Law firms have long specialized in efficiently and effectively supplying legal guidance to companies. As with professional legal services, manufacturing a new product is best left to experts that have a core competency in the desired supply need in order to ensure product launch success. Today on average, manufacturers outsource 70-80% of finished product content by partnering with contract manufacturers to leverage their established infrastructure and manufacturing expertise. Outsourcing manufacturing is a challenging strategic initiative due to the many variables that need to be simultaneously considered ahead of selecting a partner. Choosing the right contract manufacturing partner can make or break a product launch or company so it is critical to choose the right partner to ensure success.
Many companies that source a contract manufacturer believe all their product commercialization challenges are solved only to later uncover many challenges remain unaddressed. The right partner can make or break a program so the robustness of a company’s process for identifying, qualifying, engaging, and selecting a contract manufacturer is critical. As a result, companies are finding they must develop capabilities or partner with services firms to effectively manage outsourcing manufacturing operations. Due to the strategic, financial, and operation risk involved, exchanging product designs, disclosing intellectual property, and satisfying production schedules contract manufacturing poses many complex challenges. Ensuring scalability, choosing the right location, and meeting a target cost, all play major roles in your product launch and need to be carefully evaluated during the sourcing process. Challenges in choosing the right contract manufacturer are prevalent, but with the right information and processes in place, outsourcing manufacturing can be very advantageous.
What is Contract Manufacturing?
Contract manufacturing is a form of outsourcing where a company provides designs and technical requirements to a contract manufacturer to manufacturer and assemble a product or module. Traditional component suppliers possess manufacturing capabilities to produce specific types of components, while contract manufacturers specialize in assembling entire finished products and modules. Often contract manufacturers specialize in select manufacturing capabilities which allow them to produce various types of components. The abundant supply of low cost labor and limited regulations results in many organizations focused on cost to utilize contract manufacturers in developing countries. However, due to the risks in quality, compliance, and communication, there has been a recent shift to onshoring manufacturing to domestic partners. Companies that focus on strategic, operational, and financial fit considerations ahead of selecting a contract manufacturer increase their success in choosing the right partner.
Companies should strategically align with contract manufacturing partners that share their long term vision and partnership. Seek out contract manufacturing partners with specific industry and manufacturing process experience. Utilizing the established infrastructure and manufacturing expertise of a contract manufacturer can level the competitive playing field for smaller manufacturers. When deciding on a contract manufacturing partner, understand the percentage of business your program will be to their current operations and their ability to scale with your volume projections. Outsourcing manufacturing services has allowed companies to not only expand quicker, but strategically refocus efforts to other functions; research, product development, sales, and marketing. Many contract manufacturers will say they can do the job, focus on the partners who have a core competency in your components and processes.
It is critical that manufacturing is involved early on in product development to ensure design for manufacturability to reduce product assembly costs. Contract manufacturers’ engineering capabilities vary so it is important to develop a support plan for engineering modifications and assembly instruction needs as the product moves toward production. Quality, industry, and environmental certifications are an early operations qualifying filter to identify potential best in class contract manufacturers. Depending on your needs, quality certification ISO 9001, environmental certification ISO 14001, and a specific industry certification provide solid initial qualification criteria. Overseas contract manufacturers bring low material and labor costs; the disadvantages are risk to intellectual property, poor quality, compliance, and logistical disruption. Domestic contract manufacturers bring security of intellectual property, more efficient lines of communication, and generally better compliance and regulation standards; the disadvantages are high material and labor costs.
Product cost structure is critical to understand as quotes from contract manufacturers can vary in cost by 2-3x as a result of included or omitted information. Before sending a request for quote, it is important to include a response form that incorporates a total cost breakdown. Contract manufacturers should provide percentage costs for labor, scrap, overhead, and profit so a cost comparison matrix can be assembled. Industry average percentage margins for oversees contract manufacturers are; labor 5-6%, overhead 2-3%, scrap <1%, and profit 2%, while domestic contract manufacturers are; labor 8-9%, overhead 4-5%, scrap <1%, and profit 2%. Outbound logistics, dunnage, and fulfillment costs are often overlooked so ensure these costs are included in quotes. Costs vary based on complexity, location, and volume so having a detailed process for quoting, analyzing, and selecting contract manufacturers will improve source selection.
As with your law firm relationship, the strategic partnership you develop with a contract manufacturer should be win-win, with clear expectations from the outset. Before you source a contract manufacturer, determine whether the contract manufacturer has the manufacturing process and industry experience needed. Carefully consider factors such as engineering capability and quality certifications when assessing different contract manufacturing options. Request the right detailed cost information upfront in the sourcing process to enable a smooth transition to quote analysis and ultimately supplier selection. Companies that focus on strategic, operational, and financial fit considerations ahead of sourcing a contract manufacturer statistically increase their success rate in selecting the right partner while simultaneously de-risking their product launch.