Although it’s not impossible to set up a manufacturing business from scratch, it’s uncommon. The reason for this is that it takes a lot of capital to buy all of the machinery, pay somebody to design the factory, and then set up the whole solution. Just look at the problems that Tesla has had over the last decade. It’s usually more economically viable to design the product and then work with a third-party manufacturer who has the tools to make it.
Apple has had enormous success over the years using this strategy. Rather than make the goods at its California headquarters in America, it farms out mass production to companies in the Far East and China. Apple exercises its expertise in design, and then leverages manufacturer expertise in actual production, avoiding any upfront investments that might affect the bottom line.
There are many benefits to outsourcing your manufacturing. Here are just a few of them.
Pro #1: Cheaper Products
There’s a reason that the manufacturing sector gets smaller in Western economies every year: it’s cheaper abroad. Labor costs in China, for example, are much lower than they are in the US or Europe.
Of course, just because it’s cheaper doesn’t mean that you can’t still command a premium price for your products. Customers fundamentally don’t care where the product is made, just whether it meets their needs. Companies often worry that if they outsource production to a third party that they won’t be able to charge a premium, but as Apple proves, it’s usually the opposite. Manufacturing abroad helps businesses increase the gap between what it costs to make a product and what they can sell it for.
Pro #2: Higher Output Per Unit Time
If Tesla had simply sold its designs for the Model 3 to another auto manufacturer, it’s unlikely that we would have seen the multi-month delays we did. Customers who pre-ordered the Model 3 would have gotten their vehicles on time. That’s because established manufacturers often have a far higher capacity to ramp up production than new ones.
The same principle applies for other manufactured goods. Injection molding specialists, for instance, can churn out millions of units with very little lead time, whereas that kind of output could take months starting from scratch. External factories usually have impressive turnaround times, meaning that you’re likely to get the parts you need in a matter of weeks, not months.
Pro #3: Easily Duplicate Parts That Work
Most manufacturers have significant experience in making a range of parts for industry. Rather than coming up with a new design every time, working with a manufacturer gives you access to these designs, allowing you to include them in your final product.
For instance, if you want to manufacture t-shirts, you don’t usually have to re-tool a factory to do so. Manufacturers often have the systems in place to ensure that you get a range of t-shirt sizes standard across the garment industry. You save on costs, and you can ensure that your products are consistent with others on the market when they go to retail.