The Challenges Of Contract Manufacturing

In every industry today, organizations succeed by focusing on what they do best and leaving the rest to their partners, agencies or outsourced vendors. Contract manufacturing, while it can be difficult from a supply chain perspective, seems to fit neatly into this scenario. In addition to allowing global organizations to focus more on their core competencies, value proposition, and engineering; contract manufacturers provide several other advantages over manufacturing products internally to include: lower costs, flexibility, access to external expertise and reduced capital expenditures.
However, the question remains and must be addressed: with so much potential and cost savings that contract manufacturing can offer to their partners, why do so many of these relationships fall short of expectations? Perhaps one reason is that many of those expectations are flawed from the very beginning.
For example, let’s take the first example of cost savings. The fact of the matter is that many of the cost savings that should be passed on to the customers may go to the contract manufacturer’s bottom line instead. This happens more than you think. Additionally, many contract manufacturers don’t always have the supposed influence with their suppliers since the original manufacturers often select the partners from the very beginning. This lack of influence is a key driver for an increase in costs from the contract manufacturer. Also, flexibility can be compromised by the contract manufacturer’s focus (or lack thereof) on low costs and low inventory. And, although using contract manufacturers often ties up less capital, the dollars need to compensate against the inventory holding costs included in contract manufacturers’ charges.
Even with clear assumptions on the objectives and expectations, it may be a challenge to realize the benefits. That’s largely because it’s difficult to manage relationships with vendors and suppliers; especially when those suppliers were not selected by the contract manufacturer. Essentially, the parties should create clear objectives and expectations from the beginning that would make it possible to manage the relationship through service level agreements linked to a set of key performance indicators. However, these challenges may tempt businesses to keep manufacturing in house, at the sacrifice of increased costs. Instead, organizations need to take a strategic approach to contract manufacturing relationships; one that will benefit all in the supply chain.

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