The True Costs for OEM’s Trying to Handle Supply Chain Processes In-House

Supply chain operations are a lot like household chores: they clearly need to be done, but by whom depends largely on the household and its current circumstances. Also, just like how chore responsibilities change over time, the systems, procedures, and structures around supply chain processes sometimes need to be dramatically changed.

Of course, supply chain activities are a bit more complex than chores, but those activities can definitely feel burdensome when those processes zap resources and divert attention from operations that drive core business value. This is often the case with rapidly growing OEMs or those whose core strengths are in areas other than materials, like design or customer service.

If supply chain management (SCM) isn’t in an OEMs wheelhouse, then that OEM should look into outsourcing that function to third party logistics providers (3PLs) or full-service contract manufacturers (CMs).

There are certain scenarios where insourcing supply chain processes make sense, namely when the OEM has matured (i.e. stopped rapidly growing) or when the 3PL isn’t meeting the requirements outlined in the service level agreement (SLA).

Outside of those cases, the costs OEM’s incur by keeping supply chain processes in-house usually far outweigh the benefit.

The obvious costs

First, let’s discuss the obvious costs. These include capital investments in machinery in addition to the maintenance and operational costs of running warehouse facilities and fulfillment centers. For OEMs, which are currently renting their warehousing space, there’s the challenge of justifying those rent payments in the face of increasing warehouse rental rates since warehousing space (especially in or near urban areas) is getting harder to find.

There are also direct and indirect labor costs: wages, benefits, equipment, training, and space. It takes money to hire and retain people with the expertise to efficiently run a warehouse. Ditto for qualifying substitute parts and alternate vendors, supplier audits, managing inventory, and balancing production schedules. Since there is a global shortage of SCM talent, don’t expect any of those costs to drop anytime soon.

Furthermore, keeping sourcing and procurement in-house also means missing out on the shortened lead times and discounted part costs available through contract manufacturers who make big purchases for several clients at once, and thus have more negotiating leverage than many OEMs, particularly smaller ones.

Hidden costs

Other costs associated with in-house SCM are less visible. Examples of these include:

  • loss of focus on core business strengths
  • inefficient knowledge transfer and access throughout the OEM due to siloed systems and tribal knowledge
  • inter-departmental friction and politics
  • the opportunity costs of devoting resources to handle all the above instead of investing those resources in areas, which more directly drive revenue

An OEM’s true costs of keeping supply chain processes in-house are the sum of both these hidden and obvious costs. Some OEMs reach a point at which it just makes more sense to have someone else mow the lawn. Others will need complete grounds maintenance. In both cases, RiverSide Integrated Solutions can deliver cost-effective supply chain solutions that grow the bottom line.