Fifty years ago, all components of an electronic product were manufactured by the same company that produced the final product. This meant that the manufacturer had to purchase the raw materials, employ experts, carry inventory for each and every individual component that goes into the product. In addition, this made it extremely difficult for small companies with small runs to enter the market and compete.
The market was ready for ‘electronic contract manufacturers’ that specialized in the design and manufacture of specific components that would then be sold to the OEM to be placed in the final product. Narrowing the focusing of a company to just one product or component, allowed them to offer economies of scale in the acquisition of raw materials, talent and expertise in the design process, and equipment for production. This cuts costs for the original manufacturer and frees up their capital.
With this new structure, manufacturing companies were able to produce a better product, more efficiently, and easily scale up or down to customer demand. In the design development process, usually the most complex and difficult part of the process, a contract manufacturer is more likely to accumulate a team of experienced engineers that will focus their expertise on the specific component. In the production process, they are more likely to keep up with the latest, high tech equipment and state-of-the-art technology.
Suppose there is a problem with one of the components. If the manufacturer is producing all the components in-house, it may take a while before it is found – and maybe even after it has gone to the end-user. In addition, the problem has to be solved using in-house resources and capital. When working with a contract manufacturer, in many cases component flaws have already been caught long before they reach the OEM – often due to experiences with other manufacturers. Often a third-party view of the problem is what’s needed, and the resolution is solely on the shoulders of that third-party.
Since an ECM only purchases materials for the components they produce, they are able to purchase in bulk offering the OEM substantial cost savings. And since they are purchasing from their individual supplier in greater frequency, the manufacturer takes advantage of the strong relationships developed.
Finally, the contract company will thoroughly test the components they provide for quality. They will stay at the forefront of technology proposing improvements and upgrading their product so that it works better, lasts longer, and is more efficiently. This is a daunting task for the original manufacturer that has hundreds of components to keep up with.
An electronic contract manufacturer is an expert in the components they develop and provide. This expertise offers extreme value.
Considerations when choosing an Electronic Contract Manufacturing partner
For many companies, especially small to mid-sized companies, having a contract manufacturing partner is not only a good idea, it’s critical to the success of the business. Besides pricing structure and quality requirements, there are several other items that should be considered in evaluating potential partners:
How much and why do they want your business – Choose a partner with compatible objectives.
Some companies may only be interested in the amount of money at stake. While it is important that the numbers match up for the benefit of both parties, find out what their main driving force is. Larger contract companies may be interested in smaller manufacturing companies if they offer the opportunity to gain experience in an industry that is new to them. Or a product that has big growth forecasts.
Learning the answers to these questions is important before proceeding to the length process of submitting an RFP, and more critically, entering a partnership.
If the business principles do not match up, the OEM may not get the attention they need to make their product successful.
What will the ECM be looking for in a partner – Provide accurate forecasts
No one knows where an original manufacturer plans to go unless they see a well-developed forecast. If they want to make the most of the partnership, they need to inform the contract manufacturer about where they have been and where they plan to go in the future. This provides needed credibility.
The contract manufacturer will need to know what level of risk they are signing up for, while determining what level of resources will be needed to meet the requirements. Will they be able to purchase materials when needed, will they be able to handle the inventory?
What are the expectations regarding inventory
Determining up front what the policies and liability for inventory are between the two companies will minimize the possibility of conflict, and surprises. Understanding inventory issues and supply chain management, and actively making efforts to reduce exposure, is crucial when forecasts do not match up to sales, or a crisis occurs.
How will the ECM handle product changes
With electronics changing at lightning speed, changes are bound to occur fairly regularly. Find out the preferences for handling product changes, and the process they have taken in implementing them in the past with other customers is very important.
Defining the level of involvement expected by each party in the change proposal, analysis, and execution is important for the success of the partnership and the product itself.
Partnering with a company that has a large amount of experience in the multiple phases of a product lifecycle will provide valuable input in the various phases. Therefore, this experience as well as the documentation process should be discussed.
There are many aspects of electronic manufacturing that need to be considered when deciding on a manufacturing partner. These are some of the less obvious, but very important issues to make sure are not forgotten.