Don’t Get Burned by the Wrong Manufacturing Partner – Part 1
January 27, 2016 | By Craig Workman |
Selecting a manufacturing partner is no easy task! It’s also very crucial to your business’s success. IndustryWeek.com shared a list of some of the most common myths and misconceptions about selecting a contract manufacturer, and here they are summed up for you.
The right contract manufacturing partner will make everything perfect. No, according to IndustryWeek.com, contract manufacturing is a very difficult, competitive, low-margin business that needs to actively be managed. In order to get the best results, your business needs to effectively manage your outsourced manufacturing.
Finding the lowest quote price. “For many products and markets, the X-works per unit manufactured quote price captures just 70% to 80% of the total supply chain cost,” the IndustryWeek.com article reads.
Author Ron Keith, Chief Executive Officer, Riverwood Solutions, wrote he’s “seen many instances where going with a per unit quote price that was two points lower ended up costing an extra five points in other less visible costs – both internal and external. Additionally, many CMs have well-developed and institutionalized business processes for identifying and capturing additional costs that were not included in the quote that are then passed on to the OEM in the form of various fees and charges.”
Impressing your board with a “Tier 1” manufacturing service provider. According to the article, contracting manufacturers are generally grouped in tiers, from one to four, a system which was developed by the financial markets to help explain the differences across the industry. Keith explained, the only time you’d truly need a big contractor is if you have a “great big piece of business to place.” He said, in most cases, he advocates finding the right size fit – including technology, geography, management style, end market experience and your business model.
Not choosing a company because they work for your competitor. You should find the most capable and compatible contractors for your business, even if they are working for your competitor. If the contractor fits your business, that’s what matters most. Having the same contractor is not the same as manufacturing your product on the same line with the same staff as your competitors.
Needing a partner willing to invest in your business. Keith explained, “In my experience, the statement above generally implies that the OEM is looking for someone to lose money building products for them. Rarely is there an actual advantage to having a key supplier lose money on your account – and if you revisit item number 9 above, the fact of the matter is that they rarely do. Expecting a CM with a 6% ROA and a 12% WACC to ‘invest’ in your business is a bit like asking Bernie to manage your accounts.”
That will wrap it up for this week’s manufacturing myths, but stay tuned next time for Part 2 of the series. In the mean time, if you have any questions about manufacturing truths or would like to know more information about what an importing business like SEI can do for your company, don’t hesitate to give us a call!