Even the highest-level managers in certain businesses find it almost blasphemous to talk about partnering with other entities to accomplish activities that they have been doing for years. The discussion usually finds its way to someone stating that paying someone else to do work currently done in-house would reduce profit.
Although such an assertion could prove true, enlightened, successful companies regularly review their core competencies and compare the costs/benefits to services that are available from competent, third-party providers. One of the key drivers for Philpott is understanding what we do well and ensuring time, energy and money are not wasted on keeping certain operations in-house that others could do faster, more efficiently and often at less expense.
Taking a closer look
A relatively recent example of the benefits of such partnering emerged when I joined Philpott in 2007. In reviewing our historical operating metrics, I found that we consistently experienced significant negative variances on our freight expense line. As a small company, Philpott did not have a sophisticated logistics program. The person responsible for arranging our product shipments was firm that the amount of product we shipped would lead to the best available freight rates. When presented with the alternative of having a third-party manage our logistics, it was met with the disbelief that adding the expense of a third-party provider could result in better prices than we got working directly with the freight companies.
During our interviews with three highly experienced freight logistics companies in Northeast Ohio, we learned that logistics were not our core competency. We have been successfully working with professional logistics partners ever since that have not only allowed us to eliminate our negative freight cost variance, but also allowed us to pass on cost savings to our customers.
Building on the idea
This same partnering concept was employed more than a dozen years ago when foreign competition for industrial rubber and plastics took the bottom out of the market due to the relatively insignificant cost of labor in Asia. Since no manufacturing facility is ever 100 percent utilized, inefficiencies in labor utilization compounded the significant employee cost advantages global competitors already enjoyed.
Rather than throwing in the towel and moving all of our manufacturing to China, Philpott negotiated contracts with several rubber and plastic molders whereby our partner would act as the host for housing our equipment, tooling and compounds. Philpott then essentially rents labor from the host partner to make our parts. This provides benefit to our partner by increasing overall labor utilization and overhead absorption while providing Philpott nearly full labor utilization. Although this does not entirely close the gap with Asia’s labor cost advantages, it has kept pricing close enough at certain volumes that has allowed our customers to purchase high quality, made in the USA parts at a competitive price. More importantly, this partnering approach serves to create and maintain jobs here in America.
In manufacturing, focusing on our core competencies while partnering with competent third-party providers can keep us focused on satisfying customers while increasing profits.