- 11 January 2007 -
Pros of Outsourcing to In-house Contractors
By Tim Klopfenstein, Metokote Corp.

One of the eternal challenges equipment, component, and parts manufacturers—indeed, all manufacturers—regularly face can be summed up in three words: make or buy? That decision can be complex, as it touches on matters of economics and core competencies. Such decisions can become even more complicated when it comes to processes such as paint and coatings.

Coating application is often considered a "necessary evil" for manufacturers and suppliers. Traditionally, manufacturers elect to either install their own in-house coating equipment or ship parts to the nearest capable job shop. However, there are many concerns associated with both of these options.

Owning a captive system in a manufacturing facility is frequently considered a questionable business expense. First, it is difficult, at best, to identify the "true costs" of the coating application—especially if coating is not considered a core competency. Identifying the true cost of coating in-house is difficult due to the fact that many costs associated with the coating activity are buried in other areas of the operation. Realistically, then, these costs are not present when the total responsibility for all coating activities are shifted to another firm. However, if these "true costs" are not accurately represented in an analysis of the present operation, a cost-saving opportunity to outsource to a firm with expertise in coating application techniques is potentially missed.

Another consideration is related to the quality and experience level of the staff required to operate and manage a coating system. Where larger facilities could support the associated labor costs, today's new, logistically friendly manufacturing plants are typically smaller and cannot feasibly duplicate staff to manage sometimes complex coating systems. Serious consideration has to be given to accurately defining what the coating operation will entail and making the commitment to spend precious capital dollars on that equipment and personnel, even without the expertise and track record in coating.

Outsourcing to the nearest job shop can raise concerns as well. Immediately, work-in-process inventories increase in order to meet the demands of the customer. Secondly, there is the significant issue of the cost of rejects due to shipping products to and from the coater. Manufacturers often must add cost to the finished product price to account for the possibility of rejects. For instance, packaging materials (such as paper, boxes and returnable containers) are usually required when outsourcing coating operations, also adding cost. In addition, corrosion can be a problem when shipping raw product to a job shop some distance away. The concern can be alleviated—at considerable extra cost—by applying a rust preventative before shipping to the coater, or by having the coater remove potential red rust or the rust preventative itself before coating. Finally, manufacturers are often nervous at the thought of having a supplier perform the final inspection of products that are then sent directly to their customer.

Fortunately, an alternative option is available to those in need of coating application activities that can actually save manufacturers capital and headaches over traditional in-house coating systems. This model, designated as "InSite™," has been successfully designed and delivered to the marketplace by MetoKote Corporation for years. In the marketplace, the InSite™ model has also been referred to as a systems integrator activity or simply as an outsourced, in-house coating application solution.

The previously mentioned concerns only fortify the very reasons why it may be advantageous for firms to consider the InSite™ model. The model is especially beneficial to firms that are considering a future capital event such as relocating manufacturing operations, updating an aging coating system, or simply for those firms that are in the midst of considering changing technologies in order to satisfy increasing customer demands for coating quality and appearance.

The InSite™ model entails a systems integrator such as MetoKote designing a coating application system, fabricating it, and installing it inside the customer's facility while operating that system over a long-term contract period. Over the past 15-plus years since the on-site coating application model was introduced, many OEMs and parts manufacturers have realized the multiple benefits of utilizing such a model that can deliver a customized, full-system management concept inside their facility. For one, the customer who selects this model does not outlay any capital for the system, thereby preserving their own capital for operations that are more fitting to their unique and distinctive core competencies.

Systems Integrator As Expert
Another significant characteristic of the model is that the systems integrator also delivers all of the expertise associated with managing the coating function. When a firm employs the systems integrator model, it is no longer necessary for them to make the commitment to becoming a “specialist” in an area external to their manufacturing expertise. An in-house provider should deliver a comprehensive on-site coating program incorporating system design, fabrication, installation, ramp up and long-term operation, thus removing those responsibilities and associated costs from the customer's plate.

As an example, simply consider the cost and talent associated with coating system operation: system design; development of racking methods; system maintenance; future upgrades; material and process selection; performance testing and certification; wastewater treatment equipment and operation; training of operators and staff; and such environmental expenses as permitting, reporting and certification. These costs can be considerable and, in many cases, overwhelming.

Additionally, the model yields to the customer the benefit of understanding up front what the cost of coating application will be over the life of the service agreement. In essence, the customer receives a customized coating application system designed for the particular need of their product(s), at a known cost for a long-term contractual period. Pricing is designed so that as volume increases, the overall cost per unit is reduced. Imagine the competitive advantage of knowing what your total coating costs will be—not only in the first year of the contract, but also in the seventh year!

Perhaps one of the least evaluated—yet perhaps the most significant—benefit of employing this type of model is the reduction of long-term risk. An effective outsourced, in-house coating application arrangement should deliver a guarantee of sorts with regard to cost, quality, performance, and throughput. A reputable systems integrator should possess a breadth of experience directly related to the long-term operation of multiple coating application systems, including electrocoat, powder, wet paint, plating, and specialty coating application systems.

Selecting a firm with this depth of experience translates into expertise in the form of personnel who have benefited from the shared organizational knowledge associated with coating application activities. Given the fact that coating application should unmistakably be your system integrator’s distinctive competency, the provider will simply be better equipped to know where to look internal to the operation in order to increase efficiencies, reduce costs and downtime, employ strategic racking methods and pretreatment methodologies, and effectively maintain a coating system more efficiently than someone who does not possess the same depth of competency. Even something as simple as understanding what critical maintenance components that should be inventoried as spare parts can be of tremendous benefit when it comes to minimizing critical downtime, thus virtually eliminating the risk of potential shutdown penalties for the customer.

An effective systems integrator is also able to deliver a leveraged advantage of overall lower material costs due to the volume of coatings and pretreatment chemicals that the firm utilizes on a global basis in comparison to the customer who typically does not buy nearly as much coating materials annually. These key market advantages yield reduced long-term risk for the customer and allow the systems integrator to deliver the model at a competitive cost.

For more information on this study, see the January issue of Metal Finishing.