Any manufacturing-based business has a much tougher start than other kinds of business. Manufacturing is the biggest cause of capital losses in a large share of companies.
When you manufacture a product, it is much harder to keep exact control over the cost of and profit on the finished product, bearing in mind that the mistakes we make cost us money. Leftover material, which in most cases can’t be reused, also costs us money.
Add to that customers who sign contracts with penalties for missing the agreed delivery date, and manufacturing becomes a risky activity for our company.
Even companies that manufacture for themselves rather than for other customers are concluding that outsourcing the manufacture of their products is far more profitable. That’s the case with Apple, Microsoft and thousands of companies that sell small items.
If Apple or Microsoft manufactured their own products, they probably wouldn’t be the business they are today.
The advantages of outsourcing manufacturing are, without doubt, certainty about the purchase price and the selling price. You know that the total cost of making a product and having it delivered to your business is €3, and you sell it to the end customer for €5. No doubt about it: you made €2. How much would it have cost you if you had made it in your own facilities? No company has an exact figure, so after a few years of inaccurate accounting, they end up showing capital losses.
Large companies, as you probably know, outsource manufacturing to industries in the East. You’ll have been told that labour is cheap there and that’s why prices come down. But the only reality, even if it’s controversial to say so, is that people in those factories work under labour exploitation and in inhumane conditions.
In short: to know exactly, from the outset, how much profit your company makes from selling your products, avoid manufacturing whenever possible and buy the finished product. Get good purchase prices and break with the old idea that making your own product will reduce costs. Outsource manufacturing to companies that do only that: manufacture for clients.
Focus on developing a good distribution system and a good business system, which starts with knowing the profit on each product sold.
Further reading
- How to start a business with no money
- 5 ways to grow your business
- Why new businesses fail
- Start a business or buy one?
Featured image: Olivier Lemoine (Photo-Terroir.fr), CC BY-SA 4.0, via Wikimedia Commons.
