Now that we’ve learned about the fundamentals and values of contract manufacturing, let's take this a step further and share some examples of how contract manufacturing works in some real-world situations.
For this particular case, our client company (aka Model Mfg) originally chose to directly purchase all of their parts and sub-assembled parts from various off-shore vendors and then have those sub-assembled parts fully assembled with their own in-house production team. With this approach, Model Mfg had to manage the supply chain of a dozen vendors, plan production, negotiate pricing and create quality documents for each of these vendors. Furthermore, all parts from various vendors were then shipped halfway around the world for full assembly in America. As Model Mfg later said, "it was a total headache, but at the time, we thought it was the only reasonable way to build their product."
Model Mfg then decided to hire four (4) full-time operators for assembly, plus one supply chain manager that coordinated production with each of their outside vendors. The company decided to take on this approach because they thought a contract manufacturer wouldn’t put so much effort into the product as they could. They also had the common misconception that outsourcing or hiring a contract manufacturer would lead to knockoff’s entering the market and stealing market share.
With taking on this approach, Model Mfg became responsible for purchasing raw material, purchasing parts, planning assembly, analyzing their supply and demand, developing a quality system and creating the work instructions for final assembly. The company quickly noticed that their original resources were now fully consumed by the needs of operations, planning and assembly, with little left for sales, marketing and distribution efforts. The primary concern was that their sales volume would soon suffer due to higher costs from their in-house supply chain management and final assembly.
The company found themselves getting into deep water with lower margins due to higher costs of operations, various supply chain headaches from coordinating so many vendors, building a faulty quality system and increased inventory in order to keep their workers busy. Their common issues and inefficiencies were as follows:
Higher costs per unit because of the large investment and ongoing costs of handling their own assembling line. In addition to the higher investment costs, the per unit cost increased without reaching economies of scale, a broken supply chain, increased transportation costs and more.
Resource Allocation Issues:
Model Mfg noticed they were starting to get into trouble when their resources were heading away from sales and marketing and more towards supply chain management and final assembly. Inventory was piling up, yet sales output was declining or flat.
Lead Time Issues:
The time to coordinate their vendors, arrange shipments and ensure on-time delivery for final in-house assembly took a lot of time and resources. Parts were constantly late, arriving with poor quality and lead times increased by months. To compensate for these extended delays, they built up inventory which tied up cash flow and restricted investments into other needed business operations.
Quality System Issues:
Defining quality requirements for each supplier and all of their parts is a hassle if you're not trained and experienced in this area. Having subpar and subjective quality standards make it easy for vendors to provide parts that they think are correct, yet they’re actually incorrect and are not acceptable. This issue alone created production issues and extended lead times even further.
Model Mfg noticed these inefficiencies and they were struggling to provide a high-quality product at the right price and on time. They noticed that the steps they were taking to build their product pushed them towards major financial difficulties. The company decided to look into the possibilities of having an outside firm take full responsibility for their entire supply chain.
Following careful research and due diligence, the company hired EPower Corp to handle all contract manufacturing, improve production efficiency and help return the company to profitability. EPower Corp quickly targeted their inefficiencies and the positive results were impressive:
After the partnership was formed with EPower Corp, the savings (over 30% lower) and reduced overhead from working with a contract manufacturer allowed them to focus more resources on sales, marketing and distribution. This influx of cash on the marketing side allowed the company to spend more on acquiring customers through targeted marketing programs, advertising, trade shows and more. They were also able to turn inventory more quickly, thus freeing up their cash flow to investments on additional marketing programs.
Re-Allocation of Resources:
The four assembly workers, plus one supply chain manager were able to refocus their attention on business development for the company rather than taking resources away from the business.
Improved Lead Times:
Their contract manufacturer was able to use their relationships with raw materials suppliers, subcomponent vendors and improve alignment with assembly to provide the company with a lead time that was over 65% shorter than their previous lead times. Having shorter lead times improved their cash flow, reduced inventory needs, increased inventory turns and improved customer satisfaction.
Retaining a contract manufacturer who can leverage their long-lasting partnerships and knowledge of the required processes and materials lead to a detailed and objective quality system. These changes drove the needed quality improvements and have to this day enabled zero rejected shipments.
Conclusion - Simplifying Your Supply Chain After hiring EPower Corp as their contract manufacturer, Model Mfg became much more efficient with their production which improved cash flow and confidence. With these two important improvements, they were able to develop and launch new products with their contract manufacturing partner more quickly and efficiently than ever before.
To learn more about EPower Corp, schedule a free consultation.