Realizing the Potential

Businesses today thrive by focusing on what they do best and leaving the rest to others. Contract manufacturing seems to fit neatly into this practice. In addition to allowing companies to focus on core competencies, contract manufacturers offer numerous other advantages over in-house manufacturing, including lower costs, flexibility, access to external expertise and reduced capital.

It is important that Original Equipment Manufacturers ( OEMs ) and Contract Manufacturer relationship from the start have expectations set that are real and manageable.

Cost savings pass from the contract manufacturers to the customer in the form of flexibility and inventory costs. Contract manufacturers do not always have the presumed influence with suppliers since original manufacturers often select the suppliers. Flexibility can be compromised by the contract manufacturer’s focus on low costs and low inventory. And although using contract manufacturers often ties up less capital on paper, the numbers need to be offset against the inventory holding costs included in contract manufacturers’ charges.

It is never easy to manage complex relationships and Contract Manufacturing and OEM relationships are no exception . Ideally, the parties would create perfect plans that would make it possible to manage the relationship through service-level agreements linked to a set of key performance indicators.

Such challenges may tempt businesses to keep manufacturing in-house, but the potential of contract manufacturing is too great to ignore.

Instead, organizations need to take a strategic approach to contract-manufacturing relationships. In this article, the authors explain how businesses can do this by rigorously assessing when and why to use contract manufacturers, setting the appropriate working model and developing an effective organization.