In this article, learn about:
Manufacturing from a supplier’s perspective
Suppliers who do their own manufacturing, versus those who outsource
Pros and cons of self-manufacturing and outsourced manufacturing, and solutions for both
Without manufacturing, the entire supply chain would come to a screeching halt. In order to sell a product, a supplier needs to create the product or have someone else do it, and to create a product, materials must be sourced and purchased.
Manufacturing is the process of gathering raw materials, creating the product, and distributing it to the relevant partners, in preparation for sale.
Manufacturing for Suppliers
Manufacturing as a function includes three main processes:
Procurement is the process of sourcing and purchasing the necessary raw materials required to create the product.
Production is the process of actually creating the product. This includes assembly, quality control, and sometimes packaging and labeling.
Distribution is the process of getting the product into the hands of the retailer and ultimately into the hands of the customer.
These processes will look slightly different for suppliers who outsource their manufacturing, versus those who manufacture their own products (also called self-manufacturing).
It is important to note that outsourced manufacturing, also called contract manufacturing or co-manufacturing, can also include a subcategory called co-packing. Co-packing is the process of outsourcing portions of the manufacturing process — typically, labeling and packaging. This guide will focus on outsourced manufacturing on a broad level, in comparison to self-manufacturing.
Related Reading: A Comprehensive Overview of Manufacturing Business Problems
Self-Manufacturing Process Overview
For suppliers who do their own manufacturing, the manufacturing process, as defined above, would look something like this:
Procurement: The supplier should first determine what materials they need to create the product. Then, the supplier will need to establish their budget for purchasing the materials, how much raw material they will need, and finally who/where to source the raw materials from.
Production: Once the raw materials are procured, the supplier will then turn the raw materials into finished products. However, production does not only include product creation and assembly but also quality control. Sometimes self-manufacturing suppliers will outsource portions of the production process, such as packaging and labeling finished products.
Distribution: Finally, once the product is made, the supplier will need to determine if they distribute the product to the retailer themselves, work with a third-party logistics company (3PL), or distribute the product directly to the end consumer.
Outsourced Manufacturing Process Overview
For suppliers who outsource their manufacturing, the process starts with finding the best manufacturer to partner with. The manufacturing partner will handle the following processes, and it might look something like this:
Procurement: Typically, the manufacturer is responsible for finding and purchasing all necessary raw materials for production. Depending on the type of contract established, the supplier may pay for materials even though the manufacturer does the sourcing. Sometimes, the supplier or brand will purchase all materials and ship them to the manufacturing partner. This is called tolling. Additionally, there is the option for a hybrid approach where the manufacturer procures the basic raw materials, and the supplier provides the more specialized materials.
Production: This is the part of the process that involves actually manufacturing the product. Product creation is handled by the manufacturer, while details, product specs, and final approval are the supplier’s responsibility. The manufacturer will create the product based on the details and specs provided by the supplier, and the supplier will approve the final product.
Distribution: The final step in the manufacturing process is dependent on what kind of contract is drawn up between the supplier and manufacturer. Some suppliers who outsource their manufacturing will still manage the distribution of the product themselves, while others may partner with a manufacturer who handles product distribution.
Related Reading: How to Tame Volatile Manufacturing Supply Chains with Automation
Pros and Cons: Outsourced Manufacturing Versus Self-Manufacturing
As hinted in the explanations of outsourced versus self-manufacturing, there are pros and cons to both solutions for suppliers. Suppliers should review their current business practices, budget, and needs, to help determine which manufacturing solution is best for them. Additionally, some suppliers might opt for a bit of both, or a “make to assemble” methodology — outsourcing some portions of the manufacturing process, while keeping others in-house.
Pros of Outsourcing Manufacturing for Suppliers
Without the need to fund in-house manufacturing facilities, outsourcing manufacturing can lower a supplier’s upfront investment.
Outsourcing manufacturing gives suppliers access to specialized expertise that they may not have within their own operations.
Because of the specialized expertise that manufacturing partners provide, products are more likely to have a faster time to market.
Outsourcing manufacturing allows suppliers to keep their focus on core business processes and the money they can make.
Cons of Outsourcing Manufacturing for Suppliers
Without handling the day-to-day of manufacturing, suppliers have less control over the process, including quality control.
By being more removed from the manufacturing process, suppliers will feel supply chain delays more acutely — particularly regarding the effects on cash flow.
Brand standards may suffer from outsourced manufacturing if the manufacturer’s standards don’t align with the supplier’s.
Lack of visibility into the details of the manufacturing process can cause communication delays between partners, resulting in production disruptions.
Ultimately, outsourcing manufacturing lowers visibility, which in turn can lower flexibility during unforeseen circumstances.
Pros of Self-Manufacturing for Suppliers
By managing manufacturing in-house, suppliers will have more operational and quality control over the production process.
In addition to more control, suppliers who self-manufacture may have greater flexibility when things need to pivot during the production process.
Delays are easier to manage and forecast for when the manufacturing process is done in-house, because communication will face fewer delays overall.
By handling the manufacturing process from procurement to distribution, suppliers have better visibility into the entire supply chain process, which can help limit large scale issues and revenue loss.
Cons of Self-Manufacturing for Suppliers
Reliance on manual processes for everything from purchase orders (POs) to shipment tracking can lead to frequent errors, slower operations, and higher labor costs. This ultimately will limit scalability and competitiveness.
Manual finance workflows make it hard to reconcile POs, receipts, and invoices, which delays payments and ties up working capital, hindering agility and the ability to reinvest in growth.
Even suppliers who manage their manufacturing in-house can suffer from poor communication and collaboration. This will impact the manufacturing process, resulting in poor supply chain performance overall.
Self-manufacturing suppliers may struggle to align production schedules. This may result in idle time, missed delivery commitments, and unplanned downtime that can halt operations.
Manufacturing Solutions with SPS Commerce
While outsourcing manufacturing can lower upfront costs and provide access to specialized expertise, it can also introduce challenges to visibility, communication, and control. Self-manufacturing can offer greater oversight and flexibility, but it also requires strong operational processes to avoid inefficiencies and scalability issues. Whether a supplier chooses outsourced manufacturing or self-manufacturing, success depends on having the right systems in place to maintain visibility, streamline processes, and improve collaboration across the supply chain.
Enhance your processes and improve communication between you and your manufacturing partners with Manufacturing Supply Chain from SPS Commerce.
