one product in one market into another market. Many
contract manufacturers offer reference design models
and product design support, along with a readily available supply base and an established presence in the
• Global Reach. Contract manufacturers have already
established near-shore and off-shore production facilities. They likely have knowledge of local government
policies and have already gone through the legal and
regulatory procedures needed to begin operations. With
facilities in place, they may be in a position to offer value-added services such as reverse logistics and distribution.
• Focus of Core Competencies. Many companies see manufacturing as a necessary competency, not as a core competency. They tend to focus their energies on research,
development, design and marketing, and leave non-core
production activities to others. Contract manufacturers can
free up resources to allow OEMs to concentrate on the
areas that matter most to them and to their customers.
Unfortunately, many manufacturing companies fail to take
full advantage of these benefits. They deal with contract
manufacturers as they do with other vendors, possibly making many decisions on the basis of cost without exploring the
possibilities offered by a more collaborative relationship with
the contract manufacturer. We have found that a more strategic approach to contract manufacturing can significantly
enhance operational flexibility while reducing the substantial
costs associated with building or buying new facilities and
investing in new equipment and personnel.
This approach involves five key steps.
1. The manufacturer would conduct a cross-functional analysis to determine which capabilities should be kept in-house
or outsourced. Leading companies identify a capability as
“core” if it offers a competitive advantage. Core capabilities,
typically, are difficult for competitors to imitate, and they
provide differentiation that is highly valued by customers.
All capabilities not meeting these criteria can be considered
The manufacturer then completes a “make versus buy”
analysis of non-core capabilities. Those that can be produced
at lower cost or more effectively by external resources are
candidates for outsourcing.
2. The next step is to determine how to partner with a contract manufacturer. It is important for OEMs to decide in
advance upon the type of relationship they want to have
with their manufacturing partners. Do they desire a highly
strategic, collaborative partnership in which the manufacturing partner may bring new capabilities to the table, or even
co-invest in a product? Or do they desire a more transactional relationship in which the partner is focused on supplying a
“standard” product at the lowest cost of ownership?
OEMs should also think about the level of control they
want to exert on these relationships, and what kind of
resources they have to manage the day-to-day aspects
of production. One company may want to be intimately
involved in all aspects of the relationship and have deep
visibility into where things stand at any given point in the
supply chain. Another company may prefer a “hands-off”
approach in which it is expected that the parts or materials
will be available when they are needed. Others might be
comfortable somewhere in the middle.
3. The third step is to conduct a capability scan of manufacturing partners, based upon their capabilities, assets,
locations, and value provided to the OEM’s manufacturing
network. Targeted capability areas may include design skills,
manufacturing locations, manufacturing models, IT infrastructure, relationships with local authorities, production
planning, materials management, productions scheduling
and execution, and logistics and/or fulfillment capabilities.
The capabilities are analyzed using a scorecard, and a
business case is developed using desired capabilities as they
measure up against potential partners under consideration.
The business case also helps identify value targets to track
initial and ongoing efficacy of outsourced operations.
4. Once the evaluation is completed, negotiation of outsourcing agreements with the chosen partner can begin.
This involves establishing a contract with the partner. Best-in-class companies invest time and resources to consider
more than time and materials when formulating and negotiating their manufacturing partner agreements to fulfill a
strategic need. Some keys to successful negotiations involve
understanding the manufacturing partner’s cost structure,
risk profile, limits of liability and profit generation centers.
During the negotiation process, a contingency plan is also
developed and business case assumptions are updated.
5. With the contract in place, the final step is to set up and
maintain the outsourced operation. The OEM should have
the right people, processes, and tools in place to help ensure
partners are delivering what they have committed to deliver,
and that potential issues can be identified and addressed
well before they become problems.
Contract manufacturing can be an effective way for
companies to extend capacity and add flexibility to their
production network. These are critical benefits in a highly
volatile business environment. Contract manufacturing can,
however, provide much more. A properly executed agreement with a contract manufacturer can provide access to
processes or intellectual property rights that can speed production runs or, in some cases, improve the product itself.
Contract manufacturing can also open strategic doors for
OEMs, helping them gain entry to new markets or meet
rapidly changing customer demands. Companies with a
clear understanding of how they want to go to market can
gain important competitive advantages by choosing the
right contract manufacturing partner.