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Choosing a manufacturing strategy

As an entrepreneur you might not be thinking at a manufacturing strategy, but the make or buy decision should be on your list even from the beginning. You should do what you can do best, and outsource the rest without complicating to much and taking into account that transactional costs are not something to ignore.

Insourcing costs include property, plant, equipment, associated taxes and depreciation but also materials, labor and utilities. And, it’s never easy to organize production and to be as flexible as contract manufacturers that excel at this. If we don’t consider the dependency relation with the manufacturer, of course there are also costs to consider when outsourcing, and they grow in size to match your business size.

You have to deal with transaction costs, oversight challenges, recalls and labor abuses. Transaction and oversight costs will be a real burden on your business if you choose to work with various manufacturers in various locations and give lots of control over the production and delivery. Dealing with recall will basically mean replacing faulty products and losing money since you are not the producer and you will be held accountable by justice and public opinion for labour abuses if the products bear your logo.

There are 5 potential manufacturing strategies to employ:

  • ship-to-stock strategy (full anticipatory) – build and distribute products in advance of demand. Everything sold in common stores follows this scenario;
  • make-to-stock strategy – buy materials and make products in advance but don’t distribute until customer order is received. You don’t ship until you get an order, you get by with less inventory  but the customer will have to wait.
  • assemble-to-order, configure-to-order, mass-customization strategy materials are procured in advance and products are semi-finished. This is what happens when Toyota does mass customization.
  • make-to-order strategy – raw materials are on hand but not assembled until customer order is received. As a customer one should be prepared to wait. Yet this allows for greater variation with less materials, if the case is that you are buying a Bugatti.
  • buy to order strategy – raw materials are not purchased until customer order is received. The producer does not commit at anything at first – eg. aircrafts, satellites.

In a world of free and fast access to how to advice a bit of back to theory does not harm and knowing that large manufacturers often employ multiple strategies to accommodate different customers and smaller companies  usually start off with a single strategy, less risky and less speculative will help you make a better decision in designing your manufacturing strategy. In the end is about selling more and having less inventory to store.