HOW TO DETERMINE IF CONTRACT MANUFACTURING IS RIGHT FOR YOU

HOW TO DETERMINE IF CONTRACT MANUFACTURING IS RIGHT FOR YOU

While contract manufacturing offers many advantages, it is not mandatory for everyone, and the timing may not be ideal for your organization. If you are unsure about securing a contract manufacturing partner, here are some key indicators to guide you.

Key Signs That Contract Manufacturing Might Be Right for You

1. Complex Supply Chain

   • If your supply chain is becoming overly complex, it may be time to simplify it. Experienced contract manufacturers can significantly streamline the entire process and reduce moving parts for your company.

2. Small to Medium Business Size

   • Small and medium-sized businesses often have the resources to manage contracts remotely, but in-house production can be challenging. Purchasing and maintaining equipment can be difficult for companies of this size, making outsourcing an attractive option for startups and mid-sized organizations.

3. Limited Focus

   • Some companies have capacity limitations and cannot invest in their core strengths. If you want to shift your focus toward expanding in non-manufacturing areas, this might be the perfect time to secure a contract manufacturer. A lack of functionality or internal bandwidth is a strong indicator that your company could benefit from outsourcing.

4. Variable Demand

   • If demand for your products fluctuates frequently, inefficiencies arise due to the friction of scaling production up and down. In such cases, manufacturers can offset significant costs by outsourcing to a contract manufacturer that specializes in handling demand fluctuations.

Misconceptions About Choosing a Contract Manufacturing Partner

Selecting the right contract manufacturing supplier is crucial to your company's success. However, many companies approach the process with misconceptions. Here are some of the most common myths and the reality behind them:

1. Choosing a contract manufacturing partner that is willing to invest in your business is ideal:

   • False: The idea here is essentially looking for a supplier willing to manufacture at a loss, which is unrealistic. A contract manufacturer’s strength lies in maintaining competitiveness while ensuring profitability for both your company and themselves. This benefits you in the long run.

2. Always choose a Tier 1 contract manufacturing partner:

   • False: This is even more incorrect. "Tier 1" is a term created by financial markets to differentiate large companies from smaller ones. What you actually need is a contract manufacturing partner that suits your unique business needs. This may mean selecting a partner that is not the largest company in the field. Instead of choosing based on size, consider the following criteria:
     • Technology
     • Location
     • Company Culture
     • Management Philosophy
     • End Market Experience
     • Business Model

3. Choosing the right contract manufacturing partner eliminates all challenges:

   • False: No, it only reduces challenges. You are still responsible for your product line. This does not mean you can abandon responsibility. However, contract manufacturing allows you to delegate a significant portion of the workload to experts who are better suited for managing specific tasks. OEMs (Original Equipment Manufacturers) succeed by effectively delegating tasks—not by forgetting them. You will still need to manage the relationship to some extent.

4. Always choose the contract manufacturing partner with the lowest bid:

   • False: As with anything, shopping based purely on the lowest price is a flawed strategy. Your contract manufacturing partner should offer competitive pricing and help your company save money. While obtaining a quote is necessary, the price alone does not tell the whole story. In fact, unit price per cost typically accounts for only about 75% of the total supply chain cost. Some contract manufacturers pass the remaining 25% on to OEMs in the form of additional fees. Consider the entire package and all related factors when selecting a contract manufacturing partner.