A couple of blogs ago we discussed the part outsourcing can play as a means of generating additional cash for the owners. In addition to the loss of what I deem to be a very key part of your core business, outsourcing has its own built-in perils.

Supposedly, the same manufactured parts can now be brought in through that wonderful new technology called the “supply chain.” Inventories are reduced with “just-in-time” deliveries. Subcontractors who become dependent on this new-found business can be pressed by purchasing agents to lower their prices. That’s much easier and cheaper than coming up with innovative new ideas to reduce costs. Purchasing agents are also a lot cheaper than skilled engineers and manufacturing technologists.

Of course, for the sake of costs, it is not uncommon that little time is spent with these subcontractors to ensure they have met the same standards previously imposed by engineering on the in-house manufacturing people. Instead, we rely on our in-house receiving quality control that can at best test for dimensional conformity.

In a perfect world, one could predict exactly what products their customers will buy and be able to order the correct volume of parts to process that need. Inventory costs plummet, deliveries are on time and customer satisfaction soars. But in today’s economy, anything but that is happening.

In the real world, suppliers become insolvent and snow storms and weather hamper ground transportation. Volcanic eruptions and terrorist threats can shut down air deliveries for days.

Managing these risks will now become a full-time job for a number of people. So what you have done is replaced the traditional manufacturing managers with new risk managers. A new overhead is put in place to replace the old overhead you thought you could live without. Unless you have a perfect method for forecasting your customer needs, you have also given up control of your production scheduling to your vendors.

So, the message is to be very particular on how you define your core businesses. For most of the suppliers to the industrial heating community, manufacturing capability is most likely to be a vital element in that exercise. Outsource your payroll – OK. But your manufacturing capabilities – be very careful.