Risk 1: Loss of the capability to manufacture internally
The first risk of outsourcing manufacturing is that you may hollow out the firm. Once you have outsourced manufacturing, it can be difficult to bring it back in-house. You lose the skills and knowledge on how to manufacture the product.
Risk 2: Can make the development or product improvements can be more difficult
Outsourcing manufacturing can also make it harder to make developments. While when manufacturing internally you have the ability to make process improvements to be able to improve the product, when outsourcing, you are now dependent on others to make improvements. Not only do you need to work with someone else, but you may not recognize ways of improving the product – your supplier learns on ways to improve the production process, with you not easily able to capture that learning.
Risk 3: Now need to negotiate with a supplier
The next potential problem with outsourcing is that now you need to negotiate with a supplier. All changes that you want to make now need to be run through the supplier – potentially adding delays to what would normally not require any discussions.
Risk 4: Becoming dependent on a supplier
The next disadvantage of outsourcing production is that you start to become dependent on a supplier. There is a danger that the supplier can hold you up, potentially looking to increase their prices should you become dependant on their manufacturing your parts. The more dependent that you become, the greater the likelihood that the supplier can look to exert that power to gradually increase the costs of your input.
Risk 5: Potential for your suppliers to enter your market
A final risk with outsourcing is that your supplier may become able to enter your market. Indeed, if they now know the production process better than you, there is a danger that they may be able to develop a better product than you would be able to conceive.