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5 Mistakes OEMs Make When Outsourcing To A Contract Manufacturer

When choosing a contract manufacturer (CM) to bring certain products of your original equipment manufacturer (OEM) to market, you need to be extremely careful.

Too often, OEMs want the outsourcing process to begin straight away and end up neglecting certain factors that cost them in the long run. When looking for the right CM for your business, avoid the following five costly mistakes.

1. Disregarding Your Own Manufacturing Team

It’s very common for OEMs to start obtaining proposals and negotiating contracts with a CM before they have properly evaluated how this decision impacts their own manufacturing team.

For outsourcing contract manufacturing to be successful, you must prepare your team for the change – before, during and after the transition to a CM. If you don’t prepare your manufacturing team, issues like possible job loss and resistance to change could crop up during the transition. It’s imperative that you plan for and guard your OEM against these possible negative outcomes.

Involve your existing staff in the transition as much as possible, and keep them informed as much as possible. Help them understand why it’s critical to outsource a program to a CM.

2. Not Receiving Cost Transparency From Your CM

Many CMs are hesitant to provide an accurate, detailed breakdown of costs that specifies material costs, direct labor, testing, overhead and profit. But without visibility into the CM’s cost breakdown, you have zero visibility to answer the following critical questions:

  • How does your OEM know what assumptions were used in quoting the product?
  • How may you help improve cost improvement in the future?
  • How are new products priced next time a new order is to be placed?
  • Is the CM giving you a price they are capable of sustaining, or are they “buying” your business initially and planning to raise prices once they have your business?

Lack of price transparency is a lose/lose situation for both the CM and OEM, leading to a strained relationship between both parties. Look for a CM who operates with open book clarity.

3. Ignoring The Hidden Costs Of Contract Manufacturing

Many OEMs limit their decision-making analysis to the CM’s direct costs of labor and materials, while excluding the indirect costs. Usually, the OEM reviews what their internal costs are and then compares them to various CM quotes. However, there are many other indirect costs that OEMs miss in the evaluation process.

Make sure your chosen CM provides you with indirect costs, too. If you or your team is spending too many resources making sure the quality and on-time performance is met with the CM, are you helping reduce the costs of outsourcing?

Furthermore, the relatively low costs of real estate, labor and materials overseas makes it difficult for a U.S.-based contract manufacturer to compete. But, many CMs who offshore their manufacturing don’t realize the price they pay because of hidden expenses – shipping, product quality, limited oversight and longer supply chains – all of which are more difficult to quantify.

4. Having Unreasonable Expectations Of Your CM

Even the best CM experiences difficulties when aiming to get you low prices, on-time shipments and consistently great quality. If you’re promised all of these services, you are not talking to a trustworthy CM.

Always remember what is most important to your OEM, and plan accordingly. For example, if you absolutely need on-time, high-quality products, then the lowest-priced CM isn’t for you.

5. Failing To Secure Your Intellectual Property

The issues of not properly protecting your intellectual property are multiplied when outsourcing to a CM. Ensure your CM is utilizing all three types of IP protection – physical, electronic and legal.

The right CM should have a secure physical facility where the manufacturing is conducted. The CM should also have a firewall, VPN and encryption to protect IP that’s transmitted through the Internet. As an OEM, your company should have proper legal protection, including written agreements and Non-Disclosure Agreements.

Partnering with a CM is not meant to be a quick fix for your business, but rather a long-term, lasting relationship. You need a CM that works as an extension of your business, providing you all the information you need to make smart decisions for your OEM, now and in the future.