To produce your sub-assemblies in house or purchase them from an outside vendor. That is a question that OEM Manufacfturers ask themselves constantly. Is there a clear answer? Not really, read on..
The topic of this post states “It’s your choice. As part of the decision making process have you considered all of the factors in your decision? Each company and situation is different but the factors used to make a decision are fairly common. So let’s uncover them.
Buying Sub-Assemblies: The Advantages
Buying from an outside vendor does have it’s advantages.
- No Capital investment.
- Application specific expertise from Vendor
- No raw material inventory to maintain.
- No direct labor required.
Making Sub-Assemblies: The Advantages
Making your own sub-assemblies also has clear advantages
- Production Flexibility
- Not waiting for Vendor lead time.
- Preserve raw material in a non-processed state and producing lower quantities as needed.
- Not paying overhead cost and profit margins as part of the Vendor price.
Simplicity vs Complexity, a sliding scale.
Most decisions are made based on a number of factors. In general our observation is there is a sliding scale of complexity which when all factors are combined, provides a clearer decision making process.
Processing steps: Simple one or two step assembly to complex multi step assembly. For example, measure, cut and strip being one or two steps and terminal crimping being another to form a single wire lead. More complex assemblies include terminal block loading, heat shrink or convoluted tube covering over multiple wires. Producing a complete wire harness.
Capital Investment: Single (cut, strip or crimp) or two stage (cut and strip) processing tools are fairly low cost. Adding additional processing steps like the above mentioned block load, heat shrinking adds additional capital cost. Leasing processing tools through lease to purchasing programs can spread the cost of the capital investment over time.
Volume: Low volume assemblies are easier to make in house as they do not take up a lot of resources, high volume is easier to move to an outside vendor to preserve resources.
Floor space: A few small bench top machines do not take up a lot of space. But consider space for raw materials (wire, terminals, tubing etc..). As the processing steps and volumes increase, additional space may be required.
Labour: Do you have sufficient labour resources to set up, operate and maintain equipment required? Also do you have or can you acquire the assembly knowledge to produce quality assemblies. Are your labour costs higher (or lower) than an outside vendor?
Longevity: What is the life span of the product? Is it sustained long enough to recover the capital equipment costs? Can the equipment be used in a next generation project?
All of these factors can be placed on a sliding scale. For example Capital Investment on assembly processing equipment may be low in relationship to the volume. Floor space may be at a premium as well as labour shortage or required processing knowledge may not be available. If the longevity of the product is high then it may make sense to bring the assembly in house. Conversely if the Capital cost is high in relation to the product life span, it would be better to utilize the existing Capital of an outside supplier.
As said in the beginning, there is no easy answer to this question. But if you consider all of the above factors and place them on a scale from simple to complex, then an objective decision can be made.
Counting the Cost of Quality: The Cost of Inaction
Every Decision has a cost.
Continuing the series Counting the Cost of Quality, we turn from the Cost of Action in Part One to the Cost of Inaction.
So what happens when you do not act? Maintain the status quo. I acknowledge that there are some times in a company’s history when a short term “pause” is needed. Due to uncertain economics or other external conditions. This is different from big picture inaction. In the case of quality, there is no time that a company should pause from improving quality, quality systems or understanding the changing dynamics of quality processes.
… there is no time that a company should pause from improving quality, quality systems or understanding the changing dynamics of quality processes.
In the end all decisions to act or not rest with management. And the implications of the decision (or non decision). Here are a few possible considerations and implications of not acting.
First, not taking the step of understanding the changes in quality processes and the standards that industries are using to validate and monitor quality. This can be as damaging as knowing and not acting.
Some industries are leaders in quality. And what they adopt often become best practices which other industries adopt in whole or in part. They were created for a reason. Not investigating new practices and reviewing the potential use in your organization can be a lost opportunity to become a leader in your industry. For example the Automobile Industry are widely using cross section analysis to validate, monitor and improve quality of connector crimping. With the cost of these systems coming down, it makes sense for non-automotive companies to start adopting cross section analysis.
Not investigating new practices and reviewing the potential use in your organization can be a lost opportunity to become a leader in your industry.
What if your competitor seized the opportunity to implement new quality processes? And their quality improved when they used these new tools. And they broadly publish their new capability to the world. Prompting companies (including your customers) to take notice. You are at a strategic disadvantage when your competitor gets a jump on your company.
You are at a strategic disadvantage when your competitor gets a jump on your company.
Inaction due to the cost of processing tools, systems and training ignores the long term benefit from reduced cost of processing. Scrap and rework costs can eat into profitability. A focus on quality improvement can also help to improve production efficiency.
Employees are watching. Engaging personnel in the process of quality improvement can be positive and beneficial. But when personnel see management not acting, they soon follow and productivity declines. Personnel on the factory floor are looking for individual benefit in the case of working conditions and some level of assurance the company is going all out in their efforts to maintain and grow the business.
Customers are also watching. With domestic and international competitors on your customer’s doorstep, can you afford to not consider new quality systems? And implement them into the company’s culture.
With domestic and international competitors on your customer’s doorstep, can you afford not to consider new quality systems?
Looking at the negative side of this topic is something companies do not enjoy doing. Simply put, ignoring the world changing around you or knowing and not acting is not a good business strategy. And can be damaging or fatal to a company in the long term.
The good news there is always an opportunity to turn the ship around, no matter how big the ship. Today would be a good day to seize the opportunity and start acting!