Arena Blog

How small manufacturers can establish better outsourcing relationships pt. 2

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As I said on Tuesday, small manufacturers face unique challenges when it comes to navigating the contract manufacturer (CM) and original equipment manufacturer (OEM) relationship.

Tuesday, I posted five tips from Manufacturing Outsourcing for Small and Mid-Size Companies: 10 Key Challenges and How to Address Them, a white paper produced by Arena Solutions and Symphony Consulting, created by Bijan Dastmalchi. Today I will be sharing the last five tips from this white paper, with the hopes that you can take the next step toward finding the right CM for your business, determining appropriate pricing and contract terms and establishing a collaborative OEM/CM relationship.

Keep your product data in a centralized location, and adopt tools that provide both your team and CM with real time visibility into product changes

In our recent Manufacturing Outsourcing Survey, almost half of all respondents said that at some point in the last year they had received the wrong product from their CM. If that is a mistake you would like to avoid, there are two very important questions you need to be able to answer. Where is your product record—a complete bill of materials (BOM) that includes sourcing information, part specifications and assembly instructions—kept, and who manages it? Once these two questions are answered, you can begin to develop an effective process for proposing, reviewing and implementing changes.

Small manufacturers’ product data is often kept in a variety of formats, and is managed by a variety of people, which makes effective collaboration difficult and leads to mistakes. If you want to operate more effectively with your CM partner, at the bare minimum you should build and manage your product data in an Excel BOM. And while Excel can help you keep track of a single, simple product, once you have multiple products with more complicated data and change processes to manage, you are better off deploying a product lifecycle management (PLM) software solution like Arena.

In your CM contract, negotiate an exit plan that includes the operational details of ending the relationship

Although you can find plenty of stories about OEM/CM relationships ending amicably, you can find equally numerous examples of abrupt terminations over excess and obsolete inventory, price increases, quality problems, catastrophic product failures or late deliveries. As a smaller manufacturer you are more likely to find yourself in search of a new relationship, as CMs prioritize their larger clients in the case of a capacity crunch. Protect yourself from being left out in the cold by outlining each party’s exit obligations upfront.

In your OEM/CM contracts, be explicit about what will happen when you part ways, Make sure your contract identifies how FGI (finished goods inventory), WIP (work-in-process) and component inventory will be handled, and negotiate to prevent the CM from giving you a short termination notice.

Generally, your CM does not have as much at stake as you do in case of a termination, so don’t be afraid to push for protections in your contract. Consider the alternative—if your CM decides to end the agreement on short notice, you could spend months identifying a replacement, transferring tooling and components and setting up the new CM—all while your business suffers.

Take steps during the CM sourcing process to ensure you get the right team supporting your business

Another common problem smaller OEMs face is a lack of CM attention.  In many cases, this frustration is compounded because the OEM met with a very high caliber team during the sourcing process, and got passed off to less experienced and busy personnel after signing the contract.

While your business may not justify the CM’s best team, you can still get the right team for your business by identifying your greatest needs, and establishing a strong first impression during the sourcing process.

To increase the odds of getting the right team in the first place, know your needs. If you have someone internally with a lot of product engineering and manufacturing experience, getting your CM’s best engineer is not a top priority. Before awarding business to a CM, ask to meet the team you will be working with and be sure to insert contractual language that gives you reasonable control of who will be assigned to you. Lastly, while you’re negotiating your contract with a potential CM, send people from your team that know the ins and outs of the outsourced manufacturing model to negotiate during the sourcing process. Understand that the process you follow, the documentation that you request and the quality of questions you ask during the selection process help the CM decide what caliber of employees to send to your project—so make a good first impression.

Before you decide to manufacture offshore, develop a model and assess hidden costs

Although building products in an Asian or Eastern European country can save you money in some areas, there are challenges and hidden costs that smaller companies in particular tend to underestimate.

While a lower labor cost is enticing, you need to make sure that labor savings isn’t mitigated by the higher transportation costs, higher than expected product price, quality problems, inventory exposure and communication issues that can come with offshore manufacturing. Depending on your industry, these costs can outweigh the savings of cheap labor. (Electronics manufacturers only spend about 10% of their budget on labor, so savings here doesn’t necessarily make a big impact.)

Before you decide to offshore, analyze your components and validate the availability of the supply chain. Additionally, factor in the cost of cash that you will have tied up in inventory when your product is ocean-freighted or the high cost of air transportation if you have short customer lead times. Assess the potential impact of currency fluctuations and intellectual property concerns so you can be ready to mitigate those risks before taking the leap.

Be ready for an audit by taking responsibility for compliance with environmental directives

If you’re blindly relying on your CM and component suppliers for certificates of compliance, you are setting yourself up for trouble down the road. Most environmental regulations, like the European Union’s Restriction of Hazardous Substances (RoHS) directive, place the full burden of responsibility on the brand owner (you)—so do your due diligence.

If your products need to comply with one or more global environmental directives, it’s up to you to work with your supply chain partners to clarify the roles and responsibilities in this objective. Update your supply agreements—especially when it comes to warranties and indemnities—and make sure someone is responsible for assessing the components in your BOM. While you should ask your CM to certify their manufacturing process as compliant, don’t give your CM responsibility at the component level or for the product design unless you are specifically paying them for it.

Regularly audit your suppliers who have questionable records when it comes to compliance, noting that blind acceptance of certificates of compliance from any supplier does not count as due diligence when it comes to the RoHS. Keep careful records of what has been done, and be prepared with all required documentation in case of an audit.

Make manufacturing outsourcing a competitive advantage

As a smaller OEM, you probably have many of the same needs as a larger company, but with fewer resources and less clout, it can be more challenging to achieve your outsourcing goals. While it may require extra effort, if you are knowledgeable and sophisticated in your approach, you will be able to get the performance, motivation, and mindshare that you need from your partners.

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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