Turning Your Contract Manufacturer Into a Partner
As we all know, businesses have always been under pressure to improve revenues, reduce costs, and to grow their overall share in the market. In the past, the common action to lower costs was to outsource production to China or another country with a similar wage structure. However, when most companies in a given industry start outsourcing to another country with similar cost structures, the result is lower prices and lower profits due to commodity pricing. Innovative companies are now looking for new, more sustainable means to improve revenues and grow market share.
Nowadays, companies are shifting their priorities away from price and towards the development, distribution, and speed of launching new and innovative products that will redefine their industry. The reason companies are taking on this approach is because of the strong correlation between being the first to introduce a product and higher margins. With these changing trends, there is a much greater need to partner with contract manufacturers that can help achieve these improvements.
For example, if you manufacture and sell a basic phone charger, margins will likely be lower because the market is flooded with similar products, it’s essentially a commodity. However, if you can develop a new type of charger that is multi-functional and includes unique features that no other charger provides, then you’re able to demand a higher price and avoid the downward spiral of commodity products.
Goal & Solutions of Companies
The goal for companies, like before, is to improve their financial situation and control a larger share of the market. The solution is to develop new and innovative products faster than others giving you two advantages. First, since no other company has this product, you have more flexibility to charge a higher price and generate more revenue and profit. Second is product differentiation. When developing new innovative products and launching them quicker than your competitors, you can quickly build your brand and be a step ahead of others to control a larger share of the market.
Surround Yourself With Supportive People
As we all know, when someone ambitious is looking to do something great they have the tendency to surround themselves with capable people. Successful businesses have the same tendencies. Companies looking to build and launch innovative products have found that partnering with outside firms having similar values is very important. These pioneering companies are looking for support from their CM to efficiently develop and build their products.
Honda & Toyota Turning Suppliers Into Partners
In the 1980s Toyota and Honda started setting up manufacturing operations in North America they provided prospective American suppliers with small test orders for evaluation purposes. These new suppliers were given a list of expectations to meet certain cost, quality, and delivery requirements. Those who performed well were given larger contracts while those who struggled were dropped from the program. This process helped Honda and Toyota find suppliers or long-term partners that could meet and support their way of doing business. (Source: https://hbr.org/2004/12/building-deep-supplier-relationships)
Partnering with a CM Can Provide Real Benefits
Although there are many purposes, the primary reasons companies are turning their CM into partners are:
1. Engineering & Technical Support
Leverage their knowledge and experience with similar products.
Improve processes, reduce costs and improve the overall efficiency of your product.
2. Product Development
Developing products goes hand in hand with engineering and technical support. Having access to a team that can engineer and develop products is a huge advantage.
Development solutions to expedite the speed from development to production.
3. Improved Lead Times
Evaluate production constraints and offer solutions to reduce lead times.
Improved lead times can provide the company with better sales forecasts, decreased in inventory, and more.
4. Reduced COGS
When reducing costs, you need to understand many factors that include materials, processes, flow of goods, scrap rate and more.
Collaborating with a CM that understands DFM (design for manufacturing) can help provide you with a lower cost product due to improved efficiency.
The Steps to Partnering
Turning your CM supplier into a partner is not a quick task. It takes time and patience from both parties. The goal of forming a partnership with your CM is so you can have a partner to develop and launch products as quickly and efficiently as possible.
1. Understand How Your Suppliers Work
Toyota and Honda have stated that they will only start a relationship with suppliers after they know everything about that supplier. This is not only true for larger conglomerates, but also smaller companies.
Most companies see things one dimensionally and don’t view things from the perspective of their supplier(s). Suppliers prefer a company that attempts to understand the way they work rather than blindly forcing their own idea’s on them without understanding the culture of the company. Once you have an understanding of how an organization works, you can make more informed decisions about the company.
2. Turn Your Supplier Into an Opportunity Rather Than A Threat
Most companies look at suppliers as a tool in order to get the cheapest product or part. They often withhold information because they see the supplier as a potential competitor or threat. This approach does not build trust or loyalty and the supplier is less willing to invest in the company and help them with future development.
Successful companies do the exact opposite. They don’t look to squeeze every last dime from suppliers, but prefer they profit from the relationship. The company then knows that they are valued higher as a customer because of this win/win relationship. In return, the supplier will provide your company with more support and development because they see that they are valued by the supplier and a long-term partner.
3. Supervise Your Supplier
Finding a way to supervise your supplier that’s in between hand-holding and an annual supplier evaluation meeting is an important part to gauge the effectiveness of a supplier. Continually measuring your supplier after each shipment in terms of quality, engineering + technical support, delivery, and more is vital to building a lasting partnership. You can use this Supplier Evaluation Form as a reference.
By understanding how your supplier works from day 1, you can continually share feedback and work towards a stronger and more effective partnership.
4. Share Technical Capabilities
Having a supplier that is willing to invest in their engineering team means that the supplier will provide you with quicker and smarter solutions.
If the product is a complex project with a number of subcomponents then both parties will need to share information in order to save costs and execute the project in a timely manner.
5. Joint Collaboration
This is when the supplier and company are able to collaborate together on projects. Mutual trust and respect lead to a more effective relationship that benefits both parties.
The company provides the CM with the issues in the market and the CM can provide product solutions that will solve the issue.
With priorities leading away from pricing and towards first to market heightens, the need to partner with a legitimate CM is in high demand. Remember that partnering with companies that share your vision and also have the pioneer mentality is vital to creating lasting relationships. Taking steps to partner with your CM will provide your company with the services to expedite development to launch times and to sustain a high level of production within the defined quality. Good luck and always feel free to contact us if you have questions or would like to discuss an upcoming project.