Subcontracting or manufacturing outsourcing used to be the domain of most large electronic equipment original equipment manufacturers (OEM). Now, the contract manufacturing industry is providing a wider variety of services to a wider variety of companies. Smaller OEM manufacturers have many of the same needs as larger companies, but they have fewer resources and less influence to achieve their goals. That is why it is important for them to be more proficient and sophisticated in their approach so they can get the performance, motivation and idea-sharing they need from their outsourced manufacturing partners.
Subcontracting or manufacturing outsourcing is not a convenience for small and medium-sized OEMs, it is also a prerequisite for their survival. Without the ability to outsource manufacturing to contract manufacturers, small and medium-sized OEMs will fail to compete effectively with larger competitors for lacking economies of scale. Few can afford to invest millions of dollars and regularly upgrade equipment, personnel and process technology to compete in a market with shrinking product life cycles and profit margins. If you are a smaller OEM business, you may face more challenges in outsourcing than larger competitors. It is the responsibility of small and medium-sized OEMs to select the right contract manufacturer and establish robust business processes.
The following are the most common challenges OEM manufacturers encounter when subcontracting or outsourcing manufacturing:
Contract Manufacturer Selection
Not all contract manufacturers with the capabilities you need will be interested in the empty volume you offer. But if you ask for volume forecasts and product specifications and bills of materials (BOM), almost every contract manufacturer will continue to talk with you. Because this allows the contract manufacturer to roughly calculate the overall business opportunity. In other words, you need to have the ability to provide a specific volume of business for a contract manufacturer. That said, if contract manufacturers help OEMs enter new markets with strong growth potential, they may consider partnering with smaller OEMs. In these cases, contract manufacturers may be willing to sacrifice short-term revenue gains for the chance to pioneer a thriving industry.
Before sending a request for quotation (RFQ) to a contract manufacturer, you should ask some strategic questions to determine if the contract manufacturer is really interested in your business. This will save you a lot of time later.
8Manage SRM’s BOM function predicts material mix and business volume based on product specifications, allowing you to have more specific conversations with contract manufacturers. Leverage the system for contract manufacturer long-list to short-list selection prior to the RFQ process. Whether you are using quick quotes or actions to decide on a contract manufacturer, you can use 8Manage SRM to ensure a fair and transparent process.
Reduce inventory liabilities
Inventory costs are often unknown or overlooked, and during recessions, OEMs and contract manufacturers often have severe tensions as each tries to pass inventory responsibility to the other. The issue of inventory liability remains one of the most significant sources of disputes between OEM manufacturers and their contract manufacturers. The problem often stems from forecasted demand that never materializes, but that is only part of the story.
You should define the content, persons, methods and time of the inventory responsibility. By establishing a baseline with 8Manage SRM, you can start making changes to processes and policies that drastically reduce risks and inventory risks. For example, you can provide forecasts directly to suppliers, allowing them to reserve buffers for unfinished and lower-value chips, thereby shortening lead times for critical semiconductor components. Contract manufacturers cannot drive this activity as effectively as OEMs. Because you know the product better, you can more accurately assess the relative importance of components, appropriately weighing the risks and benefits of different solutions for inventory risk reduction. Generally, contract manufacturers do not have the resources, company-specific knowledge or incentives to proactively promote this activity.
Eliminate price surprises
OEM manufacturers are often surprised by changing product manufacturing prices. In fact, pricing surprises are the second largest cause of controversy and stress between OEMs and contract manufacturers. The divergence in this area derives largely from OEM manufacturers’ focus on bottom-line pricing to quickly select contract manufacturers. Contract manufacturers exacerbate the problem by stacking multiple best-case scenarios (such as extremely low setup times, low-priced labor and test times, component price lower than actual) to offer prices that beat competitors.
Use 8Manage SRM to make cost structures transparent and stay away from contract manufacturers who do not provide the required information. In 8Manage SRM’s Contract, define the upper limit for managing purchase price differences, the currency that the calculation is based on and the re-approval process of price changes. Unexpected price increases may cause lower profit margins, affecting your ability to price your products competitively in the market, and resulting in lost market share and lower revenue, which is bad for OEMs.
Quality monitoring before and after shipment
Although quality is important, many OEM manufacturers do not have good product quality monitoring procedures before shipment. Once losses are incurred, they typically manage quality in a reactive manner. Some OEMs don’t know enough about what happens to contract manufacturers in the manufacturing process. This information must be considered when designing next-generation products, but some OEMs do not have the underlying processes and solutions to collect this information.
Use 8Manage to find quality issues during the production process, not just at the end of the production process. For each production activity, you should set planned output, expected failure rate, and control limits for each critical stage throughout the process. Work with your contract manufacturer during the design phase to ensure quality is incorporated into your product design and production processes.
Effectively manage product changes
Most electronics OEM manufacturers, large and small, face relentless pressure of product life cycle shortening, product proliferation, and price/performance improvement. This requires a strong foundation to manage change. But before making any changes, companies need to know where to start. In other words, what is the single fact that describes what you are trying to build? With frequent product changes, establishing a "single point of truth" can be difficult.
With 8Manage, you can provide your internal organization and your contract manufacturers with real-time visibility into a "single point of truth". You can also have a single repository containing all the relevant documents and data needed to describe and build your product. For each change, you can utilize 8Manage’s change management function to revise the activities that require changes, and from the dependencies of the activities and deliverables, track other activities and deliverables affected by the changes.
Assign the right team
The contract manufacturer team that wins business is often not the team that serves your customers. All OEM manufacturers want to have the best support team in a contract manufacturer. Smaller OEMs are often frustrated by not getting the attention of contract manufacturers. In other words, the contract manufacturer team presents itself as a high-quality team during the procurement process, and once the business is acquired, it is assigned to less experienced personnel and/or those with limited bandwidth.
Even with a high-quality team assigned, smaller OEMs are more likely to be destabilized by personnel changes as new, larger customers emerge. But there is another problem that is usually caused by OEM manufacturers. They set high expectations for contract manufacturers, but contract manufacturers often fail to allocate resources with the appropriate level of expertise.
Make sure you make a strong and positive impression in handling the contract manufacturer purchasing process. While your business may not be able to justify a contract manufacturer’s assignment of its best team, you can take steps to ensure the right team is found for your business. First, you should know where you need it most. If your product engineers have extensive manufacturing experience, you may not need the contract manufacturer’s best engineers on your team. You might want to use your influence to get the best buyers or planners. Be specific about your needs early in the relationship, before the contract manufacturer starts assigning people. Set high expectations, and assign the right people to interact with contract manufacturers.
Leave a strong first impression during the procurement process with a team that understands the details of the outsourced manufacturing model. The process you follow, the documentation you require, and the questions you ask during the selection process will quickly give a contract manufacturer an idea of the staff quality needed by your project.
Before you award business, meet with the team responsible for supporting your product and insert contractual language to give reasonable control over who is assigned to your customers. Think of your team as an extension of your organization, making them successful and willing to support your business. Much of what your contract manufacturer can accomplish for you is based on the depth of relationships you can build within the plants that manufacture your products.