How Outsourced Manufacturing Leverages Latent Overcapacity
July 12, 2017 by IDW
Over the past three decades, corporations have relied on moving manufacturing capacity offshore in order to stay competitive. While this has resulted in increased profitability, access to reliable overseas manufacturing was restricted to only the largest multinational corporations. In this article, we’ll outline how manufacturing supply chains have shifted from being available only to the largest, most successful corporations to becoming widely available to firms of all sizes through outsourcing. To do so, we’ll look at how the economics of scale have been commoditized, granting smaller players access to manufacturing, supply-chain, and logistics economies of scale that were heretofore only viable for a much larger multi-national organizations. This commoditization of scale has allowed companies, such as IDW, to restructure not only our manufacturing chains, but also how we design products and tailor them specifically to customer’s needs.
Over the previous decades, only the largest corporations had the ability to profitably access overseas manufacturing. They did this through a variety of different means. In general, corporations would incorporate, or develop exclusive large-scale contracts with, overseas manufacturing facilities. Along with manufacturing, this would necessitate acquiring or forming relationships with transportation and logistics organizations to deliver finished goods to market. Thus, corporations would have a broad system wherein they could design products, manufacture those products overseas, and move those products to market.
This approach, still in use today, has given a number of different competitive advantages. The first is that the scale required to conduct this type of operations has insulated corporations from competition, allowing continued growth and profitability even in volatile world market conditions. This is due to the simple fact that very few competitors have had access to the resources necessary to conduct operations of a similar scale. The second advantage is that it allowed companies to streamline their internal processes, trimming excess where they could to create efficient value chains in their organization. This however, came at a cost. Specifically, in order to properly take advantage of the economy of scale inherent in this approach, companies needed to have extremely large logistics and support services integrated with the organization. This then increased both the scope of their operations, and the cost of producing goods and services.
This approach, taking advantage of the economies of scale to minimize competition, has become increasingly unsustainable over the past few years. Manufacturing, particularly overseas, has grown at such a rate that there exists a latent overcapacity in supply that has begun to be commoditized. This means that rather than forcing companies to incorporate manufacturing plants into their holdings, or force manufacturers to contract production with one large company, they can instead take advantage of overcapacity in the supply chain to contract manufacturing, while manufacturers can take on multiple contracts. Additionally, latent overcapacity in manufacturing has naturally resulted in increased competition between manufacturers, driving prices to produce goods and services down while simultaneously making them more available.
Latent overcapacity exists not only in manufacturing itself, but also in the logistics services required to move your products to your customers. In essence, this allows companies to take advantage of overcapacity to outsource all aspects of the supply chain. The advantage in this is worth diving into. First, it costs significantly less to outsource these processes rather than produce them in-house. By taking advantage of existing infrastructure used to manufacture and move products, companies can reduce overhead costs across the entire value chain. This results in significant cost reductions for the end consumer. The second advantage is that by outsourcing manufacturing and logistics, companies can move resources to other areas such as research and design, customer service and outreach, and quality control. This results in products that are better designed, higher quality, and more aligned with what consumers want all while being produced for far less than they have been in the past.
By leveraging outsourced manufacturing and logistics, companies such as IDW are able to shift their resources and focus into avenues that directly benefit their customers. Refrigeration units can be better designed to cost effectively deliver added value and allowing the flexibility to adapt to environmental and regulatory changes that impact consumers. Additionally, refrigeration units are produced at a higher quality using cutting edge materials and taking advantage of greater quality control. Lastly, outsourced manufacturing allows for closer integration between how goods are produced and the desires of the end consumer. IDW, and others that take advantage of outsourced manufacturing, are able to incorporate feedback more quickly and efficiently into their designs, pushing product updates to market much quicker than was possible in the past. By utilizing outsourced manufacturing and logistics, overhead costs are reduced and the entire supply chain is able to operate more efficiently, resulting in higher quality products that cost less, last longer, and are more closely aligned with what consumers desire.
 Maxwell Wessell, “The Commoditization of Scale,” Harvard Business Review, March 2012: 4.