"...While outsourcing offers significant financial merits and enables companies to focus on their core strengths, it is not free of challenges, and that outsourcing manufacturing without the proper preparation, infrastructure and control is a recipe for failure."
"Working with the wrong CM is at the root of many problems that we observe in outsourcing. An OEM selects a handful of contract manufacturers – or worse yet, a single CM – and starts discussing business without having a clear understanding of the appropriate selection criteria. Key inputs such as geographic location, technical capabilities, materials management capabilities, quality control, strategic fit, and financial health are overlooked or discussed too late in the evaluation process, as cost or schedule overrides all other concerns. Cutting corners like this is often justified in a variety of ways: by pointing to an existing operational problem; out of frustration with the current CM; in time for a new product launch; in response to immediate margin pressures; or a combination of these factors. While these are relevant issues to consider, a major undertaking such as establishing your CM relationship must be based on a robust strategic foundation.
Prior to starting any sourcing project, fully envision your idea of a successful contract manufacturing relationship. Critical sourcing projects are normally spearheaded by the operations/manufacturing organization. But be careful not to exclude major stakeholders such as engineering, product management, quality control, and finance. Outsourcing your manufacturing is not a traditional buy/sell arrangement, and it must be managed in a strategic manner. Your CM is an extension of your business and has personnel that must interact cross-functionally with your company. Determine what role such factors as size, technical expertise, financial strength, and brand name reputation play in your selection criteria.
For example, a tier-one CM may generally not be a suitable match for a start-up or small OEM merely based on size. The mindshare associated with an annual spend in the low millions of dollars is minimal for a large CM when compared to the hundreds of millions or billions spent on outsourcing by larger OEMs. However, some start-ups or small companies are in unique niche markets where a large CM is investing to become the contract manufacturer of choice. The potential revenue that the CM can realize as a result of this partnership may therefore overshadow the immediate revenue at hand. In that case, it may be worth pursuing a tier-one solution. Finally, get references from similar sized customers within a similar technology market. Keep in mind that every situation is different and requires thoughtful consideration of multiple factors.
Before making any decisions, spend time to develop a clear set of selection criteria, understand your short-term and long-term requirements, and cast a wide net to evaluate multiple options. Develop a clear plan and follow a methodical process until you have narrowed down your choices to at least two finalists. Refrain from awarding business until you have, at a minimum, finalized your key contract terms and agreed to how your products will be priced – now and in the future. Even if you are not planning on embarking on any new relationships, validate your existing solution from time to time to ensure ongoing alignment with the direction of your business or product roadmap. This will reduce the likelihood of a hasty selection process when the need arises."