When Is It Best to Insource Production?

To meet demand, U.S. manufacturers with a global footprint have typically depended on suppliers from low-cost countries or those with specific manufacturing or process expertise. But the rapid shift in consumer demand patterns and numerous supply chain disruptions over the past three years have forced a dramatic change in strategic sourcing initiatives.

Tesla’s success with insourcing has been an early example for manufacturers of the need to reassess their supply chain strategies. Since then, other global manufacturers have been taking steps to reduce dependency on outsourced partners for critical parts and processes and, instead, investing in vertical integration opportunities. In the United States, recent government incentives under the Inflation Reduction Act and Chips and Science Act for developing and manufacturing EV components and semiconductors domestically have accelerated this move.

So when is insourcing a viable option? In many cases, cost is not a primary consideration. More important are improving supply chain resiliency and having more control over the value stream to better manage the inbound material flow and traceability, especially for custom part designs and complex assembly operations.

Insourcing investment decisions are traditionally based on three factors:

• Internal capacity expansion
• New product development
• Adding new capabilities to meet business objectives related to customer retention and growth

Other factors may include:

• Needing to improve operational efficiencies
• Prioritizing investment in environmentally friendly manufacturing technologies, health and safety-related work practices to meet ESG initiatives
• Reducing manufacturing lead times

Corporate Insourcing Strategy  

To ensure a positive net return on their investment, manufacturers must take a step back and evaluate their insourcing options holistically before making a decision.

Some things to consider:

• Insourcing tends to be most beneficial for large-scale production when in-house manufacturing operations align with the organization’s core competencies. An excellent example is large-volume steel manufacturing. Pig iron is an essential raw material for steel production. In 2021, the U.S. was the world’s largest importer  of pig iron. In 2022, U.S. Steel Corp. announced that it would insource pig iron at its Indiana steel mill ease to ease geopolitical risk and increase efficiency without reducing production output.
• Insourcing helps restrict the degree of external proprietary knowledge-sharing and promotes product innovations through made-to-order product lines and new product introductions.

Other gains include:

• More opportunities to improve the quality of the final product and time-to-market service performance
• Improved supply-chain visibility
• Rapid implementation of best-in-class practices, especially around continuous improvement, automation and reverse logistics within the supply chain.

Insourcing can also help minimize the impact on supply chains due to macroeconomic events. It may eliminate hidden supply-chain costs like tariffs, import duties, company-specific taxes, foreign currency exchange rates and additional freight costs.

Financial Implications  

At the same time, it’s important to carefully consider costs for in-sourcing that will require significant capital investment, such as adding new production lines or building an additional warehouse. And substantial demand forecasting is necessary to ensure that the existing market forces are not a short-term trend.

Other fixed costs to consider are increased labor and the upskilling of employees in an inflationary market where skilled workers are hard to find. The analysis should also include regular maintenance costs of new capital investments.

Other Concerns

Outside of cost, the other concern with insourcing is the significant amount of time it could take in the short term for a manufacturer to build new capabilities and expertise while ensuring that the right resources are allocated for timely execution.  

Project completion timelines can be hard to establish, especially for new product innovations and processes with higher production volumes. Depending on a design's complexity and the employees’ skill level, testing and ramp-up timing may be lengthy, with little flexibility on the timeline.

An additional constraint with insourcing is limited internal flexibility. An unexpected spike in orders from new or current customers can mean lost business or late delivery if the current demand exceeds the internal production capacity. That’s why it’s crucial to have a contingency plan to handle overflow production volumes and maintain relationships with outsourcing partners.

Overall, it’s wise to deploy a combination of insourcing and outsourcing strategies to minimize supply disruptions and maximize organizational value in the long run. Give careful consideration to trade-offs between costs and quantifiable benefits.

Vineetha Jayaram is a supply chain professional with more than 12 years’ experience overseeing category management initiatives, driving process improvements and spearheading global supply projects focused on risk mitigation. She is currently working as a global supply manager in Solon, Ohio, with nVent, which is a global leader in electrical connection and protection solutions serving primarily industrial, energy and infrastructure markets. Previously, she worked in procurement roles at Pentair and Avery Dennison with an internship in process improvement at Philips Medical Systems.