Should You Outsource Manufacturing? Ask Yourself Where Your Business Value Creation Happens

Peter McDonald on the potential business risks of having somebody else produce for you

One of the biggest highlights for me in my conversation with business strategy guru Peter McDonald of McDonald Strategy Partners on my “Manufacturing Talks” web show and podcast this past week (see the whole episode here) revolved around my question to him about Coke outsourcing a lot of its manufacturing. (You may be aware the company sold off most of its canning and bottling plants over the past decade or two.)

He compared the move to how McDonald’s doesn’t own most of its restaurants, and said this about the two companies: “The central question in both cases is, where and how is value added in this business for the consumer? I think what they have shown in both cases is, in the case of Coke, manufacturing and distribution isn't where the central value-add is. It's in product. It's in the secret formula. It's in the marketing. It's in the innovation and product development.”

I found his point absolutely illuminating. Coke is the perfect example of doing things right by his measure. While they shed their packaging operations, they kept the plants that make their syrups, where the consumer value is clearly created.

Now, as a manufacturing guy, I think there are a lot of other concerns beyond just that to take into account as well. As I mentioned in the show, product consistency and quality control, for example, are a couple of the biggies. But it seems both Coke and McDonald’s deliver pretty well on that front even using outsourced production.

That being said, I also think in general our finance “wizards” have given very short shrift to the value inherent in firsthand ownership of your productive capacity. Treating productive capital assets as a liability strikes me as a pretty awful accounting practice, as I detailed here.

But Peter’s observation gives one extremely good measure to consider when you’re thinking about overseas manufacturing or even domestic contract production: are you safeguarding where you’re actually creating value for the people who pay your bills?