Thursday, March 21, 2024
We’ve been given more column inches in trade media recently, with magazines covering news that we have invested £500k in relocating our Gemmak Engineering Ltd. fabrication business to Swansea from an original building next to headquarters here in Pyle, Wales.
Journalists reminded their readers that we bought Gemmak back in February 2019 with a two-pronged strategy to onboard a machine shop and gain valuable land. Such purchases — and this one was no different — are always celebrated by the businesses involved. The buyer sticks out their chest and the seller puts the cash in their pocket just as proudly. In turn, the headlines of subsequent coverage reflect the win-win situation, congratulating all involved.
The reaction is often the same when a company expands, adds a division, brings a manufacturing function in-house, or opens a new facility. However, it’s important to only engage in this activity if there is a good reason to. I want to point specifically to bringing (keeping) certain functions in-house, because that is largely what our Gemmak purchase was associated with, much like our recent expansion.
Game of percentages
Insourcing and outsourcing are words most often heard in large boardrooms and C-suites, but any business can — and should — constantly analyse the functions needed to deliver services and how they are completed.
Even a one-person start-up must consider if it makes sense for the owner to do 100% of the work, outsource, say, 20% of it, or bring in an employee on a part- or full-time basis. The larger the company, the more those percentages, costs, and outcomes are demonstrable. At the largest corporation level, these decisions equate to millions.
That said, while there are many complicated equations that can be applied at nearly every turn in the business world, many of them should be avoided. If a company adheres to simple principles about margins and culture, it should never stray into rocket science.
Continuing or starting to do something in-house might be the sensible, profitable thing to do; and continuing or starting to outsource might lead to the healthiest bottom-line situation as well. It depends. Good businesses probably do a lot of both. And good businesspeople always choose the smart option that leads to the best, long-term, situation in terms of profit.
In-housing
There are several good reasons to insource or retain production in-house, whether that be by continued investment, acquisition, or other means. Keeping my guidance as generic as possible, I’ve chosen four:
- Control
It goes without saying that if something is part of an operation, that business entity gets to control it, within reason. That’s hugely beneficial, especially under dynamic, nimble leadership. If an order comes in and spontaneity is required, a positive reaction can be taken. Quick decisions can be made to add or take product lines. A change of mind doesn’t mean negotiating to get out of a contract.
- Economics
If a business can manage materials, manufacturing, production, etc., and create the finished product or service themselves, a favourable situation is created in terms of profit because a further bill from a third-party doesn’t need to be factored into the equation. This is extremely important in a world where supplier invoices are only heading in one direction and it’s impossible to pass it all onto the supply chain and the eventual point of use.
- Volume
How much a business produces often has a direct impact on revenue. In other words, the more work you get, the more often you get paid. When a business holds all of its own tools, it can put them in the hands of more people or run the machines for longer. It can react immediately to demand. There are only a limited number of third parties than can provide the same services to multiple businesses. If there is a peak, everyone wants the same thing, yet the recipient of the outsourced work can only do so much. If an industry backlog forms, those with in-house capabilities win — and win big.
- Capacity
When I talk about insourced capacity, I mean the knock-on benefit of a large in-house operation. Think about it in terms of Gemmak. We can fabricate anything metal, using the latest design, cutting, and welding technology, thus, presenting us with all of the benefits above (control, economics, volume). But we can also leverage the land and other facets of the business to generate additional capacity. Lots of in-house functions work the same; a big part of success can be attributed to the versatility of an organisation.
Outsourcing
On the other hand, there are equally good reasons to outsource. Again, I’ve chosen four:
- Expertise
A person can only know so much or possess so many skills. The knowledge required for growth might not be readily available in terms of recruiting a person or entity, so utilising external expertise may be the best or only option. Access to such professionals is often at a premium and reserved only for the most ambitious of gazelle-growth businesses.
- Brand
If you sell or resell a particularly popular brand or product, it might not be possible to insource to the same level. People buy what they know and like, so if a loyal customer has been buying, say, a brand of tyres to the tune of 100 units a month, it’s unlikely they’ll consume the same volume if they were replaced with an alternative produced in-house. Chances are, they’d still buy 100 units of their favourite brand but source them elsewhere. Or they might only try 10 of the new type.
- Network
Access is important in business, whether it be to prospective customers, knowledge, or other outsourced supply lines. Working with specialists opens pathways for an organisation. It’s unwise to be too insular and reject outside influence. Often, the elements of a company that are outsourced create the most opportunity; they’re an investment not a cost.
- Scale
Sometimes, the largest items on a manufacturing line are the most expensive and they can create the best margin. However, owning the machinery and engineering capability to produce them is unlikely to be practical for a business largely asked to deliver smaller items and offer a wider portfolio. If a business wants to maintain breadth of offering, including the top or high end of a market, outsourcing is a must.
Home and away
If we think about a company’s in-housed and outsourced functions in terms of an old fashioned pie chart, consider that the sizes of the slices don’t need to stay the same. As a business evolves, it will likely outsource more of some things and less of others. There may come a time where an outsourced production process is brought inside the walls and another one farmed out. Timing is important, but that’s the case with so many facets of life.
As I said, good businesspeople always choose the smart option that leads to the best, long-term, situation in terms of profit.
The goal isn’t to in-house or outsource; they’re just definitions of different types of production.
And remember, insourcing and acquisitions should never be vanity projects.
Steve Hutin
Managing Director
Rope and Sling Specialists Ltd