Search

A Brief Guide to Outsourcing Manufacturing for OEMs and ODMs

Updated: Dec 7, 2018


Although OEMs and ODMs come in many shapes and sizes and from industries ranging from food and beverages to aerospace manufacturing, many outsource all or a portion of their manufacturing to contract manufacturing companies for similar reasons. The most common being the following:

  • Achieving substantial labor cost savings by outsourcing to a lower cost market

  • Attaining significant capital investment savings by not having to acquire the equipment needed to produce in-house

  • Benefitting from the improved production processes and raw materials sourcing capabilities of the contract manufacturer

  • Outsourcing manufacturing to a professional contract manufacturer allows the OEM or ODM to focus on their core business

  • Outsourcing enables the OEM or ODM to better manage spikes in demand due to seasonality and unforeseen factors that impact demand for products

  • Taking advantage of the contract manufacturer’s extensive manufacturing equipment and capabilities allows OEMs and ODMs to get products to market faster

  • Lacking specific skills, equipment, and technical processes that OEMs and ODMs do not possess that enable it to produce products beyond the scope and capabilities of the typical job shop.

  • Having a low degree of satisfaction with internal systems to manage new product development and introduction

Whatever the reason for outsourcing to a contract manufacturing company, OEMs and ODMs must establish a process to help ensure it picks the right contract manufacturing partner. This process may include up to ten steps, including:

  1. Defining your contract manufacturing objective

  2. Establishing roles and responsibilities

  3. Determining scope, technical requirements, and product specifications

  4. Searching for partners

  5. Identifying and contacting suitable partners

  6. Requesting proposals

  7. Evaluating proposals

  8. Surveying and auditing processes and equipment

  9. Awarding business

  10. Ongoing support

Step 1: Defining Your Contract Manufacturing Objective

Your contract manufacturing strategy may vary depending on a number of factors. Are you a start-up company with the primary objective of securing a long-term manufacturing partner? Or are you an established player outsourcing to reduce your labor costs and focus on more profitable areas? Whatever your main contract manufacturing objective, your strategy for identifying and on-boarding the right contract manufacturing partner must have the ultimate goal of ensuring this objective is met. Moreover, your contract manufacturing partner should be aware of your primary objective for outsourcing your manufacturing and strive to help you obtain this objective.


Step 2: Establishing Roles and Responsibilities

For a new initiative to prosper at any corporation, two elements are needed:

  1. Support from senior leadership to ensure that the new initiative is a priority

  2. A team in place to create and execute a strategy to make the new initiative grow

For your outsourced manufacturing initiative to succeed, a team, accountable for specific results and activities and supported by senior leadership, needs to be put in place to ensure success of your outsourced manufacturing initiative. Furthermore, the points of communication between the buyer and contract manufacturer need to be clear between both parties in order to avoid miscommunications. Your contract manufacturing partner, for its part, should also establish a clear point person to be assigned to your project.


Step 3: Determining Scope, Technical Requirements, and Product Specifications

Creating a written scope of work, outlining project details, technical requirements, and product specifications in advance will not only accelerate the outsourcing process, but also help ensure that you and potential contract manufacturers are on the same page. When responding to your scope of work, potential contract manufacturing partners need to provide evidence supporting the claim that they have the capabilities, certifications, production and quality control processes, and experience needed to help you achieve your contract manufacturing objective.


Step 4: Searching for Partners

Now that you have determined your contract manufacturing objective, have put a team in place to create a strategy to implement this objective, and have created a scope of work identifying what you need from a contract manufacturing partner, it is time to begin your search. There are two ways that you can conduct your search:

  • You can hire a third-party to help you identify a suitable contract manufacturing partner. Common third-party sources include agents, international business councils, and local trade associations

  • If you want to save money and conduct a search based on your own selection criteria, you can research, list, and prioritize potential contract manufacturing partners yourself

If you decide to conduct a search on your own using your own selection criteria, make sure that your selection criteria are based on your contract manufacturing objective. When evaluating your contract manufacturing needs, you may also want to determine the benefits and drawbacks of working with a large contract manufacturing facility versus a smaller firm. No matter your strategy, your contract manufacturing partner should set aside sufficient time, equipment, and resources to ensure that your products are produced at the required level of quality and delivered on time and in full.


Step 5: Identifying and Contacting Suitable Partners

Having established your contract manufacturing objective and partner search criteria, it is time to begin identifying and contacting partners that meet your criteria. When contacting suitable partners, you may consider requesting the contract manufacturer to provide you with the following information:

  • Company brochure that can be shared with the team you put together in Step 2

  • Quality manual and/ or quality control assurances

  • References

  • Assessment of whether the candidate is willing to send you a prototype in advance or invite your team for a site visit and audit of their equipment and production processes

  • Description of additional services (reporting, analysis of KPIs, warehousing, fulfillment, etc.) that the contract manufacturer can provide your company

Candidates should be removed from your shortlist for any of the following reasons:

  • The candidate is not focused on helping you achieve your contract manufacturing objective

  • The candidate has a poor credit report

  • The candidate does not possess the equipment or technology required to produce to your specifications

  • The portfolio of services offered by the candidate is too shallow

  • The candidate’s English language capabilities are poor and you do not speak the local language

Step 6: Requesting Proposals

Having created a shortlist of potential contract manufacturing partners, it is time to move forward with a Request for Proposal (RFP). In addition to reiterating the key terms outlined in your scope of work, your RFP may also outline the critical information from the contract manufacturer that you wish to receive in written format and may include:

  • Cost elements

  • Estimated lead time

  • Estimated shipping costs

  • Overview of additional services

  • Description of any non-recurring charges

Step 7: Evaluating Proposals

Now that proposals have been submitted by competing contract manufacturing firms, it is time to start evaluating and comparing bids. Apart from the degree of alignment with your contract manufacturing objective, a number of considerations should be taken into account when selecting a contract manufacturing partner, including:

  • Costs associated with producing and shipping your products

  • Lead-time to produce and ship the products

  • Whether or not the prospective partner is willing to send you a sample of their work prior to finalizing their tooling and mass producing your designs

  • Whether the potential supplier is willing to provide you with additional services (e.g. local warehousing, fulfillment, service in English, etc.) to help you achieve your stated contract manufacturing goals

  • The extent to which the contract manufacturer can demonstrate a track record of continuously producing high quality, customized products

  • Whether the potential supplier has sophisticated quality control protocols embedded into their production processes

  • The degree to which your outsourced manufacturing partner is willing to help ensure that you receive your products on time and in full through warehousing and fulfillment services

  • The extent to which your outsourced manufacturing partner is willing to work with your team to avoid supply chain disruptions through reporting, inventory management, and demand forecasting

Step 8: Surveying and Auditing Processes and Equipment

By this step, it is likely that you will have narrowed your selection down to a single candidate or small handful of candidates. Before drafting and signing a contract with an outsourced manufacturer, however, it is recommended that OEMs, ODMs, and other third parties request a site survey with contract manufacturing candidates to ensure that the contract manufacturer’s team, production processes, quality control protocols, equipment, and systems are in place to exceed your production and quality targets. When conducting your site surveys and audits of processes and equipment, consider bringing with you a diverse team that has a strong understanding of both front and back-end business, production, and quality control processes.


Step 9: Awarding Business

By this step, one leading candidate will have emerged and it is time to negotiate the contract. When negotiating contracts, OEMs and ODMs tend to be more focused on scheduling and production rules, quality standards, payment terms, and logistics. Contract manufacturers tend to be more focused on forecasting and order quantities. No matter your focus, the ideal contract manufacturing partner will have flexibility and work with you to achieve your contract manufacturing objective.


Step 10: Ongoing Support

In the ongoing support stage, you have selected a contract manufacturing partner and agreed on standard terms and conditions for a pre-determined time period. From the start of your contract to the renewal date, a good contract manufacturer will have agreed to maintain a standard level of quality for each batch of products produced and provide additional services designed to help you meet your contract manufacturing objective and satisfy your customers. Before accepting a contract renewal with your contract manufacturing partner, you should evaluate the extent to which your partner has supported your team by asking yourself the following questions:

  • What was the frequency with which my contract manufacturing partner met my quality targets?

  • What was the frequency with which my contract manufacturing partner did not produce or deliver products on time?

  • To what extent did my contract manufacturing partner support my team with downstream business functions such as warehousing and fulfillment of products to decrease my lead-time?

  • Was the number of product defects within the acceptable range?

  • How helpful and supportive was my assigned point of contact when I needed to place orders or had questions about the product?

  • What is the degree to which my contract manufacturing partner went above and beyond the call of duty to help my business thrive?

If you or your company plan to work with an outsourced manufacturing partner, it is worthwhile to make sure the factories you are considering working with will strive to help you meet your goals throughout the entire production process. If you have a project that you would like to discuss with a sales representative or would like to request a quotation, give us a call at 1-855-411-0404 or visit us at www.aimcontractmanufacturing.com.