Contract Manufacturing (CM)
Here are some key questions that need to be considered before developing a Contract Manufacturing relationship:
- Do you know how to structure a contract with a Chinese CM?
- What does your contract really mean to the CM and how will it be implemented?
- What is your required span of control?
- What is your contingency plan?
- Are there Intellectual Property issues that need to be addressed?
Contract manufacturing is the most commonly selected business relationship option chosen 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 barriers to entry: No capital, legal or tax presence required in China
- Flexibile: can redirect production between CM's or insource depending on market demand
- Expedient: CM relationships can be developed more easily and quickly than can a permanent presence in country
Disadvantages of Contract Manufacturing
- Limited Reourse: What options do you have if production schedules are not met?
- Operational control: quality issues can be impossible to predict, difficult to resolve.
- Accountability: Who pays the price for shortages of material, sub-assemblies, components?
- Flexibility: When can you increase, decrease, accelerate, delay, shift or modify production?
- Change management: Difficult to implement, often uncovers inventory issues and can lead to scrap, rework and costly field recalls.
- Supply Chain Complexity: longer lead times, challenging communications, safety stock excesses, transportation risk all add cost require professional management.
- Risks: to Intellectual Property and Know-How.
Bottom Line:
Contract manufacturing can be extremely successful but requires an upfront commitment to structuring a mutually beneficial arrangement as well as an ongoing investment in managing that relationship.
The single most common mistake Western companies make is to sign a contract and assume that their work is done and the products they ordered will be made and delivered correctly. A poorly structured and implemented CM arrangement will result in tier 1 and 2 quality, control and delivery issues, obsolete inventory, expediting charges, material shortages and late shipments, not tomention potential product recalls.
If you are continually fixing these problems after they occur, you will probably incur greater costs than if you had relied on the supplier next door. A successfully structured and executed contract manufacturing arrangement anticipates and avoids these types of problems before they happen. Results? high quality, lower cost parts and an uninterrupted supply chain.
The CFS executive team has years of experience negotiating, developing and operating contract manufacturing agreements. Whether you are at the initial stages in considering a contract manufacturing relationship or currently looking to optimize you existing agreement, Contact us to find out how we can improve your chances of success.
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