooling for
any more than 60% of the product portfolio.
In Conclusion
After only 8 months the decision was made to totally close down the UK operation, 16 months
ahead of planned schedule, with all products to be outsourced from the preferred suppliers. The
closure was handled very professionally with consideration and compassion.
This hugely successful project provided the business with a strategy and solution that maximised the
financial benefits by adding £1.1m to the bottom line whilst minimising the associated risks that are
involved in this type of outsourcing initiative.
However outsourcing the manufacturing operation should only be seen as being a first step, as this
must be an on-going process that will monitor and benchmark the benefits obtained to ensure that
they continue top obtain the savings in cost and efficiency that had initially been achieved.