1. R E S E A R C H B R I E F
FOCUSED ON REDUCING MANUFACTURING AND LABOR COSTS, cutting
overhead and gaining production flexibility, manufacturers are increasingly outsourcing
production to outside firms that can competently and reliably manage some or all of
the process. Used both domestically and with foreign entities, outsourcing has proven
itself to be a viable business strategy for companies that want to focus on their core
competencies rather than trying to “do it all.”
Outsourcing Manufacturing:
Visibility and collaboration are the keys
to a successful partnership
among all partners. Such a level of visibility
must be present across the entire, end-to-end
supply chain—a feat enabled by collaborative
platforms specifically designed to manage the
outsourced manufacturing process.
To better understand manufacturers’ attitudes
toward outsourcing and the benefits garnered
from outsourced manufacturing tasks, Peerless
Research Group (PRG) and Supply Chain
Management Review, on behalf of E2open,
conducted a survey of 69 top supply chain
executives who are employed with U.S.
manufacturing companies that report $500
million or more in annual revenue. The study
was designed to specifically assess current
strategies and future plans for outsourcing
manufacturing processes.
The objective of this research was to
understand:
• the criticality of sharing timely, accurate and
uniform information among all partners;
• the level of visibility throughout supply chain
processes; and
• which technologies are being used to
collaboratively manage outsourced
manufacturing processes
Outsourcing helps companies achieve
economies of scale that they might not be
able to attain on their own. In many cases,
for example, labor and overhead costs are a
driving factor in the decision to outsource and
represent a large portion of a manufacturer’s
direct costs. When these costs can be reduced
through outsourcing, it is a win-win scenario
for both the outsourcer and for the third party.
In terms of other benefits, companies that
outsource non-core activities are able to focus
on what they do best. So rather than tying
up resources in processes that a contract
manufacturer can handle just as well or better,
a company can zero in on the other activities
that drive its bottom line, such as sales and
marketing or product development. Put simply,
both human and financial resources can be
freed up and funneled into growing revenues
and profits.
Although outsourcing provides many
benefits, it also results in a lack of visibility
as the number of partners in the supply chain
increases. The more that happens outside the
four walls and therefore outside the scope
of ERP systems, the less visibility companies
have and the more coordination is required.
For an outsourcing strategy to be effective,
there must be good two-way communication
between the participating firms with up-to-date,
accurate and synchronized information shared
2. Outsourcing Manufacturing:
Visibility and collaboration are the keys to a successful partnership
R E S E A R C H
B R I E F
2
To identify trends in manufacturing
outsourcing, PRG conducted a similar market
study in 2015 for SCMR and E2open that also
examined outsourcing activity. Findings for
both studies are presented where appropriate
and meaningful throughout this report.
Overall, the survey results show that
outsourcing manufacturing production is a
continuing trend. Also, connectivity with
trading partners results in producing better
forecasting, streamlining processes and
reducing supply chain disruptions, improving
cost management, decreasing time to market
with products and new product introductions,
and increasing customer responsiveness.
Key Findings
A vital and strategic trend
Manufacturers across all major industry
segments are likely to contract out at least
some aspect of their manufacturing processes.
In our current study, more than 50% of those
surveyed are outsourcing one-quarter or more
of their production tasks while one-in-three
(32%) are farming out at least 50% of their
manufacturing to other firms.
These results show an emergent confidence
regarding outsourcing. In our study conducted
in 2015, roughly one out of four (24%)
outsourced at least 50% of their manufacturing
processes. This grew to one third (32%) in
2016. (Figure 1)
figure 1
The extent to which companies
outsource manufacturing
48%
28%
10%
2015
14%
45%
23%
17%
2016
15%
Outsource
1%-24%
25%-49%
50%-74%
75%-100%
3. Outsourcing Manufacturing:
Visibility and collaboration are the keys to a successful partnership
R E S E A R C H
B R I E F
3
Exactly how manufacturers handle the outsourcing process depends on the individual companies
and their goals. For example, manufacturers are more apt to rely on a third party to handle
manufacturing when a smaller series or a more flexible production process is required. This typically
includes the manufacture of design prototypes, small production runs, one-offs and so forth.
However, outsourcing is not limited to small-series production runs. Manufacturers are also likely to
outsource any or all manufacturing activity. (Figure 2)
figure 2
Circumstances in which companies
typically employ outsourced manufacturing
Small series
Any product
Short lifecycle/fashion products
New products
Other
43%
40%
22%
19%
15%
figure 3
Tasks companies commonly outsource
Logistics
Subassemblies/Components
Inventory/Warehouse management
Main Manufacturing/Production
Packaging
Kitting/Product customization
Fulfillment
Product design
61%
49%
48%
42%
32%
19%
17%
9%
Tasks associated with logistics operations, assembly, inventory management and manufacturing
production are the most commonly outsourced activities. (Figure 3)
4. Outsourcing Manufacturing:
Visibility and collaboration are the keys to a successful partnership
R E S E A R C H
B R I E F
4
Supply chain managers are seeing improvements in business-critical areas as a result of
outsourcing activities. Advancements are being seen in lead times, operating margins, development
and time-to-market with new products, product quality and in fulfilling customer service level
agreements. (Figure 5)
Since 2015, survey findings continue to show that most manufacturers outsource to lower the
costs of manufactured products and focus on their core competencies. An increasing percentage of
manufacturers also assert that they are outsourcing to establish a more agile, interoperable supply
chain operation and to improve their asset management strategy. (Figure 4)
figure 4
2015
2016
Main reasons for outsourcing manufacturing and production
66%
52%
46%
48%
39%
26%
31%
19%
27%
28%
12%
14%
9%
14%
6%
7%
Reduce manufacturing/COGS costs
Rely on third parties for manufacturing
expertise/core competency
Increase responsiveness/agility
Asset reduction (Asset-light strategy)
Rapid growth/expansion
Product design expertise
Regional/local expansion
Other
figure 5
Improvements attributed to outsourcing
42%
61%
Lead times
44%
60%
Operating
margins
16%
46%
Achievement of
customer SLAs
30%
43%
Inventory
liability
30%
43%
Speed of
new product
introductions (NPI)
14%
24%
Product quality
2015 2016
5. Outsourcing Manufacturing:
Visibility and collaboration are the keys to a successful partnership
R E S E A R C H
B R I E F
5
As a consequence of these benefits, most companies expect to either increase outsourcing
activities or remain on par with current levels. In fact, the percentage of companies stating that
they will pull manufacturing back in-house at some future point dropped substantially from 22% in
2015 to only 7% in 2016. (Figure 6)
figure 6
Forecast for outsourcing levels
during the next two years
43%
22%
2015
35%
54%
7%
2016
39%
No change
Decrease
outsourcing
Increase
outsourcing
figure 7
Manufacturers using a business network
to communicate with outsourcing providers
Yes 59%
No 41%
Information shared with partners must be in real-time
While the research confirms the importance and level of dependence that manufacturers place on
their partners, not all companies share real-time information over an integrated business network
platform. This finding suggests that manufacturers are susceptible to errors in their gathering and
sharing of information. Bad data and information delays often leads to issues in tracking, reporting
and planning, which cause added road bumps associated with materials deliveries, inventory
management and order fulfillment. (Figure 7)
6. Outsourcing Manufacturing:
Visibility and collaboration are the keys to a successful partnership
R E S E A R C H
B R I E F
6
As further evidence that manufacturers may be vulnerable to inexact data, only one-third of those
companies surveyed use fully-automated procurement and inventory management solutions. In
addition, barely one in four survey respondents operate a logistics tracking platform that is fully
automated; and fewer than one in five runs fully automated applications for forecasting, planning
and capacity management. However, with most companies claiming that their operations are at
least “somewhat automated,” there are signs that companies are moving to automate more areas
of their supply chains. This follows a general trend toward using more technology, equipment,
robotics and automation in the logistics management process by companies of all sizes. (Figure 9)
When providing network access to partners, most manufacturers still exchange information
via a Web portal access. Some also continue to use EDI applications for electronically sharing
documents such as purchase orders, shipping forms and order updates, etc. More than one in three
manufacturers also provide partners with direct access to their supply chains. These methods reveal
that many manufacturers rely on outdated and inefficient methods and leave room for improvement
in communicating with partners. (Figure 8)
figure 8
Technologies used to communicate with outsourcing partners
54%
Web portal
54%
EDI
37%
General supply
chain network
22%
Other types
of electronic
messages
(XML)
12%
Industry-
specific
network
figure 9
The extent to which information exchanges are automated for…
2%6%13%44%35%
3%6%4%54%33%
2%12%11%23% 52%
1%15%10%19% 55%
6%6%22%18% 48%
5%24%22%9% 40%
Procurement (Purchase orders)
Inventory
Logistics updates
Quality and traceability
Forecasts and commits
Capacity
Fully
automated
Partially
automated
Not now automated
but will be automating
No plans
to automate
Not
applicable
7. Outsourcing Manufacturing:
Visibility and collaboration are the keys to a successful partnership
R E S E A R C H
B R I E F
7
For many manufacturers, supply chain visibility needs improvement
One out of three supply chain executives believe that visibility across the entire supply chain is
“very good,” with 1% stating that end-to-end visibility is “excellent.” The majority (54%) gave their
supply chains a rating of “good’ on visibility and 13% an evaluation of “fair.” These ratings reveal an
opportunity for improvement in supply chain transparency. Without information and communication
among supply chain partners, it is difficult to effectively run today’s multi-enterprise supply chains.
In today’s competitive business environment, no manufacturer can afford to be behind the curve
on supply chain visibility—and particularly when it comes to collaborating with critical partners and
outsourced manufacturing providers. (Figure 11)
While most large manufacturers (80%) run sales and operations planning (SOP) processes, not all of
them are leveraging their SOP with outsourcing partners. In fact, slightly more than one-third (37%)
of those firms that employ SOP do not share this data with their outsourcing partners. (Figure 10)
figure 10
Organizations’ usage of an SOP program
Do not
20%
Have an SOP
Have an SOP
80%
Do not
37%
Use data from partners
in SOP process
Use data from
partners in
SOP process
63%
figure 11
Organizations’ supply chain visibility rating
Excellent 1%
Very good 32%
Good 54%
Fair 13%
Poor 0%
“We are looking at
investing in better
systems and also
enhancing our SOP
process.”
Director, Supply Chain;
Industrial Hygiene
Products; $1B - $5B
8. Outsourcing Manufacturing:
Visibility and collaboration are the keys to a successful partnership
R E S E A R C H
B R I E F
8
Supply chain visibility may be a top priority for companies right now, but visibility into key supply
chain areas is lagging for the majority of the manufacturers surveyed. Supply chain transparency
is most sound in the areas of manufacturing production and inventory. About one in three say
that visibility is “very good” in areas related to suppliers, outsourced manufacturing production,
goods and materials costs, and deliveries and shipments. In most cases, these manufacturers lack
visibility into the market demand and profit margins on a per-order basis—an area where nearly
75% rate supply chain visibility good at best—or even fair or poor. (Figure 12)
A lack of automation across many supply chain functions restricts visibility into forecasting data,
orders and inventory for the entire supply chain. It also affects those safeguards for process
improvement, reliability of materials supply, supply chain disruption and risk mitigation. Also
hindered are cost-cutting efforts and the opportunities to cultivate new revenue streams and
processes for better supply chain management.
figure 12
Rating visibility in key areas of the supply chain
1%15%35%34%15%
1%4%34%48%13%
13%25%34%13% 15%
6%13%48%10% 23%
6%23%39%9% 23%
3%17%42%9% 29%
Inventory levels and
location/positioning
Internal manufacturing
production
Profitability on a
per order basis
In-transit–deliveries
and/or shipments
Customer/market demand
Suppliers/Sourcing partners
Costs associated with
sourced goods and materials
Outsourced manufacturing
production
22%40%9% 26%
3%18%41%7% 31%
Excellent Very good Good Fair Poor
3%
9. Outsourcing Manufacturing:
Visibility and collaboration are the keys to a successful partnership
R E S E A R C H
B R I E F
9
Summary and Conclusions
With the aim of turning fixed costs into variable
expenses, a growing number of manufacturers
outsource production to third parties. This not
only reduces labor expenses and overhead,
but it also gives manufacturers the flexibility
to focus on their core competencies. As
companies leverage outsourcing as a
way to offer greater product variety, more
effectively manage complexity and access
new economies of scale, many are neglecting
the need for solid, collaborative supply chain
platforms to improve visibility and connectivity
with their partners.
To fully leverage the power of outsourcing—a
trend that’s expected to continue in 2017 and
beyond—companies need extended visibility
across multiple tiers of suppliers and mutually
beneficial approaches that help reduce overall
inventory liability, reduce supply chain risk, and
create a winning scenario for all partners. In
nearly all cases, outsourcing is most efficient
Manufacturers responded that they have the greatest level of visibility among Tier 1 contract
manufacturers, but visibility lags across many of their providers of goods and raw materials. In fact,
roughly one-half (49%) admit that visibility with their top tier trading partners is either on medium
or low levels, while roughly two out of three operations surveyed contend that visibility with their
Tier 2, semi-finished goods suppliers (65%) and Tier 3, raw materials suppliers (60%) is medium to
low. (Figure 13)
figure 13
5 = clear view 4 3 2 1 None
Degree of visibility into tiers of supply and manufacturing
2%3%13%33% 31%18%
6%4%27%25% 28%10%
10%16%16%6% 34% 18%
Tier 1– e.g., contract
manufacturer
Tier 2– e.g., semi-finished
goods supplier
Tier 3– e.g., part/raw
material supplier
when manufacturers have complete end-to-
end visibility of their supply chains—an elusive
goal that’s enabled by today’s state-of-the-art
technology platforms. By moving to supply chain
networks and their integrated, collaborative
platform, companies can effectively see, share,
and act on the best possible information in real-
time, effectively achieving cost savings and new
revenue opportunities.
Methodology
This research was conducted by Peerless
Research Group (PRG) on behalf of Supply
Chain Management Review magazine for
E2open. This study was executed in October
of 2016 and was administered over the
Internet among subscribers of Supply Chain
Management Review.
Individuals were prequalified as being
personally involved in decisions that relate to
sourcing, outsourcing and supplier relationship
management.
10. Outsourcing Manufacturing:
Visibility and collaboration are the keys to a successful partnership
R E S E A R C H
B R I E F
10
The findings for the 2016 study are based
on information collected from 69 top supply
chain executives employed by businesses
with estimated 2016 revenues of at least $500
million. Roughly one-half of respondents say
that their 2016 revenues will exceed $2.5
billion. The 2015 study results are based on 80
executives in companies reporting revenues of
$500 million or greater.
Respondents in both surveys are
predominantly supply chain management,
logistics management, corporate or executive
management, procurement and sourcing
management and operations management
personnel. A range of industries are also
represented, including consumer packaged
goods, high-tech, electronics manufacturing,
automotive and parts, and industrial machinery.
About E2open
Founded in 2000, E2open provides the largest
and most comprehensive Supply Chain
Operating Network, including a broad suite of
collaborative supply chain solutions. Leading
global enterprises rely on E2open to provide
greater end-to-end visibility, more accurate
data and insights, and real-time business
process orchestration across complex, multi-
enterprise trading partner networks.
Contact Information
E2open
9600 Great Hills Trail, Suite 300E
Austin, TX 78759
Phone: 1.512.425.3000
Toll-Free: 1.866.4.E2open
Contact Us Online:
https://www.e2open.com/company/contact-us
