As a company gets large-scale recognition and popularity, maintaining its image and brand becomes more important than the product it manufactures. So from a product-centric view, companies have shifted their attention to other aspects which include marketing of the product, providing service to the customers and giving the product an image that differentiates it from the rest, not by virtue of its technical specifications but by virtue of customer perception. Hence the rise of outsourcing of manufacturing activities by giants across industries like footwear, iron and steel, durable and non-durable goods, household consumables and several other FMCG products, to small 3rd party manufacturers.
Benefits:
- Reduced costs for the parent company. This is because the 3rd party manufactures can be small, don’t have much bargaining power over the parent company, minimum wages to be paid are lower, establishment costs borne by 3rd parties.
- Parent company can devote its funds to marketing and branding activities
- Risks shared with the 3rd parties, in some cases they are also liable for safe transportation of finished products
- The 3rd parties instead of being competitors in local markets are now partners
- 3rd parties get the expertise of the parent company in terms of QA and R&D
- 3rd parties get a more steady source of income and also the support of a big company
- Management of the 3rd parties is either less involved or lacks sufficient operational knowhow resulting in low operational efficiency
- Financial books are not maintained properly and there are often obvious examples of attempts for tax evasion. The parent company does not interfere in these matters
- Even if most facilities show some kind of ISO certification, there is very little evidence that the norms are actually followed
- Mostly there are no proper HR processes or personnel. A big company would have trouble in such cases, but a small manufacturer gets away easily
- Both the parent company and the manufacturer only consider the margins or ROI of the manufacturers, concentrating only on certain incomplete figures than efficiency or optimization
Drawbacks:
These are but some of the characteristic features of outsourcing practices in the manufacturing industry in India. As is evident it may be reaping lot of benefits for both the big and small companies, but lot of improvement need to be done to the system, to ensure that the consumers don’t lose out.