Some issues in Strategic Outsourcing in FMCG Companies

In the current tough economic times when institutional knowledge about supply chain control is
suddenly of limited use and margins have shrunk, often little or no further scope exists in optimizing production. It is likely that many FMCG companies will look to changing their supply chain strategies and cost structures for competitive advantage. This paper tries to address the same through analysing how Strategic Outsourcing could help a FMCG company in Indian Scenario and also how difficult it is for them to manage this ‘change’. This paper is empirical in nature, and based on lessons learned from a study of a FMCG company.


The major reasons why big FMCG companies are shifting from traditional In-house
manufacturing model to a complex Contract Manufacturing are:-

1. Cost Benefits

The cost at which a vender can supply a material or finished goods is far less then when the
company makes it In-house. Costs consist of different components.

Capital Cost-

In turbulent times, companies have realised that investing the capital in setting
up new plant or extending the available capacity is not as fruitful, rather they prefer to utilize
the same in expanding the business.

General Manufacturing Cost-

It has been studied and realized by companies that the
manufacturing cost at which companies manufacture is almost double at which a contract
manufacturer’s (CM) site can manufacture, the main reason being their administrative cost
which is around 3 times as compared to CM sites along with the operating expense which is
around 1.5 times as CM.

Inbound Logistics cost-

In a pure in-house setup companies go for a centralized approach in
which a lot of material in huge quantities are manufactured at a same plant, so as to have
better utilization of its resources. This force the companies to buy the Raw Materials (RM)
from big suppliers that are few in the country RM, and this increases the Logistics cost.
However, at CM sites companies can follow a totally different approach in which they can
procure the RM for the smaller CM sites form their vicinity and hence reduce the logistic

Outbound Logistics cost-

The outbound logistics cost is directly proportional to how close the
manufacturing facility is to the end-users. In the CM site model which are small and many
this enables the company to reduce the FPLC.

Inventory holding cost-

There is cost attached to holding any inventory which is shared by
the CM site in case of outsourcing the material.

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Mon, 11/04/2011 - 22:36