As a procurement professional, you’re constantly challenged to get the most bang for your company’s hard-earned money.
The challenge to maximize return is one reason why outsourcing is so appealing. Outsourcing services can help your company save money, increase productivity, and improve product quality.
However, choosing the right contract service provider can be challenging. It can be tempting to simply choose the lowest bidder. However, this is not always the best course of action. It’s important to dive deeper into the specifics of a low bid before you sign a contract (or dismiss it out of hand).
First, determine how prospective contractors and their bids compare on some key factors:
Do they understand what you need from them?
Can they meet your timeline?
Do they have the internal capabilities – the staffing, expertise, and facilities to do the work specified?
Do they have experience with your products and industry?
According to Dr. Matthew Liotine, Vice President of BLR Research and Professor at the University of Illinois at Chicago, “another key criterion should be the contractor’s dependability. Any contractor under consideration must have an agile production infrastructure that can easily respond to changes in product requirements and volume. They should also have resiliency plans in place to respond to disruptive events, whether internal or in response to the buyer”.
All things being equal, is it then time to choose the lowest bidder? Not necessarily.
Complicating your decision is the possibility that the bids you receive from prospective contractors vary significantly in cost. You may also receive an unusually low bid that seems appealing on the surface. An unusually low bid should raise some red flags and require a thorough review.
Reviewing the Low Bid
There may be legitimate reasons for an unusually low bid. The contractor may want your business and will sacrifice some profit. They may, for example, be relatively new in the market and want to use your job as a “showcase” to help get more jobs in the future.
In other cases, an established out-of-state contractor may want to develop a local presence and view your project as a way to get their foot “in the door” with your company.
It’s also possible that the lowest bidder made a mistake due to misinterpreting your specs and plans. More concerning is the possibility that the low bidder included services irrelevant to your needs while other, more essential services were left out. Something could also be left out of the bid to make it seem more appealing.
It’s also worthwhile to consider how much a low bid deviates from the mean cost of the submissions you receive. Any low bid should be examined line item by line item to see how it compares with bids closer to the mean.
For example, consider a firm that solicits and receives bids for an ongoing service such as cleaning, lawn care, or equipment maintenance. Upon comparing the projected number of labor hours and personnel included in each bid, it’s readily apparent that there are significant differences between the bids. Procurement staff are concerned that the lowest bidder likely underestimated the people and labor hours needed to handle the work specified in the bid. In this case, the lowest bidder is not the best choice.
When the Low Bid is the Best Choice
The goal of any procurement process is to find the best quality service for the best possible price.
Unfortunately, the lowest bidder may not always provide the best bang for your company’s money. You won’t save money if you aren’t getting what you need from a contractor. A poor choice of contractor could compromise your product quality, jeopardize your delivery schedule, and lead to unhappy customers.
Fortunately, there are times when the lowest bid is the best choice. You’ve struck gold when a contractor can provide both quality service and a low price.
Any company that is contemplating reshoring their contract manufacturing should also consider whether it would make more sense to produce their components or products in-house.
This decision, commonly referred to as the “make-or-buy decision”, will depend upon a variety of factors. These factors should include the company’s core competencies, the product’s maturity and criticality, the volatility of the product’s demand, and whether or not the contractor can produce the items better and cheaper.
In the post COVID era, another key criterion should be the dependability of the contractor. Any contractor under consideration must have an agile production infrastructure which can easily respond to changes in product requirements and order volumes.
In addition, they should have resiliency plans in place to respond to disruptive events, whether internal or in response to the buyer. The contractor must ultimately be able to achieve these characteristics more economically than the buyer.
Choosing the Product to Outsource
While the decision to consider contract manufacturing depends on many factors, they can all be surmised in one word – risk.
Products that fall into the high-risk category are typically those that are of high-value or are brand-new, either with high or low demand volatility. Such products will likely serve as candidates for in-house production. Lower value products with high but stable demand that require high labor effort are better suited for outsourcing.
To guard against uncertainty in demand, firms typically produce less volume in-house to avoid overproducing. However, by doing so, they risk not being able to fulfill their production requirements. In this scenario, they would benefit by outsourcing their work to an agile and responsive contractor.
Contract manufacturers are use to working with a multiplicity of products and buyers and have mastered the integration of both product and process focused operations. A responsive contractor can simultaneously operate multiple production lines for different clients, often at a lower cost. Such contractors provide value by absorbing uncertainty (at a committed unit price) and eliminating the buyers risk of not completely fulfilling often fluctuating production requirements.
Consider a buyer who needs to fulfill an uncertain demand requirement to package, seal, and case pack tins of a particular product. Finding a contract manufacturer who can produce a fixed volume at a fixed price, say 2 million units at a unit price of $1 would be an attractive option. If the buyer were to attempt to satisfy this demand on their own at unit costs equivalent or above this price (which will likely be the case), the contract manufacturer would still provide savings over a wide range of volumes.
To analyze this situation, we developed a computational model1 to estimate the cost savings of having a lower cost manufacturer producing a volume of an item, versus the buyer producing the same volume on their own.
Our model showed that outsourcing provides savings from 3-30% over volumes ranging from 500 thousand to 2.5 million units – enabling the buyer to respond to fluctuating demand. The exact savings would depend on the level of volume and the buyer’s own unit cost percent increase. Firms might be driven to insource when volumes are high and demand variability (or uncertainty) is high, but they run the risk of overproducing or being short of product.
A Matter of Choice
In this post-COVID era, companies are contemplating insourcing versus outsourcing to contract manufacturers in attempts to near or on shore production. Assuming that it would be simply cheaper and safer to produce items in house places the firm at risk, for the very reasons described above.
Transferring risk to a responsive, agile, and lower cost contract manufacturer can better hedge against uncertainties surrounding product demand. Our example demonstrated that such an option can robustly provide added value to a buyer.
While cost is typically a determining factor when choosing a supplier, it should not be the sole criteria. Quality and reliability are two necessary characteristics that assure a supplier’s ability to unfailingly fulfill the product’s volume requirements, otherwise they would provide additional unwanted risk. Altogether, utilizing a dependable contract manufacturer serves as an insurance policy for successful fulfillment.
After the COVID-19 crisis, companies realized that they cannot do things the same way as before. Since then, companies came to recognize how important it is to have a resilient supply chain. Since crises like these will likely happen again, companies will have to plan strategies that can keep their supply chains operating reliably when they occur. Since companies will not be able to control when these events occur, they will need to devise plans to minimize the direct and indirect impacts of these events on their operations. Preparing well made plans can create some assurance regarding how a supply chain can respond to such events. These plans do not have to involve elaborate methodologies, but can employ simpler tactics such as adjusting inventory and lead time, and identifying and reserving robust and reliable sources of materials, transportation and production capacity.
Value Over Price
As companies consider moving their operations back to the U.S., they will still need to diversify their production resources and material suppliers in some way. Some companies will opt to keep all production in-house, but this can pose some risk if a company loses some of their own production capabilities during a crisis. Hence, extra suppliers of production and materials should be selected and retained using criteria other than solely the list price, which is most often utilized. It begins with finding those suppliers who can be reliable sources for materials and production. In addition to price, factors to be considered would include, among others, supplier quality, response, coordination and logistics, required control and visibility, compliance, reputation, intellectual property protection, and business contracts and agreements.
It’s All About Risk
Since suppliers should be viewed as business partners and not adversaries, contractual terms should seek to have all parties sharing risks in some way. Since risk arises from uncertainty, anything that a company can do to eliminate uncertainty in their supply chain can reduce risk. Reserving additional reliable sources of production and materials can further reduce uncertainty. This starts with realizing how a supply chain network is driven by the way the very products it supports are designed and produced. Products should be designed, or at least examined, for those portions that require responsive and dependable sources. This can then form the basis for creating the criteria for choosing the right production and material suppliers, and create further certainty that the product can be produced in a reliable fashion, even during a crisis.
Resilience by Design
In the post COVID era, firms realized that resilience must be built into the design of a product’s supply chain network. It involves using some of the aforementioned approaches, that are based on fundamental principles which did not radically change after the crisis. They include:
• Preparing response plans to minimize the impacts of adverse events on production and sourcing;
• Proactively diversifying material suppliers and production resources, including those that are in-house;
• Pre-emptively reducing risk by eliminating uncertainty in critical points throughout the supply chain, including choosing reliable and responsive suppliers and production contractors.
Hence, utilizing some simple basic approaches can ultimately shape a fulfillment network that can withstand the effects of a variety of crisis.
A unique business model allows Peoria Production Solutions to provide needed wages and benefits for employees while offering competitive pricing for high-quality assembly, kitting, packaging, and other post-production services.
In an era of ongoing labor shortages and high employee turnover, Peoria Production Solutions (PPS) enjoys an exceptionally low turnover rate of just four percent. Nationally, the average turnover rate for manufacturing companies is 43%.
At PPS, longevity is the rule, not the exception. Out of 230 employees:
Number of Employees
Years of Service
An impressive 60% of PPS employees also have consistently perfect attendance.
What accounts for these impressive statistics? A sense of engagement? Job satisfaction? Loyalty and commitment? All of these are factors, but it also has a lot to do with the significant role that PPS plays in the lives of their employees.
Peoria Production Solutions is unique in the sense that 57% of the employees have a diagnosed disability.
It is well known that people with disabilities experience high levels of unemployment. Unfortunately, even though they have exceptional skills and abilities, more than 50% of disabled Americans are unemployed at any given time. On average, the unemployment rate for people with a disability is nearly twice that for people without a disability.
The sad reality is that people with disabilities often find it difficult, if not impossible, to obtain satisfying, paid employment. That’s why the jobs and support offered by PPS provide a unique opportunity for persons with disabilities to gain financial and social independence.
The Key to Success
Peoria Productions Solutions’ key to success is focusing on the strengths and abilities of employees, rather than their disabilities. These abilities include (among others) exceptional attention to detail, dedication, and an eagerness to learn new skills.
By creating an environment that is respectful and affirming, the organization creates a win-win for both employees and customers. Customers benefit from the consistently high-quality service that only an organization with a skilled, stable, and dedicated workforce can provide.
Established in 1941
From the very beginning, providing employment and support for people with disabilities has been central to Peoria Productions Solutions’ mission. Established in 1941, the original goal was to provide employment to people recovering from tuberculosis. After incorporating as a not-for-profit company in 1951, the mission was expanded to provide employment, training, and encouragement for all persons with disabilities.
As a self-sustaining 501(c)3 charitable organization, PPS provides contract assembly and other production services for companies of all sizes in a wide range of industries. Services include assembly, wrapping, packaging, kitting, sewing, cutting, finishing, rework, and salvage, as well as turnkey solutions and shipping of finished products.
Peoria Production Solutions recently partnered with PointCore, another Peoria, Illinois based company with a high reputation for providing expertise and management of nonclinical healthcare services. PointCore identifies areas of growth and helps businesses to operate smarter and more efficiently. PointCore provides value across all aspects of nonclinical healthcare operations to add value across healthcare systems that improve operational efficiencies, workforce performance, and patient outcomes.
PointCore works exclusively in healthcare, helping healthcare providers with decades of experience managing nonclinical areas for clinics and hospitals of all sizes. Peoria Production Solutions is proud to expand our operations to join PointCore in their mission to help healthcare systems that are facing increasing pressure regarding supply availability, cost, and operational effectiveness and efficiencies.
Innovation through Strategic Partnership
PointCore initially reached out to PPS about this opportunity to see if we would be willing to partner with them which would entail building a clean room and installing a three ply mask machine. They knew we had the capacity, labor, and resources to add value to their domestic supply chain. Through this strategic partnership, we have had great success in meeting our goals and fulfilling the vision of improving PPE mask production for the healthcare industry.
Peoria Production Solutions shares PointCore’s efforts to solve supply chain issues in PPE manufacturing. PPS has expanded our operations to include machinery and mask making equipment to manufacture PPE face masks including ear loop masks, surgical masks and N95 masks, in our FDA-certified clean room.
We manufacture, inspect, and package PPE face masks with ample room in our state-of-the-art, modern facility with a team of skilled and dedicated staff. Through this strategic partnership, USA made PPE face masks will help PointCore partners to gain better control of their supply chain.
PPS: Driven by a Mission to Positively Impact our Community
PPS is a manufacturing company based in Peoria, IL, that provides employment, training, and encouragement to people with all disabilities. One of our goals is for our employees to achieve financial and social independence in an environment that is respectful, encouraging, and safe. Jointly, Pointcore and PPS achieve both of our missions of transforming healthcare and positively impacting the communities in which we serve.
80+ Years of Creating Jobs and Helping our Customers
Since 1941, Peoria Production Solutions has been driven by our mission of creating jobs for people with disabilities. The company was founded to help patients recovering from tuberculosis to find employment, and today we have grown into a fully self-sustaining not-for-profit company providing a wide range of production and contract packaging solutions.
We invest in our employees through training, encouragement, and provide a family-like atmosphere where our staff enjoys coming to work and is committed to a job well done, in every aspect of their employment.
We recruit and invest in a wonderful team of people that gain experience and master running precise, automated equipment. Our team is committed to a job well done and total customer satisfaction, following strict quality policies as part of our ISO9001:2015 registration. We provide leadership and encouragement with top-down management involvement, where every employee shares in the goal of high-quality, efficient, and productive work.
PPS offers a host of production and packaging solutions, including mask production and healthcare packaging. We offer kitting, assembly and secondary packaging solutions for OEM and private label products including fascial assembly and manufacturing and secondary packaging of many healthcare products. Contact us to learn more about this innovative partnership and our face mask production capabilities.
Peoria Production Solutions recently had an NPR article written about the company regarding its work with Rivian, the electric automaker that produces in Normal, Illinois. Rivian outsourced with PPS to meet their assembly and manufacturing needs on their electric delivery vans.
This article was published on May 18, 2021 and updated on February 16, 2023
Many types of companies have a need to assemble their products, whether a manufacturer that requires the assembly of components for further manufacturing processes or a retailer that must assemble products to make themselves ready for display. Companies that require product assembly must either perform these services in-house or outsource to a contract assembly provider. Outsourcing can be very beneficial to companies, although they should be aware of the advantages and disadvantages of contract assembly.
Advantages of Contract Assembly
Companies that utilize the services of a contract assembly provider can realize many benefits that can improve productivity and increase profitability. Some of the ways in which companies realize advantages with contract assembly include increased internal capacity, which allows the company to focus on their niche manufacturing market, budget control, improved quality and delivery, and insight from an experienced assembly provider.
Increased internal capacity – companies that require assembly of products must dedicate floor space and labor to perform in the assembly process. By outsourcing this process to an assembly provider, companies free up internal resources with increased capacity.
Savings on labor and benefits – by outsourcing contract assembly, companies do not need to hire and train individuals to perform these processes, which saves on labor expenses as well as benefits and continual training with employee turnover.
More resources to focus on niche production – freeing up floorspace and labor by outsourcing assembly allows a company to focus on its niche manufacturing market or products.
Increased productivity – companies that receive assembled products on time can improve their own productivity by producing more products internally and increasing sales revenue.
Improved profitability – with a reputable contract assembly provider, companies can increase productivity and profitability with budget control and assurances of receiving quality products on time.
Improved quality and delivery – companies that are having a hard time meeting in-house assembly demands can improve their delivery by receiving assembled products on time. Working with an experienced assembly provider can improve quality when working with a quality-minded assembly house, particularly one that is certified to ISO9001:2015 and practices quality policies.
Insight gained from experienced assembly providers – experienced assembly providers can offer insight into the most efficient assembly methods and offer suggestions to manufacturers to improve the quality and delivery of assembled products.
These are some of the advantages of working with an experienced and quality-focused contract assembly provider.
Disadvantages of Contract Assembly
Companies seeking the services of a contract assembly provider should ensure that this provider has the experience and ask to see their quality policies and performance, including customer satisfaction and on-time delivery history. When working with an experienced, quality provider, there are not many disadvantages of contract assembly. Some issues that could arise with an inexperienced provider may include communication errors, less control over the entire project, intellectual property risks, and quality and delivery issues.
Communication errors – outsourcing to a third party could create communication errors if either party does not clearly relay assembly or quality requirements or issues that may arise. Make sure your assembly provider is responsive to your needs and specifications.
Less control over the entire project – using the services of a contract assembly provider means trusting the provider and having less control in-house over the process. Working with an assembly provider that has a track record of delivering quality assembled products can ease any concerns over losing complete control of a project. Make sure that a work process is developed with quality checks as required to meet your specifications, including any critical dimension checks and quality audit requirements.
Intellectual property risks – companies that must assemble proprietary products or government projects must ensure the safety of intellectual property. A trustworthy and reliable assembly provider will sign nondisclosure agreements and ensure the protection of intellectual property.
Peoria Production Solutions, PPS, is a reliable and quality-focused contract assembly provider with more than 80 years of experience. We provide clear communication, work processes, and quality checks that align with our ISO9001:2015 certification and internal quality processes. You can have confidence in our experience, quality procedures, and highly trained staff to deliver contract assembly products on time and to your specifications.