Arena Blog

How small manufacturers can establish better outsourcing relationships pt. 1

Posted in BOM Management
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happy outsourcing relationship

Outsourcing plays a role in almost every manufacturing strategy. But for smaller manufacturers with fewer resources available, the challenges of outsourcing—finding the right contract manufacturer (CM), determining appropriate pricing and contract terms, establishing collaborative relationships—can be tough to navigate.

Small manufacturers face unique challenges when establishing successful outsourcing relationships, so to help I’d like to share some helpful tips compiled by Bijan Dastmalchi at Symphony Consulting and Arena Solutions. I will post the first five tips today, and the rest on Thursday.

Vet potential contract manufacturers to see if they’re really interested in your business before engaging in a lengthy request-for-quotation (RFQ) process

As you vet contract manufacturers, remember that they are vetting you too—and their main concern is usually the amount of business you will bring to the table. Even if contract manufacturers don’t ask about your volume directly, they may ask for projections, specifications or a bill of materials (BOM) to get a sense of your potential.

Before sending out an RFQ to a CM, ask strategic questions to see if the CM is really interested in you, and to assess the CM’s motivations. For example, if you are expecting two million dollars in business and you are talking to a multi-billion dollar CM, what’s in it for the CM? Is the CM looking to break into your market? Are you just an easy (and temporary) client during tough economic times?

A good rule of thumb: if your annual purchases represent at least 5% of your CM’s plant-level revenue, it will be easier to keep your CM’s attention.

Establish credibility with your CM by becoming an exceptional forecaster

Although forecasting is difficult, it’s a MUST—especially if you are a startup or small manufacturer looking to convince a potential CM that your company is legitimate.

When you’re just starting out, your reputation largely depends on your ability to meet or exceed expectations—so your forecast should be something you can realistically meet. (A good goal to shoot for is less than 10% variation from your predictions at the aggregate level.) Once you establish a baseline for your forecasts, be sure to make regular modifications based on prior levels of accuracy, changing supply conditions, CM capacity and inventory levels at your distributors or resellers.

Focus on inventory exposure throughout your supply chain to regularly assess and mitigate liability risk

Inventory liability causes a lot of contention between original equipment manufacturers (OEMs) and CMs, yet it’s often overlooked until unexpected fees for excess or obsolete inventory occur.

OEMs can mitigate and manage the risks associated with inventory liability by understanding and reducing inventory exposure, and by clarifying the specific conditions of inventory liability agreements upfront. Start by assessing the relative importance of your components, and weighing the risks and benefits of different solutions so you can evaluate potential process and policy changes that could reduce your risk. Determine what parts or products are considered “unique” and could become a liability for you—making sure non-unique parts are excluded—and outline acceptable lot sizes, reels and minimum order quantities.

For small organizations with leaner staffing levels and broader functional responsibilities, committing resources to developing a liability profile is tough, but taking steps to remove ambiguity early will drastically reduce OEM/CM conflict when issues occur.

When it comes to sourcing, focus on price structure and pricing details—not just the bottom line

It’s no surprise that unexpected costs are another major cause of conflict for OEMs and CMs. Unexpected price increases can lead to margin erosion, impact your ability to price your products competitively in the market and ruin the best OEM/CM relationships.

Fortunately, there is an easy fix for this problem—do your due diligence. Ask questions about your CM’s assumptions on the approved vendor list (AVL); make sure you understand the cost breakdown when it comes to raw materials, labor, test, overhead and profit; and don’t get distracted by multiple best case scenarios set up by potential CMs that feature aggressively low set-up, labor and test times. Always validate the assumptions used to build a quote, and make cost-structure transparency a condition of doing business with your company.

Spot quality issues early by monitoring quality before and after shipment

If you are a small manufacturer, mistakes are deadly—because of this, quality management is key. Many small manufacturers are reactive rather than proactive when it comes to quality control, so if you can master quality you will have a clear competitive advantage.

Discuss expected product yields, parts-per-million (PPM) failure rates and control limits for each critical stage in the manufacturing process with your CM, and incorporate quality checks into your product designs. Once you’ve established your projections and talked about the best ways to ensure a high level of quality, you can begin to utilize tools that enable you to achieve real-time visibility into what is happening on the production line so you can monitor trends and identify potential problems.

Remember—how you manage quality will set an example for your CM, so demonstrate its priority in your company.

Make manufacturing outsourcing a competitive advantage

To make manufacturing outsourcing a competitive advantage for your company, you must establish a positive, collaborative relationship with your CM, and manage that relationship by proactively working to identify and mitigate liability and risks before something goes wrong.

Check back on Thursday, when I will post the last 5 tips in the series. And you can read the full article here.


About the Author

Alex Gammelgard

Alex managed social media marketing and communications at Arena from 2011 to 2012. Although coming in fresh to the manufacturing industry, Alex is married to an engineer and is well ...

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