It’s not just about capacity.
Parent Plant Efficiency
Unfortunately, consumers rarely purchase items and create demand at the exact same rate that goods are produced. Add to this an increasing amount of retail channels and more product choices and its amazing forecasts are reliable and that there aren’t huge inventory issues – either too much or not enough. Forecasts will never be perfect so somewhere in the supply chain producers must be flexible with production and outputs. The solution for many companies is simple, outsource. Not everything, but the idea is that the parent plant produces the vanilla standard product in large quantities and outsources peak production or the lower quantity or specialty products.
In many situations there may not be a clear line to identify those items best suited for outsourcing and the variables to analyze the decision will likely be different by situation. Market share and competitive advantage should be in the conversation. Determining what to produce in-house is a strategic decision based on what the company excels at producing (what it’s good at) and what it needs to maintain competencies or capabilities (what it needs to be good at) in order to serve customers in that industry. It’s also worth considering those areas that need to be developed to maintain or make a move towards increasing share in a market or industry including new capabilities or technology (what it wants to be good at).
Every project, initiative or effort to run a business either adds to or detracts from strategic focus. If it detracts it distracts. Aligned, successful businesses organize around innovation and improvements in everything from product design, to supply chain to production or service flow. Anything else may be targeted for outsourcing. The argument is that anything but those things that truly make the business unique or provide leverage linked to competitive advantage distract employees from what really sets the company apart.