As an original equipment manufacturer (OEM), when you choose to outsource to a contract manufacturer you must be certain that the contract manufacturer is producing your product at a reasonable cost and with the same quality your customers have come to expect.
When you have zero insight into your contract manufacturer’s direct costs, overhead cost and profit, you are unsure as to whether they’re giving you a clean and concise quote. Price transparency is what creates true partnerships. This is why your contract manufacturer should offer total transparency by opening their books to you willingly. Acting as an extension of your business, the right contract manufacturer gives you ample opportunity to review their direct material costs, direct labor costs, factory overhead costs and profit related to your outsource manufacturing program.
The following are the top three ways a contract manufacturer with an open-book policy is beneficial for your business:
Identifying Discrepancies in Material Costs Is Encouraged
When your contract manufacturer offers total transparency, you are able to spot any inconsistency in material costs right away. This safety net helps in the event you know how to direct the contract manufacturer to a more cost-effective source or one with the ability to deliver materials quicker.
If you noticed this discrepancy without an open-book policy, you’d likely assume the contract manufacturer is operating at much higher overhead and/or profit than you may be comfortable with.
Ensuring Over-Skilled Talent Isn’t Used For Simple Tasks
As an OEM, when outsourcing to a contract manufacturer, your goal is to reduce a product’s drain on your own key assets. One of these assets is labor force. A benefit of partnering with a contract manufacturer is that, ideally, you’d be outsourcing to the correct skill level than what you currently use in-house.
When your contract manufacturer operates with an open book, you are able to easily see if over-qualified talent is being used to do basic assembly tasks. A transparent contract manufacturer is never utilizing their more experienced senior technicians to do simple tasks.
Monitoring Contributions to Factory Overhead and Profit
When your contract manufacturer volunteers to tell you their gross margin and how much applies to factory overhead and profit, you plainly see where all costs originate.
Visibility into your contract manufacturer’s gross margins helps you to promptly address any issues or concerns. The result is an increased ability to eliminate setbacks and achieve greater speed to market.
It’s also valuable to see if the net profits are reinvested for future training, equipment and infrastructure, or if your contract manufacturer owner is taking all profits out of the business and not reinvesting in the future.
When your contract manufacturer offers open insight into their costs and margins, you are able to make smarter decisions for your OEM business. Look to partner with a contract manufacturer that utilizes transparency, not only when delivering you a quote, but as a long-term strategy.