Originally Published on TradeReady
The truth is that many businesses tend to overcomplicate their supply chains. Unless they are taking in hundreds of millions of dollars in revenue, most don't make it a top priority to simplify their global supply chain, especially if most of their products fall within the same industry or product category.
Many, if not most businesses also don't invest enough in a supply chain team dedicated exclusively to sourcing product parts and components, planning production and arranging assembly.
Their reasoning? It takes resources away from the principal goal, which is generating sales. More companies are beginning to realize the added benefits of partnering with a contract manufacturer (CM) that can improve the efficiency of managing their supply chains.
Why do companies complicate their global supply chain in the first place?
Budgeting alone is not to blame. There are other culprits, such as misconceptions about how best to handle supply chains, which can end up by having real impacts to the bottom line.
4 Reasons to maintain a complex supply chain - Debunked
1. The best way to protect your IP (Intellectual Property)
Many companies complicate their supply chain by employing multiple suppliers for the same product. The reasoning being to prevent one manufacturer from acquiring all the information required to reproduce their product.
Rather than consolidating their supply chain, some companies choose to source each part using multiple suppliers to keep their suppliers in the dark. This method is adopted to reduce the risk of their IP leaking.
While it makes sense to protect your IP, the question is, why work with a supplier you cannot trust? Would you continue to work with a distributor that steals your IP? Probably not.
Many contract manufacturers have IP protection policies in place to prevent IP from leaking. Ask your supplier about their IP policy and ask if they work with any companies similar to yours. Are they an elite CM responsible for assembling products for industry-leading companies? If so, that’s a good indicator that they are trustworthy.
If the answer is no, you may question if they are the right supplier for you and your project.
2. It's more cost-effective to do it yourself
Many believe it's cost-effective to source products, subcomponents and parts on their own rather than having a CM do it.
Good CM’s have a list of pre-approved vendors they have worked with for years. Building an excellent relationship with a supplier can take years to develop, more so if you are starting with lower MOQs (Minimum Order Quantities).
One useful approach is to provide a prospective CM with a full BOM (Bill of Material) and ask them to provide you with your target costs. A good CM will give you quotes for both in-house production and quotes using their list of pre-approved vendors. The goal is for them to match you on the price.
Some companies may have a limited amount of resources. Rather than using a costly sourcing team to manage your supply chain, it may be more beneficial to allocate your resources to departments that can generate revenue such as sales & marketing, product engineering & development to boost sales. You may want to consider identifying a CM who can hold their weight and provide full support to allow you to allocate resources to more critical departments.
3. Contract manufacturers are not project managers
Manufacturing a unique or customized product requires full attention from a project manager. Many companies believe a third party cannot provide such care and decide not to work with them.
CMs run production projects to stay in business, so proper project management should be embedded within their organizational structure. A CM can effectively track the entire process of the project and work with other departments heads (supply chain, production, quality and engineering).
A CM can provide you with a project manager to be your point of contact and provide you with updates on new developments.
4. Contract manufacturers lack vendors for my project
Another common misconception is that CMs cannot vet or provide vendors that align with your organizations' goals. However, one of the greatest assets of working with a reputable CM is to take advantage of their roster of pre-approved vendors. Validating a vendor is no simple matter and does not take one or two projects to develop, but years of collaboration to build trust.
Sometimes companies are content to use existing vendors and can request their CM to use designated suppliers. In this case, the CM is accountable for using only your list of suppliers, and thus both parties accept the price and quality, especially with projects using electronics (e.g. hardware, Internet of Things (IoT), robotics, etc.).
Consider the benefits of consolidating your supply chain
Consolidating your supply chain into one centralized location can expand your budget needed to increase sales, product development, and engineering.
There are many reasons why companies choose to consolidate their supply chain. The initial process of validating the right CM might seem complicated at first, but it can provide a substantial positive impact on your company and profits in the future.
1. Allocation of resources
Allocate more resources to sales and marketing, rather than taking resources away from it to focus on sourcing.
2. Cost effectiveness
CM’s prefer to handle a more significant chunk of the project, than a small portion of the project like parts or subcomponents. The broader your engagement with a CM, the better your prices. When you leverage their full capabilities, your efficiency will improve, and costs will likely be more economical.
3. Better lead time
Your CM has a number of pre-approved vendors that include a number of materials. Consolidating your supply chain with them will give you access to those pre-approved vendors.
Rather than sourcing suppliers from all around the country or world, and driving your logistics insane, you can allow your CM to take the brunt of the pressure and take the lead.
4. Stronger development support
Provide your CM with a more substantial mass of your project, will encourage them to be more inclined to allocate more resources to your project as well such as engineering and technical support.
Leverage professional supply chain management
As a business owner, you need to focus on growing your business rather than the management complexities of sourcing, manufacturing, assembly scheduling and shipping coordination. Consider delegating your supply chain management responsibilities to a team dedicated to managing all the moving parts to allow you to allocate resources to more vital aspects of your business such as generating revenue via sales and marketing - the lifeblood of any business.
Special thanks to TradeReady for posting this blog.