Should YOU Manufacture Your Product? 6 Key Factors in the Make vs. Buy Decision

The decision about whether to manufacture your product in-house or to outsource it

to a contract manufacturer (CM) is one that will have short- and long-term strategic

implications for your company. While there are a number of factors that go into that

decision, some are more easily quantified than others — like projected time to market,

production capacity and the overhead costs for capital equipment and personnel. Other

factors are more difficult to quantify with a high degree of confidence, especially for those

businesses that traditionally focus on design instead of manufacturing.

In today’s complex, highly competitive marketplace, businesses face new pressures. They

must contain costs with leaner manufacturing processes and improved asset utilization,

maintain high levels of customer service and keep pace with rapid technological

developments. As a result, many businesses — for which manufacturing is not a core

competency — are looking to develop strong partnerships with CMs who can help them

contend with today’s new challenges.

Here’s the good news: The world of CMs has evolved to such an extent that there is a

viable CM option for nearly every product in nearly every industry — including aerospace,

defense, energy, medical, automation and precision motion control.

6 Factors to Consider in the Make or Buy DecisionNo two make or buy decisions are alike. Some companies may choose to outsource the entire manufacturing process for a product, while others may outsource only some subassemblies that are not core components of the manufacturing process. In any case, the decision

should not be made lightly. Many factors should be taken into consideration when weighing the relative merits of each strategy.

The decision should be considered at both the strategic and operational level. At the strategic level, factors that will impact the decision include

government regulations, market trends and competitive activity. Factors at the operational level include cost considerations, plant capacity and control. Here we explore some key factors that may make or break your make or buy decision.

2 SHOULD YOU MANUFACTURE YOUR PRODUCT? 6 KEY FACTORS IN THE MAKE VS. BUY DECISION

1 CORE COMPETENCY

If the manufacturing process that you are considering is a critical component of your company’s business or dependent on highly valuable intellectual property, it is probably not a candidate for outsourcing. After all, if the manufacturing process itself is your key differentiator, you’ll want to maintain control of that proprietary information.

On the other hand, if the manufacturing process is not a significant component of your business model today, there is probably no benefit to keeping manufacturing in-house. If your strengths are product marketing and commercialization, for example, you’ll want to find a CM that can take over the manufacturing so that you can focus on what you do best — ideally, helping you save production time and costs in the process.

2 SKILLSETS

When you’re ready to consider the make vs. buy decision, it will be important for you to anticipate the skills that will be needed — and to assess whether your internal capabilities include those skills. If not, it will be costly and difficult to add those capabilities and manage them effectively. If the manufacturing process demands specialized expertise or a new technology that does not currently exist within

your organization, you may want to seek out an outside resource that has the skills and experience needed to make your product successful.

If yours is a medical device, for example, you’ll want to look for a source with experience in developing products that meet FDA regulations and standards. It will be important for you to visit their facilities in order to get a better understanding about whether their techniques would be transferable to your project.

3 CAPACITY

Often, the lack of sufficient production capacity is the single driver of the decision to outsource manufacturing. In those cases, making the move to contract with a partner that has the needed physical space is a no-brainer.

If you are considering making the capital investment in space and equipment to perform

manufacturing at your own facility, however, it will be important to look beyond the initial phases of the project and forecast what your future needs will be. Start with an assumption about the capacity demands and impact on your facility at the outset and, when the space is no longer needed, think about what you might use that space for in the future. Will there be something else in the future that you could use that space for? Or will it become a financial burden?

4 RAMPING UP

There is a potentially dramatic difference between in-house manufacturing and outsourcing when it comes to ramping up people and processes. If your staff does not currently possess the capabilities needed to manufacture the component or product, you’ll need to consider the cost and time involved in integrating a new

3 SHOULD YOU MANUFACTURE YOUR PRODUCT? 6 KEY FACTORS IN THE MAKE VS. BUY DECISION

team into your organization. Some estimate that interviewing, training and incorporating new skillsets and processes into your organization — plus getting it all up and running — can take up to a year.

By contrast, when you make the decision to work with a CM with the relevant capacity and skills in place to manufacture your product, you can potentially be up and running in a much shorter time.

5 HIDDEN COSTS

In the midst of a make vs. buy decision, there can be many so-called “hidden costs” that businesses tend to ignore. These include:

• Certifications that are required for personnel that will perform certain processes

• Retraining that may be needed in the event of changes in technology

• Administrative costs — including process setup and inventory management

• Software costs — the majority of which are incurred after product launch and the potentially significant cost of ongoing maintenance by developers

• Shipping costs of materials for production

• Material management

• Working capital management

There are many startup costs that businesses don’t consider upfront when making the make or buy decision. These include setting up databases for document and revision control, setting up the line and establishing the manufacturing footprint, optimizing line flow with lean/Six Sigma processes, getting up to speed with ISO certifications, purchasing new software (from database storage to MRP and ERP) and much more.

6 CHANGES

When inevitable technology advances happen, a part becomes obsolete or feedback from the field necessitates a change in a product or component, the company that developed the original design will be able to turn around changes more quickly. In this case, working with a CM with design and manufacturing capabilities offers real benefits. It reduces risks when you transfer from design to manufacturing, and the time and costs involved when the need for updates arises. A CM will also be well equipped to advise about aftermarket issues, including how parts obsolescence will impact the serviceability and repair of products into the future.

THE DECISIONWhen you have completed the complex make vs. buy evaluation process and you’ve concluded that you’ll need to outsource your manufacturing function, it will be important to carefully evaluate potential CM partners. At Sparton, we encourage potential manufacturing partners to evaluate our production methodology, tour our facilities and talk with our key personnel. Ask us anything — we’re an open book.

4 SHOULD YOU MANUFACTURE YOUR PRODUCT? 6 KEY FACTORS IN THE MAKE VS. BUY DECISION

QUESTIONS TO ASK WHY IT’S IMPORTANT

Do you have best-in-class production systems in place?

A simple “yes” is not a sufficient answer. You want assurances that the CM will deliver the quality you expect, so make sure the CM has adopted quality standards and can provide documentation and test data.

Best-in-class is not simply that you ARE measuring, but HOW you are measuring yourself to a high standard.

Do you have quality management systems in place?

There is a wide range of quality management systems that demonstrate how a CM stacks up, including:

• ISO 9001 certification requires a CM to focus on continuous improvement in customer service and satisfaction

• ISO 13485 is a specific quality management system for the design and manufacture of medical devices

• AS 9100 is a specific quality management system for the aerospace industry

Simply having these certifications is not enough. The CM must have a strong record with no certification disruptions or black marks for performance.

Can you help with compliance issues?

The CM should not only understand the regulations and standards that your product needs to meet, but also be willing to provide labeling guidance and manage regulatory filings that may be necessary.

Do you operate with an open book?

The CM should provide information about their production processes and costs (material, labor and overhead) so there are no surprises later.

What’s your inventory management process?

You want to be sure that the CM can ensure that components are available when needed and that they are willing to inventory parts that may not be needed immediately.

How will you protect my intellectual property?

Your CM should have the systems in place that can ensure that your sensitive proprietary information is 100% secure.

Can you demonstrate expertise in manufacturing specifically to the technology in my device?

You should understand the specifics about the experience the CM has in working with various technologies, applications and platforms. This means getting out on the production floor in addition to case study demonstrations and examples.

Due Diligence: Questions to Ask a Potential CM PartnerWhen you outsource the production of your product or component to a CM, you can focus on your core capabilities. That’s the idea, but not all CMs are alike. Here are a few questions that may help you determine whether the potential partner is right for you.

5 SHOULD YOU MANUFACTURE YOUR PRODUCT? 6 KEY FACTORS IN THE MAKE VS. BUY DECISION

SPARTON CORPORATION

425 N. Martingale Road, Suite 2050Schaumburg, Illinois 60173 800.772.7866www.sparton.com

About Sparton CorporationSparton Corporation (NYSE:SPA), now in its 115th year, is a provider of complex and sophisticated electromechanical devices. We use our Sparton Production System (SPS) to produce breakthrough products and address complex manufacturing challenges — faster and more cost effectively. We have experience in many industries, including medical and biotechnology, industrial and commercial, and military and aerospace. Headquartered in Schaumburg, IL, Sparton has design centers and manufacturing facilities worldwide. For more information, visit www.sparton.com.