License vs Manufacturing In House vs Contract Manufacturing

Many companies struggle with how best to commercialize their technology.  I touched on value chain a bit in a prior post and will take the time to really expand on the topic in a later post.  If the root of your business is a technology that manifests in the form of a product, at some point you have to make some difficult decisions.  Do you manufacture in house?  Perhaps seek out a contract manufacturer?  Strategic partnership?  Perhaps you should stay out of the manufacturing business altogether and simply license the technology?  These are indeed difficult questions to answer and the right path is different for each business.

Rather than attempt to answer the question I'll just point out some of the factors that might impact your decision.  Many entrepreneurs are either scientists, engineers or technologists.  Most in that group lack significant experience outside of their specific area of expertise.  For example, very few have experience leading complex manufacturing processes.  In that light it is quite easy to see why many choose to license their technology rather than manufacture.  Many of these inventors simply enjoy creating new and exciting technologies.  When you add the capital requirements to fund the requisite facilities and equipment, their decision to allow others to assume the risk seems sound.  Of course, the downside of licensing rather than manufacturing is the significant reduction in upside potential.  A lot of units have to be sold for the inventor to realize a significant return and for the most part, the inventor has very little control over the effectiveness of sales outcomes.

As I mentioned, building out a manufacturing facility can be a weighty endeavor for a start-up.  The entrepreneur is forced to raise significant capital, probably give up a large percentage of their business, buy or lease a facility, source expensive machinery, build out a manufacturing team, create a supply chain and build distribution channels.  In so doing, the entrepreneur takes on significant risk but if they are able to master the process, they alone (include their investors in the collective "they") realize the return.  In this scenario they take on substantially more risk than in the prior scenario to potentially realize a much larger return.  But what happens if/when output struggles to keep up with demand?  Expansion is an option; build, buy or lease a new building, source more equipment, hire additional personnel etc.  Or, the entrepreneur could look to contract manufacturers to accommodate the incremental demand.

Contract manufacturing is certainly a viable option to meet demand exceeding the production capacity of the facility.  However, why not explore this option before opting to build in house?  Outsourcing manufacturing can allow the company to realize economies of scale while focusing internal resources on core elements of their business.  For example, in the prior scenario, rather than hire say 15 employees to handle production, those dollars can be redirected.  Perhaps additional sales or marketing personnel would make a larger impact?  The benefits of outsourcing manufacturing are fairly simple: 1. save the capital and human assets required to produce product and redirect them to other core elements of the business 2. realize the economies of scale that come along with the significant buying power and experience of the contract manufacturer.  However, by outsourcing production, you have essentially built your business on top of that of another.  Their errors are yours.  There is a lack of control that can be disconcerting.

Again, there is no universal answer.  I don't profess to know all of the key attributes.  I have simply attempted to present a few of the pertinent elements.