You Say “Tomato,” I Say. . .

Originally Published MDDI November 2003

Outsourcing

You Say “Tomato,” I Say. . .

Maureen Kingsley

Is there a difference in meaning between the terms outsourcing and contract manufacturing? Well, yes, but it depends on whom you ask. Uday Karmarkar, professor at The Anderson School of Management at UCLA, believes outsourcing is best used to describe sending work out of house for something small, like a coating or a part. Contract manufacturing, he says, developed out of the electronics manufacturing business a few decades ago, when “the extent of the outsourcing got to the point where somebody was literally putting together the whole product for you.” Firms that call themselves contract manufacturers, he says, “prefer to do the whole job. They're very competent in all aspects of the job.”

Randy Bormann, general manager of UTI's Development Center, agrees. “Contract manufacturing clearly is a focus toward delivering the customer the final assembly.” That includes packaging and sterilization, he says.

J. Randall Keene, president of Avail, and Mike Burke, vice president of operations at KCI, see things differently, however. “We treat contract manufacturing like a dirty word, frankly, because gluing a few parts together, assembling a few things, and having a contract that says that's what I'm going to do is totally different than being an outsource service provider,” says Keene. An outsource service provider is essentially the manufacturing, quality, sourcing, and R&D portion of an organization, he contends. “It's a whole business unit, so to speak, all the way from the development-services side to shipping to the end-use customer,” he says.

Outsourcing is more all-encompassing than contract manufacturing, says Burke, who shares Keene's interpretation of the two terms. In Burke's experience, contract manufacturing is done “specifically to save money on a labor-intensive piece of business.”

With two such polar opposite views of how the two terms are defined, then, is it acceptable to use them interchangeably? It seems the answer is yes, so long as an OEM and its partner agree on the nature of their relationship and speak the same language. And of course, “there is an overlap in the terms,” Karmarkar admits, so using one or the other consistently isn't likely to lead to a serious misunderstanding.” 

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