Is Outsourced Production Really Cheaper?
Many companies move to outsourced production to reduce fixed assets and fixed supply chain costs, and to increase overall production flexibility. Others decide that they do not want to devote attention and resources to manufacturing expertise.
The Dell factories, however, were known for their cutting-edge efficiency and heavy use of automation in delivery parts and moving finished goods from work cells. Could the company really save money by moving to an outsourced model?
“Contract manufacturers can generally produce computers more cheaply because their entire operations are narrowly focused on finding efficiencies in manufacturing, as opposed to large firms like Dell, which must also balance marketing and other considerations,” the Wall Street Journal piece noted.
In some cases, there can be an immediate short-term benefit to the bottom line, as the company can book a profit on the sale of the factories, especially those that have been well depreciated.
It seems likely that in the short run, unit costs would not be lower for Dell, and maybe even higher, as the CM’s profit margin would also have to be absorbed. However, it would allow Dell to eventually shed or redeploy a significant amount of overhead that is tied up in managing production processes and facilities, and to act more quickly to shifting demand and product patterns in the fast changing high tech world. A substantially greater percent of production could move to lower-cost countries.
Underlying the change in part is the background of Michael Cannon, president of global operations for Dell. Cannon was previously CEO of contract manufacturer Solectron. At a Wall Street analysts meeting in April, he said that Dell was now committed to leading the industry in delivering equipment “at the lowest total landed cost” anywhere on the globe. “That’s what drives our supply chain decisions,” he added – and obviously greater use of outsourcing and the flexibility that brings is a key part of that strategy.
At the time, Cannon said these and related moves would reduce supply chain costs at Dell by some $3 billion annually. He also stated that Dell had “underestimated the capabilities of our supply chain partners” such as CMs in the past.
There are some barriers to the potential factory sell-off. Most CMs operate in low-labor cost areas, such as Asia or Eastern Europe, and may be leery of buying plants in the US or Ireland.
Dell has also received some government incentives for plants in the US that came with commitments about employment and investments.
Are you surprised Dell may be interested in selling off its company-owned factories? Would you expect that to lead to lower total costs – or not? Is this a smart long-term move? Let us know your thoughts at the Feedback button below.
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