Hope is not a strategy. Yet when it comes to their most important supply relationship, many OEMs seem to adopt this approach. They wash their hands of the details and hope that product comes out in the right quantity and with the right quality.

In outsourcing the manufacture of your products, you are gaining efficiencies that you would be unlikely to achieve by manufacturing in house. But it is also important to realize that in this process, you can lose control over factors that are critical to your success. Many companies erroneously view the outsourced manufacturing relationship as a traditional buy-sell relationship rather than an extension of their own business. This simplistic view has a direct impact on your operational – and financial – performance as a company.

In our practice, we have identified a handful of key areas in which OEMs need to play an active role and retain control of fundamental attributes that can differentiate between success and failure:

• Key component supplier relationships. Keep your strategic, high value component relationships close to your chest. This will require that you have the appropriate resources and expertise to engage in technology roadmap exchanges, forecast sharing, supply buffer programs, and price negotiations. Your CM should be considered only as a point of sale, with little to no impact on affecting these strategic relationships. This should also impact how much mark-up you pay on these components vs. other off-the-shelf components that are completely managed by your CM.
• In-process quality management. Quality problems that are not caught on the manufacturing line show up in the field or in your factory, resulting in dissatisfied customers, a tarnished reputation, not to mention higher recovery costs. You should have clear visibility to what is happening on the production line and what corrective actions are being implemented when problems occur.
• Product lifecycle management. With product life cycles shrinking and abrupt changes in product introduction and obsolescence activity, you need to have a solid foundation in place for managing change. Also, changes to your bill-of-materials require robust business processes and tools to ensure that your supply chain risk is minimized during these transitions.
• Inventory exposure. Inventory within your four walls is only a small subset of the inventory that you need to worry about. The amount of inventory that you are exposed to at your contract manufacturer and further upstream in your supply chain can be significant, requiring you to have a program to measure and mitigate this risk.
• Supply buffer programs. The biggest problem with supply buffer (or flexibility) programs is that they become stale over time. You should make sure that there is a solid rationale behind your buffers, as well as a process for re-setting the buffers as business conditions change.
• Early warning metrics. While it is nice to have post-performance metrics like inventory turns, shortage reports, and quality-as-shipped, it is even more critical for you to have metrics that help you discover risks in your supply chain long before they create problems. More progressive metrics like Inventory Exposure, Supply Mis-Alignments, and In-Process Yields can give you information about risks so that you can address issues proactively.
• Environmental compliance. While your contract manufacturer will play a key role in your environmental compliance (e.g. RoHS), the ownership falls on your shoulders. In fact, it is important for you to fully validate the robustness of your CM’s manufacturing process because in the final analysis, it is your brand name that will be on the line.
• Testing – CMs build products for a variety of OEM companies and it is unreasonable to expect that they will have an intimate knowledge of your customers, the operating environment for your products, and the relative weight you put on product reliability. Because of this, you have to take the lead on product quality and reliability testing. Sure, the CM will execute to it, but you have to set the stage with a strong test plan and by having the product engineering resources to follow-up on trends and issues. In addition to the normal product testing (ICT, functional testing, etc.), the plan might include occasional product stress testing or out-of-box audit. Your product engineering team should review test results on a regular basis to look for issues that may need attention.

There are many benefits that come from manufacturing outsourcing. But an OEM to CM relationship should not be treated with a typical buy-sell mentality. There is too much at stake and you will be well served by maintaining control over certain aspects of the business. While the list above is not an exhaustive, these are the areas where we have seen the greatest opportunity and/or the greatest risk for the OEM.