Contract Manufacturing (CM)Key Questions to ask yourself before seeking a Contract Manufacturing supplier:
- Do you know how to structure a contract with a Chinese CM? (This question is especially important if you are a small to mid-sized Western manufacturer.)
- After you have a Contract, what does it mean, and how do you use it?
- What is your back-up plan?
- Do you have Intellectual Property issues that you need to address?
Contract manufacturing is currently the most commonly selected business relationship option by Western OEMs, manufacturers and Design/Sales companies. In most cases, companies choose CM partners because they either do not possess the skills for low-cost and/or high quality manufacturing, or they have made a strategic decision to concentrate their energy or investments on design, engineering or marketing - leaving the physical manufacturing to specialists.
Advantages of Contract Manufacturing
- Low initial cost: no requirement for capital
- Low initial cost: no requirement to establish a legal and tax presence
- Flexibility: move from CM to CM almost at will
- Quick: supply specs, negotiate price and delivery, strike the deal
Disadvantages of Contract Manufacturing
- Cost: If you are already a high quality low cost provider, you will share your profits with a manufacturer that may be inferior to you
- CM will look after his own self interest: are you a "big fish or a small fish" in his pond?
- Little or no recourse if production schedules are not met
- No operational control: quality issues impossible to predict, difficult to resolve
- No operational control: who pays the price for shortages of material, sub-assemblies, components?
- No operational control: can you increase, decrease, shift or modify production,?
- No operational control: Change management can be difficult at best, produce scrap at worst
- Extended Supply Chain Management: longer, more complex, challenging communications require very advanced professional attention
- Extended Supply Chain Management: Safety stock issues
- Risks to Intellectual Property and Know-How
- The Blame Game
- No foothold for further horizontal or vertical expansion into China
Bottom Line:
Contract Manufacturing can be extremely effective, but you need to put the proper management investment into it in advance. The single most common mistake Western companies make is to sign a contract, and then assume that the work is done and the products they ordered will be made and delivered correctly.
Even though someone else is making your product for you, effective Contract Manufacturing requires you to make ongoing financial and talent investments on the ground, in China. If you are continually fixing problems after they happen, you will probably fail. If you anticipate and avoid problems before they happen, you can be successful.
Contact us to find out whether one or more of our U.S. or China based associates can improve your success with Contract Manufacturing
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