The business model
The process begins with the
hiring company approaching the contract manufacturer (CM) with a formula or
product/component design. The CM will quote a price including labor, material
costs, tooling and processes. Once the price, quality and other parameters are
agreed upon, and safeguards put in place, the CM acts like an adjunct to the
hiring firm’s factory, producing and, if required, shipping the product on
behalf of the hirer.
Who uses contract manufacturing?
The demand for the services of
Contract Manufacturers is growing exponentially both in number and types of
industries using them. Among the major users are automotive, aerospace,
computer, energy, semiconductor, pharmaceutical and defense and personal care
industries.
What types of work does a CM do?
The type of work a CM does is
wide ranging, and includes casting, forging, machining, grinding, complex
assembly and much more. The key is to find a CM with the capabilities and
equipments to carry out what is required.
Cost savings
In an increasingly competitive
environment, the cost benefit of contract manufacturing is hugely positive. The
hiring company does not have to invest capital in setting up a facility and
buying raw material and equipments. There are also savings in terms of wages,
employee benefit and training expenses all of which are built into the CM
costing.
Advanced skills
A CM usually commands a set of
advanced skills and specializations that a hirer may not have and which are
expensive and time-consuming to obtain.
Material procurement
A CM has the advantage of
well-established business relationships with the materials suppliers required
for bulk manufacturing which results in reduced cost of the end product and
shorter start-up times.
Quality
A reputed CM follows his own high
standards and methods of quality control. These can quickly be modified to meet
the demands of the hirer to ensure that the final quality control meets the
required standards.
Freedom to focus on core competencies
By outsourcing non-core
production to a CM, the hirer will be able to renew focus on his own core
competencies. In addition, he can now direct his management resources towards
new business opportunities and markets.
Economies of scale
Because CMs have multiple clients
for whom they produce, and may use the same raw materials and components, they
can offer economies of scale which would not be available to a hirer on his
own.
Finding the right CM
The relationship between a hirer
and a CM is one of mutual trust and benefit. The hirer expects to get cost and
other benefits from outsourcing production. The CM expects to have a long-term
client for whom it is worthwhile to devote production and management resources.
The key issue for the hirer is to find a CM capable of meeting the demands,
which will free the hirer to work on other aspects of his business. A CM with a
wide client base, years of experience and a reputation of meeting client
requirements is the foundation of a mutually profitable partnership.
Did
you find these ideas useful? Leave a comment. Tell us what you would like to
read further.
More in our next post.
