An outsourcing relationship between an original equipment manufacturer (OEM) and a contract manufacturer (CM) is a marriage of sorts. In most cases, no other relationship between a customer and a supplier is as close and as interdependent as that of an OEM and CM. Missteps, communication problems and differing priorities can make the relationship difficult and impact both parties. Like marriage, selecting the right contract manufacturing partner can make the difference between contentment or disappointment with the business relationship.

Despite the importance of this relationship, it is surprising to see how cavalier many OEMs are about selecting a contract manufacturer. In our consulting practice, we have seen three attributes where mismatches can put OEMs on the wrong track from the start:

• Size: There is no magic formula prescribing that an OEM and CM must be of a certain size in annual revenues or number of employees in order to enable successful outsourcing. However, the size of the potential business opportunity relative to the size of the CM’s revenue should not be ignored. In the end, the issue of relative size boils down to power in the relationship. Ideally, both parties would have an equal amount at stake and there would be a delicate balance between mutual benefit if things went well and equal harm if things went poorly. When relationships are not balanced, the side with less at stake can treat the relationship opportunistically. Not only does this limit the potential value to both companies but it tends to cause conflict and/or unproductive behavior.
  
  Of course revenue and profit are only a couple facets in the realm of mutual interests. A CM may put a premium on business that helps it break into a new market or that helps it diversify its business base. Also, just because an OEM might be small relative to the global footprint of a CM does not eliminate the possibility of a good fit. Many times, CMs manage their metrics at the site level and a smaller OEM might be a big player at a particular site. This gives the OEM the mind share it needs at the division to get things done while leveraging the size and the resources of the larger CM. On the CM side, there might be something extra to bring to the table in the form of special capabilities that meet the needs of a niche market or product. In the end, you need to ensure there are significant points of mutual interest. If not, you are probably in the wrong relationship.
  
  
• Geography: Long- distance relationships can work with OEMs and CMs. Unfortunately, what we see often times is “wrong distance” relationships. By “wrong distance” we mean that the distance becomes a significant hindrance because of the nature of the business of the OEM. When it comes to determining the most optimal geographic location for the manufacture of their products, some OEMs set themselves up for failure by relying on perception rather than reality. In their efforts to have their products manufactured in low cost regions, they sometimes overlook the extra cost structure required to manage the situation and they do not fully account for the extra risks and inventory to deal with business fluctuations. A case in point is a recent Symphony client that had previously joined the crowds in the rush to China. They were tempted by the lower cost of labor. What they did not pay enough attention to was the nature of their demand which was US-centric and prone to quantity and mix changes. When we factored in the costs of expedited shipments and looked at the inventory risk in the extended supply chain, their savings for going offshore were completely offset by these factors. Think about whether your business can handle the distance before committing to this type of relationship.
  
  
• Personality: Yes, companies have personalities just like people. Some refer to this as the “company culture”. The most successful business relationships form when the personalities of the OEM and CM match or at least complement each other. In particular, there are three traits you should consider: discipline, openness, and communication style. Discipline shows up in both decision making and process controls. Some companies eschew any hint of bureaucracy and want things fast, loose, and creative. Others want to make sure everything is nailed down, studied and documented. Nobody would argue for poor discipline within a company; it is really a question of the degree to which rigor is enforced. Openness is a more subtle and varied trait. In some relationships, both parties are sharing data and plans, while in others, information is shared more on a need to know basis. There is no right or wrong answer; it is a question of style. Communication is also a question of style. Some companies want regular updates of all of the details and others just want the bottom line and do not want to bother with all of the noise from the day-to-day workings. These traits get to some of the fundamental issues on how a company works. A relationship is going to be more successful if there is alignment on these types of issues.

As you evaluate your current CM relationship or consider new ones, establish a clear definition of what you are looking for in this marriage before you go too far. Granted, site audits, price analysis, and prototype runs are all valid steps to go through but be careful not to lose sight of the higher level issues that determine a good fit between you and your CM before you even start your analysis.

Symphony Consulting provides expertise at both the strategic and operational level on manufacturing outsourcing. If you feel that we can add value to your efforts, please do not hesitate to contact us at info@symphonyconsult.com.