Survey Shows Mixed Feelings on Outsourcing

Our joint survey on contracting-out production, R&D and other functions finds a lot of mixed feelings.

By Dave Fusaro, Editor in Chief

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• Certify contract manufacturer prior to contracting (65 percent of production outsourcers)
• Testing of product by our company (64 percent)
•  Testing of product by contract manufacturer” (56 percent)

“Due to our strict and thorough preapproval auditing practices, we usually have few problems with contract manufacturers,” one food and beverage executive says. “Most issues arise as a result of cultural differences when dealing with offshore suppliers.”

But not R&D
The vast majority of food and beverage manufacturers choose to keep their R&D/product development activities in-house. In fact, 68 percent report they do not outsource product development (as measured by percentage of SKUs), and another quarter of respondents outsource between 1-25 percent. Only two percent of survey respondents outsource all of their R&D/product development.

Among those food and beverage manufacturers currently outsourcing some R&D/product development, 56 percent indicate they do so to gain “access to technology/equipment” and 47 percent hope to find “access to new ideas.” Additionally, 44 percent of R&D outsourcers look to “increase R&D capacity.” Only 21 percent outsource R&D “to lower costs.”

Most firms that outsource R&D rely on a cadre of vendors: 68 percent use more than five firms. And 53 percent report that they outsource the function to ingredient suppliers.

That situation can create some unexpected outcomes. “As an ingredient supplier to the food industry, we are feeling the outsourcing in two different ways. First of all, our customers are expecting us to deliver all of their R&D work. Second, we are then asked to problem-solve their outsourcing contractors.”

One executive reports that he uses a consultant firm to manage all the R&D work. “They perform tremendously to save my company a lot of revenue. And since they work out of their own location, my company is not bothered with taxes, employee benefits or providing offices.”

Yet, not all praise their R&D contract providers. “We have not been impressed with the outside vendors/flavor houses showing new products/ideas. The last time a major flavor house showed us new product ideas, we painfully told them we already had similar products on the market! They don’t do their homework.”

The SKU volume of outsourced R&D is likely to increase among 24 percent of survey respondents (3 percent of those indicate it will increase significantly); 71 percent indicate no change in the volume of outsourcing and 5 percent report it will decrease. Among R&D outsourcers, 56 percent will increase the dollar volume of outsourced production and 38 percent will keep it the same.

Looking ahead to 2009, 20 percent of survey respondents will increase outsourcing and 75 percent indicate no change in SKU volume of outsourcing. Among R&D outsourcers, 49 percent will increase the volume of outsourced production and 46 percent will keep it the same.

R&D outsourcing is not without its problems. Approximately one-third of firms that outsource R&D (36 percent) indicate their most significant problem is loss of intellectual property, and another 27 percent cite late deliveries/poor lead times.

Other outsourced functions

Highest among other outsourced functions is warehousing and/or distribution (47 percent). One-quarter (26 percent) outsource information technology and 20 percent outsource packaging.

The percentage of outsourcing among food and beverage manufacturers for these categories is significantly higher than what’s found across all U.S. manufacturing. Just 16 percent of U.S. manufacturers report they outsource information technology, and only 7 percent outsource staging and/or packaging; 14 percent farm out warehousing and/or distribution.

Some of the gap for warehousing and distribution may be because food and beverage firms perceive the category to include “transportation” (half of all U.S. manufacturers report outsourcing transportation).

Still, some in the food and beverage industry outsource nothing, and they seem quite proud of it. “We don’t outsource anything. It is all done in-house — buying ingredients, bookkeeping, baking, cooking, packaging and shipping,” wrote one respondent.

Outsourcing of production, R&D or any function by food and beverage manufacturers should be done in a strategic, corporate context. One executive says, “Outsourced solutions have to work at the right price.”

But savvy food and beverage processors take a more rigorous approach that analyzes multiple factors beyond price to ensure that outsourcing is the right decision. Examples of this approach include:
• Assess business operations and functions; develop measures by which to evaluate core competencies

• Understand and prioritize corporate strengths and weaknesses before deciding what should be outsourced (top concerns can include intellectual property and brand identity)

• Commit to decisions and execute an outsourcing strategy. Invest in core competencies that are kept in-house.

• Manage the in-house and outsourced functions as a single, continuous and highly productive chain of activities that serves customers.

By applying a thorough and holistic approach to your company’s outsourcing strategy and execution, the ensuing experiences and bottom-line effects can make for some very appetizing results.

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