Internal External Development: Production Trade-offs

Date published: 10th of May, 2023
Last Updated: 9th of June, 2023

Introduction:

Externalizing is a prevalent practice among individuals and organizations seeking to streamline operations, reduce costs, and tap into specialized expertise.

Determining whether an activity should remain externalized or it should be internalized requires careful consideration, as there is always a trade-off. In this blog post, we explore three factors builders should evaluate when making these decisions; Strategic Alignment, Cost Considerations and Risk. 

1. Strategic Alignment

When deciding between outsourcing and internalizing, it is crucial to evaluate how the activity aligns with your organization's strategic goals. Outsourcing can be an effective strategy for non-core activities that do not directly contribute to your competitive advantage. By delegating these tasks to external vendors, you can focus your resources and on building on functions that differentiate your project in its context.

On the other hand, if the activity is tightly linked to your unique value proposition, internalizing might be the better option. Keeping this activity in-house supports greater control, allowing you to align it more closely with your overall strategic objectives. It enables process customization, as it integrates into other internal functions opposed to needing to wait, and arguably most importantly, allows the maintenance of a competitive edge by preserving your intellectual property.

An example of this is deciding to produce the next collection here fully within Australia opposed to overseas. Quality can be managed with ease as logistics can be personally undertaken, and any product variances are able to be resolved with a lower environmental toll, and timeframe. Additionally, any patterns, fabrics or new experiences undertaken are kept within this team, opposed to shared with one which may at a time work with competition on similar ideas. It is then in our best interest to not enable our competitions growth. Allow your competition to undertake their own research in their own way.

2. Cost Considerations

Cost is a fundamental aspect all organizations must carefully evaluate when deciding between outsourcing and internalizing. While outsourcing can at times offer cost advantages, such as reduced labor and their supporting expenses, it's essential to conduct a thorough cost analysis. Consider both the short-term and long-term implications of each option.

Externalizing often involves signing contracts with external vendors, which may come with varying pricing structures. Make sure to assess the total cost of integration, including any unknown charges, potential price escalations or reviews, and termination fees or breaches of contract. Finally, these facets require management and overseeing the outsourced activity is also a component that costs.

Internalizing an activity requires upfront investments in infrastructure, technology, and human resources. However, it can provide greater cost control and potential cost savings in different time horizons. Consider the scalability of the activity and whether bringing it in-house would allow you to leverage economies of scale over time. Conducting a comprehensive cost-benefit analysis will help you make an informed decision.

An example of this is the trade-off apparent with screen-printing. Often with a 20+ Minimum Order Quantity when externalized, this can be several hundreds of dollars, and if only a handful of items are sold, the gap in material and financial waste can be detrimental. The gap can however be absolved from the acquisition of a printing setup for the office. The cost of a custom screen to be burnt for own-use, and the skill required to print most designs is a low-hanging fruit for a fashion brand to internalize, and one that pays itself off quickly, alongside being able to receive the items as they're completed, not needing to pick them up. But contrastingly, space, maintenance and the operational skill are required.

3. Risk Management

Risk management is a crucial aspect to consider when deciding between outsourcing and internalizing. By outsourcing, organizations can transfer selected operational tasks and therefore, risks to external vendors, leveraging their expertise and specialized capabilities. However, this also introduces dependencies on the vendor's performance, consistency, and timeliness.

In cases where sensitive information or property is involved, internalizing the activity may provide better control for risk mitigation. Internalizing allows organizations to establish and maintain quality standards with shorter feedback loops while protecting valuable assets. It also reduces the risk of intellectual property leakage, as you have direct oversight of all processes and access points. The skillset and learnings developed in completing the task is also kept inside the business, which prevents learned IP from being picked up by competition.

While internalizing an activity mitigates certain risks, it also exposes organizations to new challenges. Building and maintaining the necessary infrastructure, acquiring specialized skills, and adapting to market changes can be demanding and require significant investments. Assess the risks associated with both options and determine the level of risk tolerance your organization can bear.

An example of this is needing to add brand tags onto the neck-seam. Initial attempts, although eventful, were not up to the required standard that the externalized garment provided. It was best to delegate this task in short term to a seamstress, while learning how to sew, at least tags, to then internalize the activity and save costs later down the track.
The neck-sewing ability would then turn into whole garment creation as an internalized activity, which will save roughly 1/3 of average garment sale price. 

Conclusion

Choosing between the external or internalization of tasks is a complex decision that requires careful analysis and consideration of multiple factors. By evaluating strategic alignment, cost considerations, and risk management, organizations can make an informed choice that aligns with their goals and maximizes their competitive advantage.

Remember, outsourcing is often suitable for non-core activities that do not differentiate your organization, offering cost advantages and specialized expertise. Internalizing is preferable when an activity is closely linked to your value proposition, providing greater control, customization, and the protection of intellectual property.

Over time, its best to internalize each repeated activity at least once to fully understand what's required to see it through to ensure quality, trust in pricing and an appreciation for what's undertaken and provided. Mistakes are part of the process, but repeating them after their emergence is however a [conscious] choice. Document, review and improve, you can do this!