Improving Operational Efficiency With Contract Manufacturing

Amir Taichman
Founder & CEO
January 20, 2022

Businesses have outsourced warehousing and fulfillment tasks for decades. And over the last 10 years, this practice has gone a step further: outsourced manufacturing has become the norm. 

This is a part of a larger trend for companies going asset-light and outsourcing different parts of their operations. At face-value, the trade-off appears straightforward: what you sacrifice in operational efficiency, you reap the rewards of financially. Best of all, contract manufacturing (CM) often has little impact on brand identity. Companies such as Nike and Apple may not physically produce the shoes and iPhones that they lend their name to, but they’re still world-renowned for them. 

According to Gartner, over 80% of professionals surveyed in 2020 indicated that they planned to significantly increase logistics outsourcing budgets beyond warehousing and fulfillment. In the wake of COVID-19 related disruption, their motivations may surprise you. Only 34% of survey respondents named saving money as a priority.

So, if it’s not about cost optimization, what is it about? 

What’s driving the increase in budget is a need to update operations technology and support increasingly complex logistics operations. Supply chain managers want speed to market, end-to-end visibility and better data quality. Even the most modern third-party logistics providers have trouble keeping up with evolving challenges, so businesses are eager to partner with organizations to manage the complete logistics life cycle.

What is contract manufacturing? 

A contract manufacturer (CM) is a firm that is hired to produce components or products on behalf of another company or brand. Contract manufacturing is a form of outsourcing in which the brand approaches the contract manufacturer with a design or formula. The CM will quote the parts based on processes, labor, tooling, and material costs. Then the brand selects a CM that then acts as the brand’s factory, producing and shipping units of the design.

When you outsource manufacturing, you essentially create an autonomous operating unit that you don’t manage directly. That unit will often handle every aspect of creating your product - from sourcing to manufacturing and even distribution. 

The level of autonomy that contract manufacturers have can vary. Some CMs source everything and others’ sole purpose is to run a production line, leaving the logistics and sourcing to the hiring brand. For example, companies might retain production of certain critical parts because they’re very rare or expensive, or simply because they don’t want the contract manufacturer to be able to create fakes.

What are the challenges? 

Contract manufacturing is not without complexity and risk.  

First, there’s an inherent conflict of interest within the company-contract manufacturer relationship. At a fundamental level, the company doesn’t want to manage the production themselves; they simply want to be able to trust that the contract manufacturer will deliver on time and the high standard that’s expected of them. And it’s not surprising that the contract manufacturer also may not want to share too many details about their manufacturing process - after all, it’s their competitive advantage! 

Suppliers already provide purchase orders statuses to the contract manufacturer, and also sometimes to the company. Meanwhile, the carrier provides ETAs and shipment statuses to the contract manufacturer, and the contract manufacturer provides production plans and inventory levels to their company. The challenge here is that all this reporting and data that is procured is done so manually and on-demand. And with all these disparate information sources, there’s no way to ensure the company gets a complete view of their operation, outsourced or otherwise.

As always, it’s a case of cost-benefit analysis: working with a contract manufacturer can be just as challenging as working with a supplier, and it may leave the company more vulnerable to potential disruptions. Whether working with a contract manufacturer or managing your supply chain internally, covering your back with ‘buffer’ inventory and back-up materials is crucial for resilience-building. 

The primary benefit to managing your supply chain end-to-end is operational ownership. For the company, not being able to ensure the contract manufacturer’s production will meet the market’s demand for their product could have terrible results.

Where are we now?

The supply chain is the backbone of business operations, and the need for deeper insights is clearly there. Unfortunately, the majority of companies still don’t have total visibility into their supply chains, and those who do their best to monitor their supply chains are limited to measuring daily performance, cost reductions, and production rates. 

Going (mostly) digital was a good first step—at least we’re not sharing papers anymore! 

Yet few companies are aware of or empowered by the significant potential of real-time data to transform their operations. Thankfully, this is all about to change. 

The missing link isn’t just getting access to end-to-end supply chain information. It’s having a way to pull all the data together. With a single view of the supply chain, companies that use outsourced manufacturing can go from reactive to proactive - planning their operations and resolving issues before they wreak havoc. 

Companies need a simple and fast way to get quick answers to daily questions. Will my contract manufacturer have enough supplies? Will they manufacture enough to meet demand? And, following on from this, they’d be able to identify issues ahead of time - something that only 22% of companies are able to do at present (Logistics Bureau, 2020).