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Contract Manufacturing - The Big Picture

March 07, 2012 at 10:28 AM



Taking Advantage of Custom and Contract Manufacturing Resources – Part 1, the Big Picture

Add value where your firm has unique capabilities, and outsource where you don’t.

Most companies have heard this advice.  Some have, to a degree, adopted a portion of it.  Few, however, have gone far enough to reap the benefits available to them by putting part or all of their manufacturing operations in the hands of a partner with true expertise in that area.

When it comes to manufacturing, there are many options: manufacture and assemble in house, assemble only in house, outsource domestically, outsource off-shore, or simply purchase completed product from a third party.  In this article series, we will be examining each of these options in greater detail, with the objective of helping companies make the right choices when it comes to high-level manufacturing strategy.

Why outsource?

Outsourcing can positively impact a company’s financial performance in several areas.  Among them are:

  • Conversion of in-house fixed costs to truly variable costs by paying for services only when they are needed.  This can be a significant help when volumes vary from period to period.
    • Indirect labor, manufacturing supervision, and shop floor support costs are all normally reduced.
    • Procurement and materials management expenditures can often be reduced.
    • Incoming, in-process, and finished goods costs of quality become the responsibility of the contract / custom manufacturer.
    • Engineering and product design support costs can often be shifted to the contract manufacturing partner organization, if the correct partner is selected.
  • Greater leverage of the supply chain, particularly when the client organization by itself, does not purchase enough volume to qualify for large quantity discounts
    • Reduced purchasing transaction costs
    • Greater high volume discounts
    • Ability to leverage fixed costs across additional volumes
    • Access to global suppliers that would not be interested in clients volumes alone
  • Lower working capital requirements
    • Custom manufacturing partner can (but doesn’t have to) own and manage raw and in-process inventories
    • Custom manufacturing partner can (but doesn’t have to) apply their own cash to support operating costs
    • Many custom manufacturers are experts in lean manufacturing systems, allowing them to employ kanban and other lean concepts to reduce overall inventory levels while still insuring needed service levels.

Depending on the circumstances, those using contract manufacturing solutions may also realize a number of operating benefits including:

  • Reduced floor space requirements
    • Reduced stockroom/warehouse space
    • Reduced production floor space
    • Reduced office space needed for supporting production operations
  • Simpler management of human resources
    • In some instances, contract manufacturers can be set up as a second source of supply, allowing the client to remove the peaks from their production schedule, thus avoiding many of the challenges of the hire – layoff cycle.
    • Fewer demands on the Human Resources Department, and hiring managers required for recruiting, interviewing and the other aspects of the hiring processes.
  • Reduced manufacturing cycle times
    • Management of fewer part numbers and sku’s, resulting in less confusion and lower administrative workloads
    • Improved ramp capability by having additional, inexpensive standby capacity
  • Improved trouble-shooting, return, and repair processes
    • Contract manufacturers can establish a return and repair center for products, freeing the client organization from this nuisance operation, and improving customer satisfaction by speeding up the receipt, disposition and repair cycle.
    • Contract manufacturing employees develop the expertise to support your organization with field diagnostics and phone support when problems arise.

Of course, these benefits must be balanced against the costs of working with contract manufacturers.  If the client organization insists on comparing only their variable costs to the purchase price from a contract manufacturer, in most cases they will not find attractive proposals.  When some of the benefits above are taken into account, however, the total cost of outsourcing usually becomes attractive for the client.  The client organization, however, has to be prepared to make the internal adjustments necessary to capitalize on the services the outsourcing company can provide.  When they do, Contract Manufacturing can be a win-win for both firms.

TEK Services is a contract manufacturing company located in Eastern Nebraska specializing in metal working (laser machining, CNC, welding, laser cutting, metal cutting and other services), wiring work (wire end terminals, small wire terminals, wiring harnesses, circuit board assembly and other services), and electro-mechanical assembly.  Our website is, and our phone number is 402-727-0262.

Tags: custom manufacturing contract manufacturing
Category: Contract Manufacturing

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