Scope: Contract manufacturing is a mature industry. Manufacturers make products based on specifications in the purchaser’s “bill of materials” or specifications. Manufacturing comes in many flavors:
- OEM: Original equipment manufacturers produce goods under the brand name and markings of the customer. This is sometimes referred to as “white label” manufacturing.
- ODM: Under “Original Design Manufacturing,” the manufacturer designs the product and manufactures it. The design process is based on customer specifications for the product, but the final design is subject to customer approval and customer ownership.
- ICM: In “Interactive Contract Manufacturing,” the customer and the manufacturer engage in interactions relating to key elements of design, prototyping, testing and manufacturing.
- ECM: In “Electronics Contract Manufacturing,” he manufacturer makes electronics products according to the customer’s specifications and industry standards for such products.
Technical Requirements: Outsourced manufacturing services depend on effective mutual planning and project management. Basic principles of outsourcing apply to manufacturing services. The customer organization is responsible for defining the scope of services (and the quality of the products), the performance standards and for identifying “show stoppers” that could put the customer out of business.
The manufacturer must be sensitive to the customer’s needs and communicate effectively on critical risks. Such risks include:
- shortages of raw materials, energy or skilled workers;
- quality constraints arising from inferior raw materials or semi-assemblies from the manufacturer’s extended supply chain;
- capacity constraints arising from purchase orders for volumes in excess of the manufacturer’s capacity at the relevant time;
- political risks such as regulations or tariffs in either the manufacturer’s country or the customers country;
- communications difficulties arising from language and cultural barriers, particularly from the misunderstandings concerning timing, deadlines and project planning;
- risks of loss of proprietary intellectual property to a potential competitor;
- exclusivity and non-exclusivity risks; and
- scheduling for delivery including stocking of emergency inventory in case of shipment delays due to production delays or shipping delays.
Benefits: Trade in goods is subject to bilateral and multilateral free trade agreements including the World Trade Organization agreements from the Uruguay Round. The benefits of outsourced manufacturing include cost savings (“build vs. buy” decision), obtaining advanced skills, getting process quality, a dedicated focus on manufacturing as a core competency, avoidance of capital expenditures and economies of scale. Contract manufacturers take certain risks. However, the benefits are reduced generally because manufacturers may refuse to absorb the full losses due to changes in product design, major shifts in currency values or raw materials costs.