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Make It or Buy It? Part 2: Opportunity Costs

Can You Find Your Opportunity Costs? Can You Find Your Opportunity Costs?

Doug Sharpe President of Elasto Proxy

In Part 1 of this blog series, we considered manufacturing overhead (MOH) costs – and how failing to account for them can cause companies to produce parts in-house even when outsourcing is more cost-effective. By adding these indirect costs to direct labor and direct materials, however, you can capture all of your expenses and make more informed buying decisions. Yet there’s another type of “cost” that doesn’t appear on your general ledger. Ultimately, it’s related to productivity – and quality.

What are Opportunity Costs?

Opportunity costs are the loss of a potential gain when you choose one option instead of another. For example, let’s say that your factory has four machines. All can do the same type of work, but the fourth machine can perform some additional, higher-value operations. If you’ve allocated all of your equipment to running lower-profit jobs, you can’t use Machine #4 to complete a higher-profit job that requires its advanced machine functions. The lost profit differential is your opportunity cost.

Did you know that opportunity costs can apply to personnel, too? For example, let’s say that a welder who normally makes $35/hour is cutting rubber profiles into gaskets, a task that could be performed by an employee who makes $20/hour. Even if the welder didn’t having any welding to do, your opportunity cost is $15/hour, the difference between the higher and lower pay rates. The more time that the welder spends cutting rubber instead of joining metal, the greater your opportunity costs.

Productivity Meets Quality

Some readers may argue that it’s better for a welder to cut gaskets than to remain idle. Yet that doesn’t change the fact that the welder’s higher pay rate is now part of the job’s higher overall costs. There’s also the possibility that relying on this welder for gasket cutting means that a second welder must now work overtime (at an even higher rate) because the first welder is unavailable. As skilled as both welders are at metalworking, neither specializes in gasket cutting.

By contrast, a gasket fabricator’s equipment does all of the work for you – and to your precise specifications every time. If your workers are cutting gaskets by hand, is the quality of work on Monday morning the same as on Wednesday afternoon? Does it vary by shift? Using a template and utility knife to do the job of a water jet cutting machine is just part of the challenge. Even if splicing goes smoothly, the gasket still must be installed.

By outsourcing gasket fabrication, you can find out-of-the-box sealing solutions that are cut-to-fit and ready-to-install every time. Just remove the gasket from the box and install it on the assembly line. There’s no cutting or splicing involved, and no special training or tooling required.  Workers can install more gaskets per hour, or complete an installation and then perform other duties that add value to your operations. Outsourced, fully-finished gaskets can perform better, too.

Quality Meets Sales

Would you buy a new car with a door that didn’t shut securely? If you were in the market for heavy equipment, would you invest in a half-million dollar machine where the gasketing hung off the door frame? First impressions matter – and you may not get a second chance.  If a car’s door doesn’t shut properly, a buyer may discount assertions that the automobile is well-designed. If a gasket is hanging from a door frame, a buyer may doubt claims about low maintenance costs for mobile specialty vehicles.

Losing the sale isn’t the only way that gasket failure can hurt a company’s bottom line. Let’s say that you’re a manufacturer of food equipment, and one of your customers is a chain with hundreds of stores nationwide. What’s the cost of replacing defective oven seals at every location? If your designers correctly diagnose the problem, do your production personnel have the tools and training to fabricate the replacement seals in-house? Who will do their jobs while they’re busy with re-work?

Skeptics may claim that buyers don’t pay much attention to door seals, or that gasket failure is unlikely. Remember, however, that opportunity costs are only one part of picture. What do the manufacturing overhead costs that we examined in Part 1 of this blog series tell you? Are you ready to reconsider whether in-house manufacturing is really more cost-effective than outsourcing?

How Can We Help You?

Do you need finished gaskets for applications such as automotive, construction, defense, electronics, food equipment, green power, mass transit, medical equipment, or mobile specialty vehicles? For 25 years, Elasto Proxy has been helping partners to solve sealing and insulation problems. From compound selection to seal design and custom fabrication, we’re ready to listen. How can we help you?

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