The Art of Rightsizing: Choosing the Right Contract Manufacturing Partner Can Make the World of Difference

By Chng Boon Huei (BH), President and CEO of Flexi Versa Group

It might seem deceptively simple as a part of the outsourcing strategy, but rightsizing your contract manufacturing partner can make the world of difference when you get it right, and can be a costly disaster if you get it wrong. So, why is it so important and how so?

There are a myriad  of factors that require scrutiny before selecting a long-term manufacturing partner. Choosing a partner isn’t like selecting a supplier for a part or component. It needs careful consideration. Your manufacturing partner is a long-term collaborator in your business and can have a positive or negative impact on your products, your company’s performance and your reputation. After all, this is the manufacturing partner who will build quality products and have them out in the market in a timely manner. Choose wisely and the relationship will grow and add mutual value. Choose poorly and the partnership will fail to stand the test of time and could quickly unravel. Worse, it may cause your product or your company irreversible reputational damages.

Some selection factors are related specifically to scale or capacity, while others might relate more to capability and expertise. Here we’re focussing on scale and capacity, but within that is the scale or capacity to complete specific tasks or services. There’s no point in having a manufacturing partner with dozens of SMT (Surface Mount Technology) lines, if most of your manufacturing is box build, plastics, or even a specialized area like wood.

The Goldilocks Effect

Not too big, but not too small. That’s solid advice, but how big and how small? The largest contract manufacturer in the world has over a million staff and sales revenues of more than $200 Billion. For most OEMs or brands they are simply too big. For companies like Apple or Cisco, they might be just right. The smallest EMS might have sales below $10 Million, one SMT line and is perhaps ideally suited to a local OEM who outsources less than $100,000 per year.

The first thing to consider is what you’re looking for in a contract manufacturer, what you expect from them, and how much business you plan, or expect, to place with them. It’s practical to start with your current spend, but that’s by no means where it ends. You’ll need a manufacturing partner that can grow with you and if you’re launching a new product, will be ready to scale at the speed you need.

Share of Wallet

You’re going to want to know that the amount of business you place in not going to disrupt the contract manufacturer to a point where they fail to meet your volume demands. That’s the not too small side of the equation. On the flip side, if they are too big, the amount of business you place might not demand the attention you think you deserve. All in all, you probably want to be spending enough to get real attention, say around 2% of a facility’s revenue, but not so much that they become dependent on you, say over 15%. So, if you’re spending a million dollars on outsourcing, you might want to start with EMS companies or factories with sales between $8 Million and $50 Million. If you’re expecting a steep ramp, then you’ll want to increase both of those numbers.

Eggs in One Basket

Another often overlooked question is ‘do you want a single manufacturing partner, or more than one?’ This is a tough question and should be considered with the realms of the factors mentioned above. Some very large OEMs have specific policies that dictate what proportion of their spend they will dedicate to one supplier, while others feel that a very focussed partnership is the best way to get maximum attention. It is not a matter of which is right or wrong but what is more right for both your company and your selected manufacturing partner. If you share your manufacturing demand across two suppliers, you might benefit from spreading the risk of disruption in your supply chain, but you might also be spreading your buying power too thinly. A word of warning with supply chain risk mitigation. There’s no point in spreading the risk in the first tier of your supply chain if both suppliers are at the mercy of the same subcontractor or supplier further down the supply chain. This is a common mistake and one that needs some diligence in supply chain design to eradicate.

The Right Fit

At the end of the day, you need to find the right fit for you. That will include the right mix of culpability, capacity and culture. If all of these fit, you’re probably in the right place for a solid long-term partnership, and that’s exactly what you and your manufacturing partner should be looking for. There must be a fit and the long term strategies for both companies must be aligned. Simply put, it is both an art and science. But it seriously takes more scrutiny and trust me when I say that it is more complex than what is immediately apparent.