Contract Manufacturing – No Easy Button.
Updated: May 26
Contract manufacturing plays a key role in the global economy and for global supply chains. A recently reported quality issue at a vaccine contract manufacturer put a spotlight on manufacturing outsourcing. How can we maximize these important supply relationships and avoid common pitfalls?
Big picture, the benefits of contract manufacturing are in these three areas:
1. The efficient utilization of global manufacturing capital.
2. The prioritization of capital deployment for an organization.
3. Speed to market opportunities for new products. Where the benefits of a faster entry to a market, would outweigh a longer lead-time required to build self-manufacturing capacity.
There are a wide variety of business circumstances that support contract manufacturing and these vary by industry. For example, for a consumer products company (CPG) it’s likely self-manufacturing will be foundational for its core products. Contract manufacturing may be used for less strategic product lines and to test-market new product innovations. Conversely, food retailers are likely to have a relatively small portion of their product lines (private labels) self-manufactured and will have a heavy reliance on contract manufacturers, sharing production facilities and capacity, with numerous other retailers.
Where do things go wrong with contract manufacturing?
An old boss once said, “don’t outsource it unless you understand it”.
When from the outset an organization adopts a hands-off approach, it quickly becomes a recipe for the supply chain “falling off the rails” and the contractor, “getting in over their heads”. As a result, numerous issues unfold including quality, unexpected cost increases, service failures, and delayed product launches.
The root cause of these types of failures are often an outcome of the following situations:
1. Lack of a clear corporate manufacturing/sourcing strategy that articulates what’s core to the company, what’s not core, or in what circumstances the company will use a contract manufacturer.
2. The organization lacks a robust supplier selection process that involves evaluating and understanding the contractor’s capabilities for product quality, cost management, and service (e.g., product supply and management team).
3. Roles and responsibilities are unclear e.g., roles of the internal quality, manufacturing, marketing, sourcing, and finance teams, and how these functions interface with the contractor are not defined and agreed. Who owns the relationship is also unclear.
4. Processes are not established e.g., a negotiated contract, visibility of cost and principals of cost management, specifications or service level agreements, quality management, communication protocols, and access to the contractor (i.e., when it becomes a free-for-all)
The flip-side of the above is key in developing sound sourcing relationships. What are some other key success factors?
1. Start with the mindset that the manufacturer is an extension of your business.
2. Company executive leadership plays a role in the relationship. Having a senior executive at the table (e.g., a business unit head, head of technology, or manufacturing), at the appropriate times, can help garner greater commitment, resources, and innovation from a contractor. A contractor is looking to grow their business and allocate resources. Having appropriate c-suite involvement can raise your customer profile, commitment, and help unlock innovation.
3. Hold business reviews. Structure an agenda including quality review, service performance, cost forecast, and new product innovation. Bring cross-functional groups together periodically from both organizations.
4. Get on-site. By visiting the contractors’ plants, distribution facilities and even headquarters will provide a deeper upstanding of their operations and foster relationships with their support teams and operational staff.
Like many facets of business, “the devils in the details”. Through thoughtful planning, creating processes, and engaging key stakeholders we can significantly increase the likelihood that both parties will be successful in growing their businesses profitably.
Graham Leary is the President of James Alistair – a procurement and strategic sourcing consulting firm.
Find us at: https://www.jamesalistair.com/
Contact us at: firstname.lastname@example.org