Process and Operations

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

Outsourcing provides options for food and beverage manufacturers to grow their businesses, fill niche product lines and execute many functions more efficiently — from production to product development R&D to maintenance. Yet, new survey findings indicate outsourcing is not favored by all; and for many, it has left a bad taste on their company palates. 

Food Processing and Grant Thornton LLP, the audit, tax and business advisory firm, collaborated on this survey, taken in August and September of 2008. Some analysis was provided by consultants MPI Group. There were 115 respondents of all sizes and from all segments of the food industry (see methodology for details).

We hope if offers insights to help you evaluate your own outsourcing prospects and challenges.

Outsourcing production

As measured by sales volume, nearly one-third of food and beverage manufacturers (32 percent) indicate that none of their production is outsourced. Another 54 percent report that one-quarter or less of their sales volume is outsourced. Just 11 percent have outsourced a majority of their production and 6 percent outsource all production.

Firms that don’t outsource often do so to maintain control of their product. As one executive says, “By not outsourcing, we control all elements of our products, quality, cost, research, etc.”

Another offers: “I believe that we can assure the quality of our products by not outsourcing.” He goes on to indicate his firm currently uses some outsourced warehousing but “are in the process of remedying that.”

Among food and beverage firms that do outsource some production (“production outsourcers”), a majority (58 percent) indicates they do so to “increase/develop production capacity.” One satisfied food executive explains, “Contracts with outsourcing contributed to our success of expansion to gain market in other areas.”

Another adds, “We have outsourced in the past to find capacities that match the volume. For example, [our] organic business is small, therefore smaller contractors can handle that much more efficiently, and we have been generally satisfied with the results.”

Other top reasons for outsourcing production were to gain “access to technology/equipment” (46 percent) and to “lower costs” (37 percent).

Most firms that outsource production rely on more than one vendor: 40 percent of food and beverage manufacturers use two to three firms, 13 percent use four to five firms, and 31 percent use more than five partners.

Among all respondents, the dollars spent on outsourced production are likely to increase among 43 percent of survey respondents; 7 percent indicate it will increase significantly; 51 percent report no change in the volume of outsourcing and 6 percent predict it will decrease.

Among only those already outsourcing, 53 percent will increase the dollar volume of outsourced production and 40 percent will maintain current levels.

Looking ahead to 2009, 41 percent of survey respondents will increase outsourcing and 49 percent indicate no change in volume of outsourcing. Among current production outsourcers, 46 percent will increase the volume of outsourced production and 41 percent will keep it the same.

Production outsourcing does not necessarily solve production ills; in fact, it can create a variety of problems for food and beverage manufacturers.

Precisely one-quarter of firms that outsource indicate their most significant problems are higher costs; another 25 percent cite poor product. Another 17 percent said problems involve late deliveries and/or poor lead times.

“Outsourcing brings a loss of product control, dilutes/eliminates brand integrity and opens the door to product recalls and/or contamination,” says one food and beverage executive.

Yet others are “very satisfied.” “[Nearly all] product is delivered when requested. Overall quality is consistent and meets specification requirements. Suppliers are very cooperative and easy to work with. [We] have had very few problems,” wrote one.

Another executive says his company is so happy with its contractor that he “intends to move all of our production to them.”

Many food and beverage manufacturers are implementing best practices to better manage their contract manufacturers, even when they no longer control actual production.

Common best practices in place at a majority of outsourcers include:
• 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.