Manufacturing must be refactored

Manufacturing is hard. It’s why people say hardware is hard. No matter what it’s called: OEM, ODM, CM, CEM, EMS, or EMS 2.0, they are all similar when it comes to the parts and pieces of the business. There are a few basics. Labor, arms, and legs, as they often call it. Factories or location(s)to perform the work. Machines to automate the process and reduce labor costs. Business and environmental process controls. Some companies have skilled accounting practices and work closely with clients to control costs and logistics. Very advanced companies offer design services for manufacturing improvements that help both companies automate more efficiently, reduce error rates, or remove cost. While this sounds like a fantastic resource to have, it’s more like having a partner with Alzheimer’s.

Contract manufacturing is fantastic for a business who knows what they want and how to get it. Sometimes an OEM / ODM, Original Equipment / Design Manufacturer, will sell it’s production capability and capacity to one of these companies. The OEM retains all the development and intellectual property, while the CM, ECM, or EMS will take over the work and improve it where possible. That usually takes the form of moving labor and factories to lower-cost regions. Sometimes it involves process and product improvements. Typically it’s all driven by the OEM specifying everything while retaining the core rights to all changes or inventions. Control like this has a very negative effect on the partner and long term relationship.

The manufacturer ends up waiting for explicit instructions. What to build, when to make it, and how to ship it. Approvals required for every detail with valuable information locked into a work cell or manufacturing line by contract. Isolating the manufacturer from leveraging any knowledge inside the business. Eventually, the culture becomes so comfortable with this operating mode they lose the ability or desire to develop new market value. It’s a head injury that leaves them in a perpetual cloud of ignorance. This makes it all the more ironic that OEM and ODM customers often buy manufacturing services looking for expertise and skill from a shared customer base yet lock it under contract and NDA.

If it’s low cost you want, be prepared to specify everything literally down to bathroom breaks. You will likely discover the manufacturing secret. They have no buying leverage to reduce part costs for you. Roughly 10% or less of a Bill Of Material (BOM) drives 90% of the cost. Manufacturers who have consigned parts, usually the 10% of BOM, don’t have any buying leverage with large players. Customers still demand cost reductions on the scraps left behind. Manufacturers call those items popcorn. Don’t be afraid to share pricing to get pricing. Keep the manufacturer in check but don’t expect you can starve them into success.

Contract manufacturing is not for a business that wants to set and forget. You will never hear a manufacturer come up with unsolicited ideas looking to save you money or time. There is no incentive based on the lessons listed above. You likely specified everything in terrible detail, trying to get the cheapest contract already. Once you have it, they will hope you set and forget the business with them. 3–5 years of steady production and any savings on process, plan, or production is margin for them. Be sure you get the data and don’t leave the relationship on autopilot.

It’s a shell game. Don’t rely on your supply chain management to lead the charge, especially if you bonus the department on cost reductions and savings. Your overly competent supply chain management team will squeeze the manufacturer in every possible way by design. The manufacturer will push back in ways you can’t imagine if abused. They will cut corners where ever possible. Look for the signs. Dutifully attended Quarterly Business Reviews (QBRs)with fewer and fewer people over time. Constant contract terms loophole meetings. Relentless pressure to shift production to lower cost and lesser trained locations. Of course, they will position it as an advantage to you. Eventually, they will do a cost-value analysis and decide when to fire you as a customer. Which happens far more than you can imagine. Manufactures will always tout their anchor customers, but never tell who is no longer a customer.

No manufacturer has evolved past the 3% model. They try. But with such low margins, they are in a race to the bottom by design. Ridiculous budget deficiency cap every effort to improve their business. Project after project laid out for growth and washed away by another huge high revenue low margin deal. It’s like building a small bridge between two sandbanks. It’s too little to manage the traffic and too weak to weather the storm. It only gets worse when the manufacturer moves upmarket into design and support. They will spend every dollar they can on building up capacity and then fail in execution. It is a perfect storm of waiting for the customer instructions and trying to build services on a shoestring.

Be wary of promises without planning or pricing. If a manufacturer is offering you a design partnership, production mastery, logistics, and pricing leverage, don’t trust them. If you can’t do what they promise before transitioning the business to them, how can they do it on a 3% or less margin? Manufactures have to change. They have to articulate a real value and show how they can meet your demands while adding value to the process. Software ownership, management, and support are prime examples. If they are not providing priced packages, assume it’s a lie.

Customers should get off the 3% drug and align with manufacturers to remanufacture the business model. Share some of the 10% of BOM costs, pay for services that enhance security, reduce costly design functions at the board level so you can focus on the high-level software stack. Let manufacturers leverage knowledge about production layouts or special features that do not count in your core value proposition. Find ways to unlock knowledge sharing everyone asks for but never gets. Don’t listen to your supply chain only and allow value-added engineering to die out. It’s a partnership in the end, and years of bad behaviors will shift manufacturing liabilities into sustainability liabilities if you are not careful.

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Business Model_Technology Evangelist

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Pieraldi

Pieraldi

Business Model_Technology Evangelist

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