Seven key recommendations

Outsourcing production to contract manufacturersoffers a simple way to organize production while avoiding the need to establish in-house manufacturing, material supply, and other related functions. By sharing resources such as purchasing, material handling, quality control and production technology, you can lower overheads and decrease the total cost. The contract manufacturer takes responsibility for several key aspects allowing the customer to focus on other areas such as sales or business development.

However, much of the in-depth knowledge of the product remains with the contract manufacturer, as they manage both the production process and the suppliers of the product's components. Therefore there is a substantial risk that the customer loses insight into cost drivers and thereby the ability to influence the production cost.

When sourcing technical products, it is always a challenge to influence the entire cost base; when using contract manufacturers it is even harder. The factors that drive the cost of a product vary but it is not uncommon for product design to make up as much as 90% of the cost. This means that only 10% can be addressed via supplier selection, negotiations, and other traditional procurement methods.

These trade-offs aside, having contract manufacturers take care of production can be a huge success with the right commitment, insight, and collaboration.

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Here are 7 tips to consider when working with contract manufacturers

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1. Involve Procurement at an early stage
‍One of the most common mistakes during the product development process is that procurement gets engaged too late in the process. Ideally, procurement should be involved at the very beginning, even being included with the same function at the contract manufacturer.

This ensures that all commercial and value chain perspectives are included from the start.

2. Closely cooperate with contract manufacturer's procurement team
Cross-functional cooperation is always important but more so when dealing with contract manufacturers. Make it a priority to have a good relationship with their procurement team and potentially their suppliers, to secure valuable insights. Without it, you could miss critical information about the key cost drivers and how they can be influenced.

3. Do not forget the designers
‍The designers play an equally important role as procurement and provide just as much valuable insight. Ensure they are always included throughout the entire process.

4. Avoid specifying brands
It is important to allow the contract manufacturer to operate as independently as possible while utilizing their existing supplier network. This approach helps achieve economies of scale and reduces the number of unique suppliers or components. In order to make that happen, try to avoid specifying brands or suppliers for components.

5. Specify functions rather than components
‍If possible, focus on defining functions rather than components or unique designs. Give the contract manufacturer the freedom to select suppliers or develop the product based on the specified functions.

6. Listen to feedback
Criticism is one of the best sources of input for improvements regarding quality or cost cuts if used correctly. Ensure that sufficient time and resources are dedicated to evaluating and implementing suggestions from the entire supply chain.

7. Create incentives for future savings efforts
It is often difficult to succeed with cost savings initiatives once the product is in production. Any change requires commitment and investment, from both parties. It is therefore important to agree from the beginning on the level of co-operation and how savings will be shared fairly between parties.

If you lack the skills and experience to match contract manufacturers, we can help. Contact Three P today and our experienced procurement specialists can help you succeed.

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