There are many catalysts that cause a vertically integrated company to consider outsourcing manufacturing content. It can be cost related, or time to market driven, or just a change in the senior management philosophy. This task is usually assigned to the supply chain management team, but generally also includes input from the quality and engineering departments before execution.
Let’s assume, for the sake of discussion, that the product is a high-tech piece of equipment that is made up of printed circuit boards (PCBs), a sheet metal enclosure, precision machined parts, and wiring content. The challenge is to break the construction of the equipment into unique electro-mechanical sub-assemblies that are logical components conducive to manufacturing elsewhere. Once this is determined, what type of vendor should you consider to quote the content?
Pragmatics of Picking a Vendor
Logic will tell you that you should try and follow either the highest dollar value of the components or the critical functionality of the device. For instance, if the nucleus of the device requires complex PCBs, the lead vendor may be a contractor who can build high complexity PCBs. If the sheet metal or precision machined parts are particularly complex or expensive, the lead vendor may be a metal shop; and if the wiring is complex or has critical performance requirements, then you may want engage with a cable and harness manufacturer. For the most part, these lead vendors can coordinate all the other “less critical” content through their established supply chain.
Once you have thought about who you should consider for your manufacturing partner, let’s look at other considerations and their impact on your decision process. One concern is whether the directive will include existing products or only new products. Each of these represents their own unique challenges.
If the directive for seeking an outside manufacturer includes existing “mature products,” there is a distinct possibility that the bill of material (BOM) structure in manufacturing resource planning (MRP) is “flat,” and is not conducive to outsourcing. The problem is that the flat format for the BOM does not identify specific sub-assemblies within the overall system that are good candidates for alternative manufacturing consideration. This must be defined, usually by engineering or manufacturing, and then broken out into a documentation package that usually includes a top-level fabrication drawing, and a BOM that contains only the content that reports to that sub-assembly. In addition, the MRP system generally requires all of this content to be identified as a “buy” versus a “make” so that the MRP does not “double dip” and buy the content both ways. All of this requires internal resources, and in many cases the decision is made to NOT commit engineering resources to mature products, thus excluding those products from outsource manufacturing consideration.
Bill of Material
If the decision to outsource only includes new product introduction (NPI), there still needs to be an effort made by engineering to structure the BOM so that it is multi-level, and identifies content that is conducive to outsourcing. Once the sub-assemblies are identified, fabrication drawings and BOMs must be developed for each sub-assembly. The challenge is to be able to anticipate the buying power, and the level of automation that will be available at the contract manufacturer—and allow flexibility in both content and manufacturing methods. This will allow the buyer to take advantage of this competitive advantage, while still maintaining functional control over the system level configuration. Many companies who outsource for the first time are paranoid about keeping control over the system configuration, and end up imposing severe restrictions on BOM content and assembly process, thus limiting the opportunity to take advantage of the potential cost reductions available through working with a manufacturing partner.
The good news is that companies that are considering outsourcing manufacturing do not need to navigate this minefield alone! If they choose to engage with their prospective contract manufacturers early in the process, they can benefit from the guidance and experience of that contractor, and in many cases get some of this engineering work done as part of the relationship.
Outsourcing is one of many considerations when bringing products to market. If new production introduction (NPI) is on your radar, you'll need to know how to leverage your core competencies with those of a top-quality contractor. Are there capabilities you never realized you had? Markets you’ve only dreamt of breaking into? The right partnership could blow those doors wide open!
Read about the successful NPI, time to market collaboration between Fourstar and Columbia Tech in this case study.