How To Balance Cost Control And Flexibility Before Committing To More Internal Capacity
A bigger order book is good news. It can also create pressure to add people, equipment and internal capacity before the business has had time to understand what that growth will really require.
That pressure is understandable. No leadership team wants to miss an opportunity because it moved too slowly. But decisions made in a hurry can commit cash, inventory, suppliers and specialist skills for years.
Capacity planning is therefore only part of the picture. Leadership teams also need to ask: what do we need to own to deliver well, and where could we remain more flexible?
Look Beyond The Traditional Make Or Buy Calculation
In our work with clients, make or buy decisions are rarely just about the relative cost of internal production and an external supplier. They affect the wider supply chain strategy and the way the operating model works.
Some capabilities clearly belong inside the business. They may protect intellectual property, security, product quality or continuity of delivery. They may also depend on knowledge and experience that people within the organisation have built up over many years.
Other capabilities may be better accessed through suppliers, partners or flexible manufacturing capacity. This can help a manufacturer respond to demand without immediately committing to more fixed cost.
We are not advocating outsourcing manufacturing by default. Our role is to help the people making these decisions develop a clear, shared view of where ownership creates a genuine advantage and where external capability could provide better economics or greater flexibility.
A traditional insourcing versus outsourcing assessment may focus heavily on unit cost. A decision made in response to growth needs to consider the full commitment:
- What capital and working capital will be required?
- How quickly can the internal and external options scale?
- Do suppliers have the capability and incentive to support the plan?
- How difficult would the decision be to reverse if demand or the product changed?
- What new risks would each option create?
The lowest-cost answer today may not be the best choice over the life of the product or contract.
Four Questions To Test Before Adding Capacity
Before committing to permanent capacity, leadership teams should be able to answer four questions.
What must we control?
Identify the capabilities where ownership is essential because of intellectual property, security, quality, customer commitments or supply risk.
What could we access externally?
Consider where suppliers, strategic partners or flexible manufacturing capacity could provide expertise, scale or responsiveness without a permanent internal commitment.
How reversible is the decision?
Understand whether equipment, people and inventory could be redeployed if demand, technology or product requirements changed.
When will growth generate cash?
Test how much working capital the business must commit before the additional revenue begins to produce a return.
These questions will produce different answers across procurement, operations, engineering, commercial and finance teams. That is to be expected. Each function sees a different part of the risk.
The important step is to bring those perspectives together early, using the same facts and assumptions. When people can see the whole picture, the trade-offs become clearer and the business is more likely to reach a decision it can put into practice.
Make Growth A Deliberate Operating Model Choice
Growth should not automatically lead to more internal capacity. Nor should manufacturers outsource capabilities simply to avoid investment.
The right answer depends on where the business needs control, where suppliers can add value and how much flexibility is worth under different demand scenarios.
These decisions are best made with the people who understand the products, customers and operation. We work alongside them to consider cost, capacity and supply risk together. We do not arrive with a predetermined answer; we help the team make a choice that works commercially and can be delivered in practice.
As part of the FourCentric group, we can draw on wider expertise across procurement, supply chain and operations when decisions cross functional boundaries. Jeremy Smith, our Managing Director, takes a broader look at the subject in a longer article on the FourCentric website. He considers how product strategy, supply chain design and investment decisions need to work together as manufacturers prepare for growth.
Continue reading on FourCentric: Supply chain strategy for growth: is your operating model ready?
