Aim of the Research
This research aims to critically review and analyze contract manufacturing as a very essential aspect of outsourcing, which is currently gaining tremendous popularity. It is because of this that this particular study also aims to look into how important both contract manufacturing and outsourcing is to many businesses. Without a doubt, both contract manufacturing and outsourcing is something of vital importance as more ad more industries because of its perceived benefits and the positive results that it also promised to yield. More and more industries also incorporate these practices including (1) defense; (2) semiconductor; (3) medical; (4) automotive; (5) personal care; (6) energy; (7) computer; and (8) aerospace fields. In the same manner, it also looks into the importance of establishing and managing relationships as an essential part of contract manufacturing to ensure the success of the businesses engaged in outsourcing.
Scope of the Study
The study would include the different American businesses that engage in contract manufacturing and outsourcing in the electronics industry. The researcher gives importance to this topic for they are reducing their costs to ensure their competitiveness despite the rise of the Japanese Electronic Industry. However, this research shall include the different industries that are engaged in outsourcing in the discussion for it is necessary to show how important this business strategy really is. It would alsolook into the different topics and issues that the researcher deems of vital importance for the discussion of the aforementioned topic, looking into the following: the definition of both contract manufacturing and outsourcing; history highlights and turning points; the need for outsourcing, especially the necessity of contract manufacturing, looking into issues such as flexibility, capacity and capital, and finally, risks. It would also focus on the discussion of the entire contract manufacturing process through the provision of a brief background, the pros and cons of this concept, the capabilities and qualities of a good manufacturing firm and the different risks that are usually associated with outsourcing.
Aside from this, the study shall also look into the importance of technology to contract manufacturing, the regulations, the status of markets and industries to which the businesses covered by this study belong to.
This research, in order to achieve the aims that had been mentioned in the first part of this paper is highly qualitative in nature, making use of the deductive approach to ensure that the topic is efficiently analyzed in its entirety.
In logic, there are usually two methods of reasoning: the deductive and inductive approaches. The deductive approach is informally called as a “top-down” approach as researchers who make use of this tend to choose a theory that is related with their topic of interest, then narrows it down to specific hypotheses which shall be tested in his or her study, based on the theory selected (Trochim 2006). Afterwards, the researcher then collects observations in order to address the hypotheses which could eventually lead to the conclusion on whether to accept or deny the original theory or theories, Trochim (2006) notes.
This kind of approach shall then be incorporated in this study by first looking into the theories concerning contract manufacturing and outsourcing. From here, the researcher shall come up with hypotheses that would be the basis of this study. Upon presenting the hypotheses, the researcher shall then make use of the methods that shall be presented in the latter part of this chapter in order to take note of different observations which could help the author of this study in proving or disproving the theories of relationship marketing that has been earlier presented.
To effectively achieve the aims of this particular study, the researcher shall rely on the analysis of secondary data – articles, books, and journals – that came from the World Wide Web in order to obtain the necessary information with regard to the topics mentioned above.
The research would then use content analysis. Content analysis is a technique used for gathering and analysing the content of the documents retrieved from the World Wide Web. The content shall be sorted into themes, analysing only what is in the text as the purpose of the writer of these articles could not be very clear to the researcher.
This part of the study shall provide a brief background of contract manufacturing and outsourcing by providing the different ways by which other scholars defined it. It is then through these definitions that this whole study shall be based upon.
The BNET Online Business Dictionary defines contract manufacturing as the outsourcing of a requirement to manufacture a particular product or component to a third party. According to the same online business dictionary, it is also through contract manufacturing that companies are enabled to reduce the level of investment in their own capabilities to manufacture and at the same time, retain the high quality of their product, its price and the schedule of its delivery. Stupp (n.d.) also defines contract manufacturing in this particular manner, stating that it is defined as outsourcing or contracting out the manufacturing services of a business to an external firm, business or third-party vendor.
Furthermore, Gerald (2006.) defines outsourcing as a company’s activity of engaging another organization to do their business process or part of their business process. On the other hand, Dutton, et al. (2004) defines contract manufacturing as the new type of relationship between brand-name firms (OEMs) and their contractors in manufacturing, often resulting from vertical specialization in the most advanced sectors of the computer and telecommunications industries. Based on this definition, it is evidently seen that contract manufacturing greatly stresses the development and maintenance of relationships between the two parties that are involved in the process: the contractors and manufacturers.
In relation to this, Gibbson (2006) defines contract manufacturers as the firms that manufacture components or products for another hiring form.
From the decisions stated above, it is evident that contract manufacturing is a very important aspect of contract manufacturing. The BNET Online Business Dictionary defines outsourcing as the transfer of the provision of services previously performed by in-house personnel to an external organization, usually under a contract with agreed standards, costs and conditions. In the same manner, the same dictionary also mentions that [outsourcing] is the use of external suppliers as a source of finished products, components, or services. Meanwhile, Patel (2007) states that it is because of the fact that outsourcing involves taking out of the internal company functions and paying an outside firm to handle these is the reason why the former is often referred to as off shoring. Nonetheless, Patel (2007) stresses that off shoring should not be completely associated with outsourcing; rather, this must be treated as one of its branches wherein companies outsource services to a third party in a country differently than the one in which the client company is based in order to lower down their labor costs. Gibbson (2006) says that outsourcing refers to delegating the task of marketing and other marketing-related jobs to an outside agency instead of company department. Gerald (2006), on the other hand notes that outsourcing is a company’s activity of engaging another organization to do their business process or part of their business process. This definition only shows that outsourcing need not require the engagement of a third party outside a certain country wherein the client country is based. The only requirement then, therefore for outsourcing is the engagement of a third party, more specifically, another business to perform a certain aspect of the business procedure of the client company, researchers note. It is only then because of globalization that contract manufacturing involved the services of companies located in foreign countries (Wilkof & Burkitt, 2005).
Finally, Vadera (2007) also provides a definition for outsourcing, stating that is a popular management tool that it is often used to redefine and reengineer a certain organization. The author also mentions that it is through this that companies can make the most out of their core competencies and at the same time, establish long term outside relationships.
Contract Manufacturing: History Highlights and Turning Points
As it has been earlier mentioned, both contract manufacturing and outsourcing are gaining tremendous popularity amongst the different businesses today who would want to gain an advantage over their competitors who also belong to the same industry. Nonetheless, the researcher gives importance to the presentation of the history of this particular concept in order to show how it has evolved into what it is nowadays.
The contract manufacturing industry was born in 1981 with IBM’s entry into the PC market. IBM then contracted a no-name manufacturing company of SCI of Huntsville, Alabama for the assembly of its motherboards. In the same manner, the companies in the Silicon Valley, most especially those who are new to the industry also teamed up with the big names of the said industry. An example of this would be the then new Sun and Cisco, who teamed up with specialized contract such as Solectron or Flextronics to ensure their success in the industry where they are in.
In the second half of the nineties, relationships between vertically integrated OEMs in the United States and Europe rapidly developed, Dutton, et al (2004) notes. This generally became popular due to the first actions undertaken by IBM as they continue to manufacture their cards through contract manufacturing in North Carolina, Texas and even throughout Europe and Asia. In 1997, the first European OEM engaged in contract manufacturing when Swedish telecommunications manufacturer, Ericsson decided to sell of their production units. This was followed by another big name in electronics production, Siemens. Siemens then sold off their manufacturing facility in Germany in 1999, followed by their PC and mobile-phone plants in 2000. Dutton, et al. (2004) states that one of the reason why members of the IT industry resort to outsourcing or contract manufacturing deals was due to the said current slump.
It was in 1999 that outsourcing has been said to be positioned for its huge growth with the coming of the new millennium, Bendor-Samuel (2007) states. It eventually took place because of the different events of that year that affected economic trend such as the different efforts employed by corporations to improve relationships and of course, the greatest advancements made in technology.
This trend then evolved into a rapid expansion as highly differentiated spectrum of outsourcing relationships begin to emerge from different corporate strategies and traditions. In the same manner, it also arose from manufacturing practices that are relatively unique to a particular nation or region. In the same manner, it also gradually evolved into the outsourcing of the entire manufacturing process rather than just parts of it (Dutton, et al, 2004). It is then because of this that many companies who engage in outsourcing and contract manufacturing that the vertically integrated OEM companies maintain good relationships with their outsourced plants even though they are in competition with their other facilities. Eventually, Bendor-Samuel (2007) notes that the aforementioned discussion helped in establishing outsourcing as a business tool and strategy of choice for building up competitive advantage in the early 2000s, and continuing until today.
However, outsourcing and contract manufacturing faced several challenges, most especially in the first half of 1999 due to the problems brought about by the turn of the millennium, more specifically, the so-called Y2K bug. Nonetheless, when this issue had been finally in control, the elements of outsourcing began to resurface which then carried on until the next millennium.
As it has been earlier mentioned, different countries in the Asian continent had also been one of the most popular destinations of outsourcing deals. However, most Asian corporations, more specifically the Japanese keiretsu and the Korean chaebol refuse to resort to contract manufacturing in their region.
Need for Outsourcing
Many authors believe in the necessity of outsourcing due to various reasons. Without a doubt, outsourcing has become a very useful option for the people with very little time and is engaged in business, Gilharry (2005) mentions. The benefits of outsourcing, without a doubt are well known (Cooper, 2007). Among these are improved return on investment through better use of resources, a focus on core competence and finally, greater economies of scale.
Krest (2007) is one of the many researchers who have presented the clear reasons why businesses, especially those belonging to the medical industry face a necessity for outsourcing. According to Krest (2007), globalization and global trending are taking place all over. Businesses are getting increasingly competitive. Technology gives rise for an improvement in all aspects and the medical device industry is not exempted. Calls for quality, compliance, marketing and cost seems to be the culprit behind necessitating the need for contract manufacturers of companies that seek to compete in the growing industry that costs only calls for a continuous supply of products to meet the demands of the challenging market. As with other industries, the medical device industry continuously grows and so does the dynamic market in which it exists in duplicating those high quality products be produced at faster rates or the company will be left out. It is imperative for the medical device companies to look for contract manufacturers that will provide them with quality products that are made and delivered to clients at faster rates than what they are used to. Through these implications, companies not just in the medical device industry could determine whether it is the right time to seek the aid of a contract manufacturer or continue to perform its activities without them. In doing so problems could easily be avoided or minimized.
Vadera (2007) asserts that one of the main reasons why companies outsource is to access expertise, experience and expensive analytical equipment that are not available to them. In the same manner, the aforementioned author also notes that it is only through the use of this particular technique that companies could save more money and at the same time, sell their products or services at a lower price thus increasing their sales and productivity. Likewise, it is also through this that companies could save from capital funds used for none-core functions. Instead, they make use of these funds in order to focus more on core functions.
Vadera (2007) also mentioned that outsourcing could eliminate the need to show returns on equity from capital investments in non-core areas thereby improving certain financial ratios. Simply put, outsourcing is necessary since this particular management strategy allows the different companies to focus more on their valued activities as its support services are being taken cared of an outside provider or a third party. Aside from this, it is also said to enable the different organizations to accelerate its growth and success as they expand their investment in areas that could generally assure them of an advantage over their competitors. Finally and most importantly, outsourcing helps the different companies become more profitable and at the same time, provide better services than what their internal departments can.
Patel (2007) on the other hand notes that the reasons by which organizations outsource depend on their business and their situations. More often than not, there are some businesses that outsource as the third party organizations tend to provide cheaper labor, thus making the former save a lot. In short, business organizations tend to rely on outsourcing to cut their costs yet at the same time, focus and access the proficiency of their organizations. Patel (2007) also concurs with the aforementioned statement of Vadera which said that companies tend to consider outsourcing when the resources they need are not available to them. Patel further notes that outsourcing remains effective for those who have a stiff control of their finances through predictable costs. The author also adds that this particular management strategy also increases the flexibility of many corporations to ensure that they reach the aspects of their businesses that are very profitable. Finally, she notes that this management tool also lowers the venture of internal infrastructure while giving the businesses access to novelty and the idea of thought leadership.
Need for Contract Manufacturing
Davis and Hong (2004) note that one of the promises of contract manufacturing is the fact that it allows the different companies who make use of this strategy to focus on their core competencies. In the same manner, it is also said to lower costs, flexibility, access to external expertise and reduced capital employment (Rozwell, 2006). Without a doubt, it is advantageous for businesses to rely on contract manufacturing, Sturo (2005) notes as he concurs with the statement of Rozwell. According to Sturo, contract manufacturing allows the different businesses to manufacture products excellently. Furthermore, he also recognizes the importance of this particular business tool as organizations today are greatly affected by a number of macro-economic factors such as globalization, increased collaborative environments in the supply chain and the cost economics of dependence to others.
Sturo (2005.) also asserts that the reasons behind the need for contract manufacturing are to obtain cost advantages, proximity to their customers and last, but definitely not the least, to gain a considerable advantage over their competitors. Rozwell (2006) also give importance to contract manufacturing in ensuring that good relationships are maintained between the two parties engaged in outsourcing activities.
As it has been earlier mentioned, many researchers consider flexibility as one of the most important advantages brought about by contract manufacturing. Flexibility often refers to the ability of businesses to choose a company that suits their style of working. In the same manner, they also have the choice to switch from one agency to another if they feel that their expectations are no longer being met. Nonetheless, Davis and Hong (2004) mentions that engaging in this business strategy do not really guarantee corporations of flexibility as businesses tend to maintain lean margins whilst focusing on low costs and low inventory. According to these authors, if flexibility is desired, then extra capacity and inventory is required which is surely not a part of the practices of contract manufacturers based on what is mentioned. In the same manner, these authors also note that there are certain barriers within the organization which negatively affects flexibility.
Capacity and Capital
Capacity and Capital are also considered to be the factors which significantly affect the need for contract manufacturing. Once again, businesses resort to both outsourcing and contract manufacturing to obtain the necessary resources they need that are not available in the country where they are located in. In the same manner, it has also been said that it is through contract manufacturing that these companies were able to look for cheaper labor thus saving a lot of money by cutting their costs. Researchers also mentioned that it is because of these advantages that these businesses are able to increase their capacity to provide quality products and services.
Nonetheless, Davis and Hong (2004) reassert the value that should be given to communication and the establishment of relationships between the OEM and the contract manufacturer in order for their business to succeed.
It is no longer an unknown fact that there are many risks associated with outsourcing as OEMs engage another party to deal with parts of their business process or its entirety. It is because of this that Davis and Hong (2004) once again gives so much importance to contract manufacturing in order for both parties to be committed towards the minimization of these risks. Rozwell (2006) notes that both parties must be committed to each other’s success. It is then through this that both of them would share in the risk, reward and success of their projects. Furthermore, it is through this that their systems and process could be highly integrated, thus avoiding confusion between the two. Finally, it is also through contract manufacturing that both parties engaged in outsourcing are able to come up with a process of governance that is highly refined.
In the same manner, businesses who resort to contract manufacturing often assume that it is with outsourcing that they could also transfer the risks to manufacturers. However, Davis and Hong (2004) mention that this is an incorrect assumption for it is usually the contract manufacturers who give the risk back to the OEMs through the incorporation of minimum-volume guarantees or commitments to order the planned volumes into the agreement.
Sturo (2005) notes that the classic value chain of any manufacturing business is made up of the following activities: (1) inbound goods; (2) manufacturing; (3) outbound goods; and (4) marketing. These are the so-called central activities with human resources, finance and R&D being its peripheries, supporting the said processes. As a result, contract manufacturing is only concerned with labor and allied services that are usually included in contract manufacturing, Sturo (2005.) notes. In the typical business model of contract manufacturing, a hiring firm will usually contact a contract manager and inform him or her of a design or formula. This hiring firm, according to Gibbson (2006) is generally an OEM. In this process, the latter shall provide the quotes of the parts based on the processes, labor, tooling and most importantly, material costs. Also, outsourcing entails different arrangements, Cavinato (1989) notes. These arrangements include inventory, timing, storage, transportation and other decisions pertaining to the facets of flow control (Cavinato, 1989).
However, Davis and Hong (2004) realize that aside from the benefits that often come with outsourcing and contract manufacturing, there are potential drawbacks as well. These disadvantages may arise in event that the relationship between the OEM and the contract manufacturer is not functioning properly. As a result, contract manufacturing fails to yield its promised positive results. It is because of this that the authors recommend a strategic approach that organizations must follow to enjoy the benefits of contract manufacturing. The authors identified three areas that should be developed and maintained for effective contract-manufacturing relationships. These are the following: (1) the rigorous assessment of when and why to use contract manufacturers; (2) the setting up of the appropriate working model; and finally, (3) the development of an effective organization.
The rigorous assessment of when and why to use contract manufacturing is the first step in the entire process, Davis and Hong (2004) identifies. Leading companies must recognize that using contract manufacturing is a strategic supply chain concern and not just a procurement issue. They then should conduct analyses and make decisions as part of an overall supply chain strategy, with support from procurement and day-to-day operations (David & Hong, 2004). As a result, businesses should not just examine whether they would use this particular business strategy but must also identify how and why. Through this, they would be assured that the decisions that they will make would be based on solid information as they begin to enjoy stronger and more successful relationships. Unfortunately, however, Davis and Hong (2004) note that most companies still tend to rely to a more tactical approach as they outsource only when an opportunity seems attractive or to win the different assets that this particular business tool promises.
The strategic assessment of whether or not elements should be manufactured within the company or through the use of a contract manufacturer usually involves two dimensions. These dimensions are of vital importance to ensure the success of contract manufacturing. The first dimension to be considered is the capabilities that are required to manufacture a product. The second one is the strategic importance or competitive advantage that this product or component brings. Usually, consumer companies tend to get involved in contract manufacturing when they would want to extend the range of their products.
Without a doubt, the aforementioned strategy could greatly help a certain business in identifying their need for contract manufacturing. However, Davis and Hong (2004) reiterate that this looks at the present situation and not of the future. Therefore, they call on businesses to solidify their analysis by looking into and giving much importance to the lifecycle of the product of a certain company. This lifecycle often involves three major phases and each phase, according to Davis and Hong (2004) lends itself to a different approach to contract-manufacturing.
The first phase is the introduction or concept. In this particular phase, it is suggested that marketing be done in-house as the different requirements for its production are still evolving and at the same time, contracting third parties would be difficult. According to Davis and Hong (2004),
The focus is on time to market and growth, contractors that bring a specific technological strength may become involved in the process.
Maturity is the second phase in the lifecycle process of products. In this phase, contract manufacturers are already employed in order to help out in the minimization of costs and capitals. It is also in this particular phase that companies retain the design of their in0house whilst contracting out the physical manufacturing activity (Davis and Hong, 2004).
After maturity, decline comes in as the next phase of a product’s lifecycle. In this particular phase, Davis and Hong (2004) state that companies focus more on maintaining their revenues aside from the development of new products. They also start in planning to outsource both the design and the supply of the product. In this particular phase, businesses are also encouraged to review their budget cycle and at the same time, perform a regular assessment to identify the different changes that took place as well as the actions needed for this.
Going back to the areas that should be given importance to in order for contract manufacturing to be successful, setting the appropriate working model is once again considered to be of vital importance. According to Davis and Hong (2004), many companies recognize that there is a substantial divide regarding the best approach to working with contract manufacturing. These authors note that employees in manufacturing want to manage contract manufacturers as if they are in-house factories; procurement experts prefer to rely on a hands-off, performance-driven contract. They however, reiterate that the corporations must consider the situation they are in. Nonetheless, they must agree on an operating model for contract manufacturing throughout the entire organization despite before going through discussions despite the circumstances of the organization.
More often than not, the companies tend to pattern their contract manufacturing strategies on the risk characteristics that are associated with their products. Davis and Hong (2004) refer to these as the inherent risk characteristics such as non-supply and lost revenues due to seasonality, demand unpredictability or frequency of project changes. In the same manner, companies also tend to rely on the sophistication of contractor capabilities. Obviously, companies tend to focus less on those products which have a more predictable demand profiles, with fewer changes and longer life cycles.
Once again, contract manufacturing reiterates the importance of the development and maintenance of relationships between both parties – the OEMs and the contract manufacturers. Davis and Hong (2004) calls on to partner less as these partnerships tend to demand more time and energy which should then be allocated strategically rather than reactively. They also encourage the restructuring of a relationship so as to ensure that both parties would gain benefits without ever having to move on to a true partnership.
Secondly, the authors assert that companies must also focus on the overall performance of their supply chain and not just how the contract manufacturer did. As a result, they call on a broader approach so that businesses could work from an overall supply chain objective so that the relationship can focus on optimizing supply chain performance (David & Hong, 2004). This then means that companies must give more importance to the performance and not the contract.
After reaching the decision to use contract manufacturers and selecting an appropriate relationship, Davis and Hong (2004) call on the establishment of an appropriate internal organizational model that may be used for execution. In this particular business model, the company and manufacturers must possess the same accountability for manufacturing performance. This model must also determine the management degree required which according to Davis and Hong (2004),
…could range from giving plans and orders to the contract manufacturers for simple contract-led relationships to jointly planning production and managing material suppliers in strategic partnerships. These processes are similar to, or the same as, the central planning activities that support in-house production sites.
he Pros and Cons of Outsourcing
This part of the study shall focus on the pros and cons of outsourcing as presented by the different studies that deal with the same topic. The researcher deems this to be of vital importance as this would definitely present both sides of outsourcing. The different articles, made available by the World Wide Web shall be used for this discussion. Below is the summary of Drakulich’s (2007) analysis of the pharmaceutical industry which eventually gives a clear picture of both the pros and cons of outsourcing and how the different businesses can balance the two.
Almost 95% of the pharmaceutical companies bring their operations to outsourcing companies in 2007. The primary rationale behind the being is the reduction of costs associated with pro-currying in new machinery developing new facilities and staff engagement. Another reason is the number of products in the company’s channel. When integrating outsourcing with the company’s operations it is important to realize the full control over all operation is compromised and that reliance to the contract manufacturers experiences and capabilities is given up, but it is also essential to keep company personnel on hand to oversee contract manufacturers’ operations. Constant communication, regular visits (announced and unannounced) and quality control should be part of a company’s a successful contract manufacturer relationship.
Advantages of Outsourcing
Outsourcing, without a doubt is becoming a very popular business tool and strategy for those who would want to establish an advantage over their competitors. In the same manner, this popularity has also been affected by major advancements in the field of technology, especially the development of the internet. The measure of the benefits that outsourcing gives is still in question, because according to Bose (2005), outsourcing only is meaningful if it is measured for the return on investment or simply, ROI.
As earlier mentioned, more and more researchers have realized the importance of outsourcing, as earlier presented in the section entitled need of outsourcing. Contract manufacturing and outsourcing once again as discussed by previous researchers — Gibbson (2006); Gordon (2004.); Gerald (2006); Malcolm (2004); are essential to organizations as it reduce the costs of certain businesses especially those that go to staff salaries. As a result, Gordon (2004.) notes that the biggest advantage of outsourcing is the fact that it guarantees lower costs. Gerald (2006) mentions that:
More often than not, companies that take on outsourcing projects and jobs already have the facilities and the manpower to do the business process on behalf of their client’s companies. This means that the clients do not need to buy the necessary facilities and hire the necessary staffs or personnel in order to get the job done. This translates to huge savings for the companies that engage the outsourcers.
It is for this reason why countries such as India became the number one destination of outsourcing, both of marketing and other tasks. According to Gordon, one of the reasons why India is becoming a very important choice of marketing outsourcing is its labor force that has significantly completed higher education and at the same time, speaks English well. Nonetheless, they still provide their services at lower rates. Gerald (2006) gives an explanation for this particular benefit of the said business strategy:
Outsourcing is one way of getting highly-productive manpower in a cheaper rate. This is because the wages of skilled professionals in certain companies are lower than in other countries. This is usually due to the lower costs of living in certain countries. This then results in skilled professionals form certain countries having a lower market salary.
Newton (n.d.) also notes that it is through the ability of OEMs to resort to contract manufacturing that they would be able to focus less on assets that are not of great value. The advantages of outsourcing, however, goes beyond than its simple cost saving model, Newton (n.d.) states. Over time, the practice evolved into a catalyst that has merely improved a lot of factors such as time to market and enables more resources to focus on core competencies to ensure that the different businesses are devoting more time and money to products and/or services that they could benefit from. It is through this that Gilharry (2005) said that through this, the businesses can become a leader in their industry. Finally, outsourcing also adds value to the final product. These benefits shall be extensively discussed in the latter paragraphs of this particular section.
Another very important benefit that one company receives from outsourcing is their ability to enjoy protection from market fluctuation. An outsource supplier, without a doubt could be negatively affected by market fluctuations. However, it is through the presence of both the original equipment manufacturer and its tie up with contract manufacturers that the effects of these fluctuations are lessened. It is also because of the tie up that exists between the original equipment manufacturers and the contract manufacturers that Gilharry (2005) also notes another important benefit of outsourcing: it can give employees time to complete their everyday tasks. With outsourcing then, lesser responsibilities are placed on the workers which negatively affect their productivity. It is then because of this that Sese (2004) notes that outsourcing also greatly increases the satisfaction of employees within the organizations.
In the same manner, Gordon (2004) also recognizes flexibility as a very important advantage of outsourcing and contract manufacturing. According to the author, and as earlier discussed, it is through this facet of outsourcing that companies are given the right to choose the company they prefer for this job, taking into consideration the style of their working. Furthermore, they could also enter into outsourcing with those contract manufacturers that have already established the necessary facilities that they need as well as those who already have competent staff members that could deal with the process. In the same manner, they are also giving the chance to switch from one agency to another whenever their contract manufacturers are no longer giving them the desired results. With this flexibility, according to Gilharry (2005) also allows the original equipment manufacturers or OEMs to save more money on materials as these are usually included in the rate quoted by their contract manufacturers.
Saving both time and money is another advantage of outsourcing, Gordon (2004.) states. Apparently, when starting a new business and opting to outsource, then one business could save more time and money as they no longer need to establish a different set-up for the sake of marketing their new products, services or their new business. Simply put, the different corporations are able to save more on their overhead costs. It is with regard to this that outsourcing also accelerates the time to market. According to Newton (n.d.), each and every company are said to face the same challenges with the introduction of their products to the market. The author said that without a doubt, these new products could naturally fuel the organic growth of the companies but there are also many factors that affect its success. These factors include the following: (a) the perceived value of the Gerald (2006); Stupp (n.d.); Davis and Hong (2004); Newton (n.d.); and Cavinato (1989) –product; and (b) the time it enters the market. It is through outsourcing that Newton asserts that weeks and even months could be taken off its launch schedule. Furthermore, outsourcing also allows the different companies to focus more on their core competencies rather than wasting their time on the development of products or services that could not yield a significant amount of income for these companies.
Aside from this, Newton (n.d.) also notes that with outsourcing, product cycle times are also reduced. This is because of the fact that assets and resource assignments are now someone else’s responsibility. Furthermore, cycle time is simply reduced to the agreed delivery of the outsource product to the original equipment manufacturer (OEM). Bendor-Samuel (2007) concurs with the fact that a reduction in cycle time is one of the benefits of outsourcing, especially in the field of e-commerce. According to Bendor-Samuel (2007),
Through intelligent piece outsourcing, organizations can run the race to market in two to three months, rather than the one to two years it would take to develop an e-commerce site in-house. Enormous opportunities for growth in the outsourcing industry exist in e-commerce.
Because of the aforementioned benefits of outsourcing, a certain company gains a better reputation for the excellent outcome of their projects. It is because of this that they tend to receive more orders and at times, have a hard time in meeting the orders of their customers. It is in relation with this that Newton (n.d.) also identifies faster ramp up as another benefit of outsourcing. Because of outsourcing, expansion is no longer just the responsibility of original equipment manufacturers or OEMs. Rather, they share this with the suppliers of their choice or the ones approved by their customers. As a result, integrated quality programs are then developed to address the growing demand for the new ideas that companies have developed. Resources shall be readily made available when the orders flood in and support the growth of their corporation (Newton, n.d.).
In relation with this, outsource suppliers also develop the core competencies that OEMs fail to do so just because they do not have the time to attend to these.
Likewise, outsourcing also improves the quality of service that businesses render to their customers. This is because of the fact that people in outsourcing agencies tend to be experts in their field and are expected to have a lot of experience with regard to their jobs.
Contract manufacturing as an essential aspect of outsourcing also possesses advantages. According to Newton (n.d.), this strategy without a doubt has contributed so much to the manufacturing landscape over the past ten years. As a result, its experience, capability and worldwide presence make them an attractive alternative to the vertically integrated equipment suppliers. They also contribute to recognized quality, compliance and delivery performance. In the same manner, their low costs also make them a very popular alternative for most businesses. It is because of contract manufacturing and its advantages that many businesses are also starting to discover the benefits of outsourcing.
The aforementioned were the benefits and/or advantages of outsourcing for the different businesses who engage in this. On the other hand, Bose (2005) notes that there are also a great number of advantages for the customers of these corporations. According to Bose, outsourcing brings innovative and streamlined products and services like billing, customer relationship management and data warehousing for the customers. These are even strengthened through the use of the internet and the other advancements made in the field of technology.
The Disadvantages of Outsourcing
With the advantages presented above also come disadvantages that outsourcing can pose to the businesses that engage in this. Nonetheless, it is perceived that the advantages outweigh the disadvantages especially within the perspective of the businesses. These disadvantages are often seen in high-tech industries where outsourcing is usually seen as a negative issue due to the fact that it entails the export of jobs and manufacturing capabilities. In the same manner, Gordon (2006), also notes the fact that most big businesses nowadays tend to prefer in-house marketing rather than resulting to contract manufacturing and outsourcing. One of the disadvantages of outsourcing are the issues that are related to security and confidentiality, Sese (2004) notes. According to this particular author, original equipment manufacturers (OEM) must give importance to the outsourcing of administrative tasks especially when these are related to accounting for this is where confidentiality issues come in.
Less management flexibility is another disadvantage that is associated with outsourcing as this particular business strategy gives OEMs lesser control of the tasks that are assigned to the contract manufacturers.
According to Gordon (2006), one the reasons why big businesses do not prefer to outsource is because of the fact that they believe that only them, and not their contract manufacturers, know what their customers want. More often than not, these contract manufacturers also tend to resist suggestions with regard to innovations on a certain product (Gordon, 2006). He also mentions that the analysis of their own employees may be different from how contract manufacturers or the research companies they employ perceive the needs of their business. In the same manner, he also recognizes the fact that contract manufacturers are not that efficient in providing the outcome of their market research analysis, as compared with the employees of original equipment manufacturers. This inability of contract manufacturers to yield efficient analysis is based on their incapacity to contact a large number of consumers. Also, contract manufacturers tend to forget the fact that they are representing the original equipment manufacturers or OEM (Gordon, 2006).
Gordon (2006) also notes that there is a tendency for contract manufacturers to take advantage of the dependence that original equipment manufacturers (OEM) have. When companies start to engage in outsourcing, they announce to the world that they are also beginning to depend on third-party organizations. As a result, there is a tendency for these contract manufacturers to demand for more money when a certain OEM increases its dependence. It is also because of this that OEMs tend to lose a significant amount of control over their business processes because of the fact that a third party is handling it. Therefore, their business processes are no longer functioning according to how they want it to be. It is also because of this that companies also lost their ability to impose quality standards on their contract manufacturers (Fiset, 2008).
Sicard (2005), then presents five things that an OEM should take into consideration should the company wish to go into outsourcing. The first is that sacrificing visibility and control means sacrificing a key mechanism in the company’s existence. The CM should be able to provide up-to-the-minute report of the status of thr products. The second factor to be considered has to do with inventory. The CM chosen should be able to give you timely updates on inventory levels on all aspects of production, it is important since having a CM does not relieve the OEM’s financial responsibilities and liabilities. Another key factor is the ability of the CM to respond in a timely manner to changes in the schema of production in the general strata of the industry. Inability to do this will mean a delay in production, delay in delivery and eventual result in dissatisfaction of the clients. It is also essential that the CM is able to innovate and respond to ideas that crop up out of the seams of the industry, especially in electronics. CM’s who are unable to do this compromise the company’s initiative of introducing new products and the lost opportunity can be fatal. Geographic location may also prove to be an important factor in choosing a contract manufacturer; it can be either close to the OEM or close to the target market. Closer location can mean faster delivery of goods to intended clients.
Shivnani (2008) then presents a discussion on the disadvantages of outsourcing using the situation in China as another popular destination of outsourcing. For this author, there are three main disadvantages of outsourcing in China. First in the list is the understanding of the English Language. According to Shivani (2008), people in China learned the English language from a text book. This then means that most of them are only educated in reading and writing but their listening skills are quite poor. However, it must be noted that there are still many exceptions to this for there are many Chinese students who had been educated abroad and established business in the country upon their return. Nonetheless, the author recommends the use of simple English words so as to avoid this disadvantage of outsourcing in China and the other problems that may arise due to communication issues.
Secondly, the Chinese also have placed a different meaning on the life time customer. Due to cultural and historical factors, the Chinese have a very short-term mentality. Because of this, they do not see business relationships as long term. No matter how it has been repeatedly said to them, they still believe that customers will eventually leave and choose their competitors over them. Likewise, they also believe that if someone does not buy or invest in them, then somebody else will (Shivani, 2008). Again, there are exceptions to the rule. Because of this, it is suggested to consider one of the advantages of outsourcing, flexibility. Original equipment manufacturers or OEMs may select partners that have a long-term mentality. Through this, the OEMs may save a lot of time as both parties could stick to each other because of this particular attitude towards the job. In spite of this however, the author also recommends having a range of potential suppliers and friends to turn to in the event that the contract manufacturer fails to commit (Shivani, 2008).
The last disadvantage of outsourcing in China is that the people fail to understand the meaning of quality. For them, quality means, it looks the same. Companies engaging in business must take into consideration the problem China has with regard to the infringement of intellectual property rights and fraud. Simply put, the do not know how to create things; instead, they only know how to best copy it so that it looks the same as the other products, Shivani (2008) mentions.
The disadvantages of outsourcing are also related to the different risks that are often associated with outsourcing. In fact most of these disadvantages are perceived to be the risks that come with outsourcing and the establishment of relationships between the OEMs and the contract manufacturers.
Capabilities and Qualities of a Good Manufacturing Firm
Because advantages and disadvantages are associated with outsourcing, original equipment manufactures or OEMs must properly select a good manufacturing firm to ensure the success of their business. Through this, they could somehow avoid the disadvantages of outsourcing and only receive the perceived positive benefits of such business strategy. It is because of this that the researcher gives a great deal on listing the capabilities and qualities of a good manufacturing firm in order to ensure that original equipment manufacturers shall be guided accordingly in choosing a partner for contract manufacturing.
According to Olson (2005), using contract manufacturers to handle production of goods allows the company to focus its efforts on its core competencies. Contract manufacturers (CM), if handled correctly does not only provide a production arm but can be a full-service partner aimed at reaching the same goals as the company, serving the same customers, investors and shareholders. In choosing a CM, it is important to consider the services you require, this will enable you to target CMs that provide your required service. It is also vital to know if the CMs facilities, equipment, services, quality, and certification meet your requirements. It is also important to note the reputation of the CM. It is also essential to check demographics when choosing your CM.
Quality and quality control measures should be the utmost priority of the company, hiring strictly on cost but compromising quality is a big no-no. Executives from both sides should handle collaboration of efforts with the CM accordingly and regular meeting should be conducted in order to assess work relationships and work on any problems that may come up. The best way to choose a contract manufacturer is to make sure of the CM’s reputation, functionality, reliability, and compatibility align with your company (Olson, 2005). In the same manner, Pudles (2005) also asserts that OEMs must not just look into the low costs of the services of a particular contract manufacturer. Instead, they must devote their time in looking into the capacity of the latter to address their quality and regulatory standards.
Hogan (2005) concurs with the statement of Olson, saying that choosing an outsourcing partner requires trust, collaboration, communication and chemistry. Thus, both parties engaged in both contract manufacturing and outsourcing must have the ability to resolve conflicts and the adaptability to certain changes in the goal-oriented approach.
The capabilities and qualities of a good manufacturing firm could be summarized into three: first, their location; second, their capability to conduct the process that the OEM requires of them; and third, the relationships that both parties establish with each other.
Barnes (2006) provides a list of qualities that the right manufacturers possess. Through this, she hopes to give original equipment manufacturers or OEMs the guide to find a contract manufacturer, especially for those in the pharmaceutical industry. According to this article, one must first consider the facilities and technical capabilities of the contract manufacturer. The author suggests the careful inquiry of possible vendors. This then entails the assessment of quality of manufacturing and the capacity of the manufacturers. In this assessment, the following issues can also arise: (1) reliability; (2) reputation; and (3) experiences after the selection process proposals. The successful bidder must then be selected based on the fulfillment of the OEMs’ needs with regard to time, trust, cost, and financial capability. In the same manner, they must also give importance to communication and cultural fit for this also plays a very important role in outsourcing, as earlier presented by the study on outsourcing in China.
Barnes (2006) also gives importance to the location of a contract manufacturer in choosing the right partner for original equipment manufacturers. Logistics is a very important factor to consider since the distance between the OEMs and their contract manufacturers becomes a great deal of importance. If it is not managed and considered properly, negative issues may arise. However, Barnes (2006) realizes the fact that there is indeed a growing trend towards off shoring because of the many benefits that come with this, cheap labor due to low standards of living being the most important influence.
Fling (2007) also provides a set of guidelines that would help small businesses in selecting a good manufacturer. These could help out in ensuring that critical factors may be avoided to also prevent mistakes like producing poor quality products that may harm businesses. These guidelines must be followed in choosing the right contract manufacturer, choosing not only to outsource because of the cost considerations that come with this. This is because OEMs must also realize that the quality of their products and/or services must not be compromised even though they are outsourcing parts of their business processes or its entirety.
It is also through considering these guidelines that the OEMs may avoid other costs that may arise in the end. The following is Fling’s (2006) checklist for success:
- Research is imperative if factory visit is warranted then do it. Face-to-face communication is essential in the long run.
- Check the contract manufacturer of choice for references. Making sure, OEMs must research pertinent information regarding your contract manufacturer’s way of conducting business.
- Both the OEMs and contract manufacturers should set quality control measures. In addition, making sure that it is adhered to will prove to be an essential move to make sure that the contract manufacturer continues to provide the OEMs with quality products.
- The vendor must realize that any change they may want to introduce with regard to manufacturing protocols, suppliers of raw materials, distribution channels and quality control checks should be routed to the OEMs and approved by such before any implementation of the proposed changes are complete.
- Quality control and cross checking must be done frequently and randomly by a trusted quality control monitor.
- OEMs must be aware of all possible scenarios about shipping. This is more important if the vendor is overseas and location differences may prove to be a burden that needs to be addressed. Documentation and legal processes of the places and/or countries where the products will be shipped should also be noted in order to facilitate faster delivery of products.
- It is also important to have a contingency measure should the primary supplier run into any problems. A backup supplier or manufacturer should be available rendering the same qualities of your primary supplier.
Aside from this, Fling also believes in considering the clients of the chosen contract manufacturer to ensure the success of the business. It is because of this that Fling, Hogan and Barnes all give importance to studying the background of contract manufacturers in order to assess the capacity of the latter in dealing with them in their business. Through this, they would be able to establish reliability and confidence with the contractors. Also, the OEMs could also obtain the feedback from both the employees and customers of their possible partners.
The Risk of Outsourcing
As it has been earlier mentioned, outsourcing could yield positive benefits for many businesses who apply this particular strategy and this includes lower costs and savings especially in labor and other overhead costs. Nonetheless, many researchers have devoted their studies to looking into the risks in outsourcing so as to inform the public as well as the businesses who resort to this strategy of the different problems they may face due to outsourcing. Most of the OEMs would rather directly process the production rather than construct a strategy for the production itself. The idea of earning quickly has cast aside the necessary steps in building a strong relationship between the contract manufacturer and the company. This can result into the said potential drawbacks of outsourcing (Pudles, 2005).
Brunelli (2004) identifies four major categories of the risks of outsourcing. These are the following: (a) operational risks; (b) commercial risks; (c) business strategic risks and; (d) legal risks. Operational risks are those that include the financial and legal risks that arise when businesses transcends into an outsourcing relationship, Brunelli mentions. Commercial risks, on the other hand are those which concerns the tendency of companies to lock themselves to a price when they lock in to a service. Eventually, companies would end up paying too much for the services that they receive from the contract manufacturer.
Thirdly, business or strategic risks are the third kind of risks. This is often related with the inability of a contract manufacturer to accommodate new goals. As a result, customers may back out of the contract thus affecting the business of the OEMs. The fourth kind of risks are legal risks which are then concerned with issues pertaining to privacy, regulatory factors, outsourcing laws and legal liability.
Several researchers that had been earlier mentioned highlight the many drawbacks of outsourcing and Cooper (2007) concurs with all the statements. These potential drawbacks usually are the following: (a) conflicts of interest; (b) the OEM’s loss of control; and (c) the loss of core competencies. Cooper (2007), in her study, also developed a model for procurement outsourcing which generally describes the perceived best practice. It generally has four matrices representing the four sets of circumstances that companies that engage in outsourcing may face. These include: (1) basic proposition; (2) access to expertise; (3) focus on core competences; and (4) the no role situation. It is in the no role matrix where the drawbacks are usually seen, Cooper (2007) notes.
The no role matrix is also said to be the most controversial for this is where the OEMs could no longer relinquish accountability and liability and at the same time, has lost their competence. Cooper (2007) provides an example of this which she identifies as one of the risks usually associated with outsourcing. She notes,
Where a product is bought for resale with no value added operationally, outsourcing procurement will remove the strategic function and raison d’etre for the original organization, which will result in higher cost through duplication, or the extinction of the first business.
Newton (n.d.), on the other hand looks into the perceived risks of outsourcing in the semiconductor industry which are basically the reasons why the businesses are hesitant to apply the said strategy. These perceived risks are the following: (a) the knowledge-rich business environment of the semi-conductor industry discourages widespread collaboration; (b) the lack of understanding or forethought of the total cost of the strategic decision; (c) customer service is diminished; and (d) once outsourcing is part of a development plan, in-house resources and core competency depart.
Identifying Risks in Outsourcing
The aforementioned risks in outsourcing shall be discussed thoroughly in this part of the paper. First to be discussed is loss of control being one of the most important risks associated with outsourcing. According to Axelrod (n.d.), this is often related to the most common view of outsourcing appears to be that the concerns generated by giving up control override any sense of relief at not having the day-to-day operational responsibilities. More often than not, this trend results from the goals and attitudes that both the external and internal staff has towards their service, the profits and the survival of the OEM (Axelrod, n.d.). Usually, these are said to arise from the suspicions of customers especially since internal staff members are more committed in meeting requirements related to service when compared with the external ones. In the same manner, this is also said to arise from the fact that the members to the internal staff are more aligned with other insiders and are committed to the fulfillment of the goals, mission and culture of the business where they are working in.
The aforementioned were basically the differences in the motivation, goals ad attitudes of both the members of the internal and external staff. Aside from this, Axelrod (n.d.) also identifies the following as the principal risk drivers of outsourcing: (1) viability of the service provider; (2) relative size of the customer; (3) conflicts in service level agreements; (4) legal liabilities; (5) knowledge transfer; and (6) hidden costs.
The second risk associated with outsourcing is the viability of the service providers, Axelrod (n.d.) notes. Customers of contract manufacturers often fear that the original providers of services and products will fail thus leaving their customers without the necessary services and systems. This is generally one of the causes why those engaged in outsourcing fail to keep their customers without access to services and systems that they consider as very important.
To further understand this risk in outsourcing, Axelrod (n.d.) also identifies the different reasons that may eventually lead to the shutting down of businesses. One of the most common factors is those that happen inside the organization such as poor management, inadequate funding, and employee misdeeds. However, it must be noted that external factors also play a very important role and these are the following: industry trends, downturns in the general economy, and mergers and acquisitions (Axelrod, n.d.).
Another risk driver that is said to affect outsourcing is the relative size of customer (Axelrod, n.d.). This then affects the relationship between the original equipment manufacturers (OEMs), the contract manufacturers and their customers. Generally, contract manufacturers and businesses give more importance to their so-called larger customers from whom more revenues come from. They often get special breaks, customized services and even receive dedicated service from support staff. As a result, smaller customers feel that they are second-class citizens as they often wait for the concerns of the bigger customers to be addressed. One must also note that the bigger customers may also provide the subsidies for the contract manufacturer and this is the reason why the latter gives so much importance to them. Nonetheless, this competition between the customers could result to customer dissatisfaction which could in turn result to switching.
Aside from the aforementioned, another risk driver is the quality of service that one gets from the contract manufacturers. According to Axelrod (n.d.), one of the reasons why OEMs outsource is because they expect that their customers would receive better services from the outsourcer rather than the internal staff. This is because of the presence of explicitly stated service level agreements or SLAs. However, it must be noted that SLAs are harder to enforce in external employees rather than the internal despite the many efforts of OEMs to establish such concept.
Confidentiality is another risk driver for the privacy of the customers and the entire company is said to be at risk in the event that the OEMs and the contract manufacturers enter into an outsourcing relationship. It is because of this that researchers such as Axelrod (n.d.) are calling on to the third party manufacturers to ensure that the information of the customers is well kept. They must also keep these pieces of information safe from inappropriate disclosure and misuse. This is of great importance especially in both the health and financial industries all over the world. If improperly managed, these information may be passed on to competitors, thus increasing the latter’s chance to steal them away from the businesses.
Keys to Reducing Risks
The entire outsourcing process to a third-party provider is haunted by both commercial and legal perils especially with regard to the negotiation and execution of contracts, Brunelli (2004) notes. Nonetheless, there are many steps by which these risks could be minimized if not avoided.
As earlier discussed and as mentioned by Zetter (2008), choosing a contract manufacturer is easy but making sure, that quality of products manufactured is hard, developing, and keeping relationships with a contract manufacturer even harder. One of the best ways to keep contract manufacturers on their toes and making sure that quality work is being done, constant communication is essential. It is recommended that a standard communication tool be developed in order for the flow of operation to be kept smooth. A manufacturing alert provided for key persons both in the company and contract-manufacturing firm should be an essential tool in keeping each other up to date with the progress of any venture. Zetter (2008) recommends the alert to be formatted in the manner that shall be presented below.
Summary – wherein problems and issues or data that needs to be delivered to the key personnel are summarized.
Calendar Days – the development of a tracking device to alert everyone regarding the number of days that passed since inception of the problem and the deadlines for solutions is necessary.
Manufacturing Areas Impacted – the analysis of the areas of manufacturing that were affected by the issue on hand.
Manufacturing Alert Team – the development of the team that will consist of the key personnel that need to be informed of the current situation, issue, or problems that the manufacturing process encounters.
Manufacturing Status – clearly stating the status of all the manufacturing departments, areas that have stopped production, areas that require prompt attention, and areas that have finished with production.
Installed Base Impact – where the total numbers are provided. Including product shipped, number of products shipped to certain companies, persons, and or clients.
Fulfillment Impact – this contains backlogs and any problems encountered at the distribution channel level and deadlines to be reached and that have lapsed.
Next Steps – this will include key personnel, and the role of the solution to the problem. Recommendations can be included here.
Issuing Source of Manufacturing Alert – they should include the name of a particular individual task and handling this report.
In handling contract manufacturers it is essential to keep track of all of the developments and problems that arise during manufacturing, keeping up to date means that problems are solved at the earliest possible opportunities and solutions are implemented at the lower levels before reaching the peak and producing more problems (Zetter, 2008). The Burberry Information Network Corporation (n.d.) also gives importance to managing relationships to ensure the success of outsourcing strategies. Like any other business high-quality service from the contract manufacturer usually keeps a contract intact but what the company should do is to allot time for an inspection of the contract manufacturer facilities and management in order to keep up with probable changes that might occur and prepare for this. Failures and mistakes could be avoided if regular communication within parties and approach that is more physical rather than telephone conversations will be adapted. This will give the parties a chance to establish a successful relationship.
Kriplani (2006), on the other hand recommends looking into the success story of HSBC’s outsourcing strategy that was seen to be very effective in lessening the risks that they encountered, thus giving them only the positive results of this particular business strategy.
HSBC is one of the largest non-US-based corporations to join the outsourcing trends. Its software development center in Pune, India has become one of its central and most important operation facilities (Kriplani, 2006). For HSBC outsourcing has proven to be a great strategic move that enabled them to move forward. The lessons learned were learning to start small then building up. Getting the customer involved was also vital; Cooperation with their own experts enabled them to finish a job that shouldn’t have been that easy for it neophytes. Using a hybrid model was also key in HSBC’s success at Prune, partnering with other companies was not disregarded by the company if it means the success of a particular project. HSBC also learned that building a sense of community for their outsourced workers spelled success especially in the field where most of the staff just came out of college and still yearning to prove themselves, a sense of community and goal setting of quality work in the staff provided intemperance and lastly maintaining quality keeps the business a success. Rumi Contractor, HSBC’s chief information officer said that it is also vital to keep masses within the company, that it’s not the outsider’s job to fix their mess. In his advice is to avoid short-term outsourcing. It’s better to let company employees to the shorter jobs and let the outsourced employees undertake the bigger ones. HSBC proved that outsourcing could be successful if done correctly and with the right partner. Letting outsiders do some of the work for them enabled them to concentrate on the main thrust of their company, which is banking. In outsourcing it is vital that the company be involved at the onset of the operations. It is also vital that contractors are familiar with the company’s operations, minimizing mistakes. Cooperating with the contractor is also an important aspect in keeping relationships at the same time, they also give tremendous value to sending key personnel to assist in some aspects of a particular project is a helpful tool, Kriplani (2006) discusses.
Brunelli (2004) on the other hand gives importance only to the relationships between the administrations in the employees in reducing the risks that come with outsourcing strategies. He mentions that companies should be able to communicate clearly and properly with the employees so as to assure them of the benefits and assistance that they could receive because of the fact that they lose their jobs due to outsourcing.
Brunelli (2004) also gives importance to the adoption of a risk model to ensure the success of their businesses.
Keys to Contract Organizations Meeting Challenges and Quality and Regulatory Requirements
Contract manufacturers have been entrusted with the job of procurement. It seems to make sense since they are connected in through the seamless movement of manufacturing. The author like the previous ones emphasize basic steps that must be taken in order to ensure that contract manufacturers that will be hired will provide the best service possible for the company. According to the author aside from ensuring quality preservation and contract manufacturers, it is also essential that the approved vendor and the company personnel be comfortable with each other. Interaction and communication is essential in keeping the contract manufacturer relationship and the report is essential in keeping the communications personable. Meetings should also be conducted in order to assess any problems, legalities, and any other tools that may be needed by either party in order to facilitate the exchange successfully. In the same manner, the development of equipments that could support design, and support for future expansion of the design must also be noted for this could help contract manufacturers and OEMs in the development of products that are of high quality.
Contract manufacturers often share the burdens of workload more than the company. Dealing with raw materials, process and time schedules, production, even product development should also be given importance. Through working as a designer for new products and coming up with various innovations, can increase their skills in various application areas and industry contacts.
Axelrod (n.d.) as earlier discussed, noted that the viability of service providers is one of the risks that are often associated with outsourcing. As a result, the author suggests the adoption of a clear and structured approach to lessen the chance of a certain business of being subject to risks and failures. On the other hand, this could help in minimizing the impact of a failure if it ever does occur. In the same manner, the author also suggests entering into a detailed due diligence process before entering into an arrangement between the OEMs and the contract manufacturers. Furthermore, this agreement could also cover the drafting of an agreement between the OEMs and the contract manufacturers wherein it would be possible for both parties to anticipate the potential failure of the service provider. Also, it is through this that provisions shall be included to protect the customers in the event that the businesses of the OEMs close down due to failure.
To ensure that the contract manufacturers produce the service that the OEMs require them to, they must effectively establish and enforce service level agreements or SLAs. In the same way, Axelrod (n.d.) notes that these must be explicitly defined so as to ensure that the contract manufacturers understand them properly and work towards its achievement thus providing the best service they could offer to their customers, making the outsourcing relationship work.
Technology is indeed becoming one of the most important aspects to be considered in outsourcing and contract manufacturing. This is because most original equipment manufacturers or OEMs outsource because they set out to look for manufacturers who have the right technology that they may need for the production of their new product. In the same manner, the proper selection of manufacturers with the right facilities must also be taken into consideration so as to assure the businesses that the contract manufacturers could effectively produce their products.
Selection of an Outsourcing Provider: Characteristics of a Good Manufacturing Firm
According to Schweber (2003), the possession of advanced technologies, especially the equipments that could support design and support for the future expansion o this is one of the factors that original equipment manufacturers must consider in selecting a contract manufacturer that will serve as their partner. It is through this that the OEMs could effectively cut down their costs in producing their products. The possession of advanced technologies does not just help in building the confidence of the OEMs but of the customers as well. Apparently, with the proper machineries at hand, contract manufacturers could help in securing the confidence and trust of the customers.
This is also highly supported by Olson (2005) who mentioned that it is very important for OEMs to consider the services being offered the contract manufacturer so as to ensure that the goals of both parties are met. They must consider the following: the facilities, equipment, services, quality and certification of the third party that meet the requirements of the OEMs.
The Natural Products Insider (2007), on the other hand, says that Many experts and CEOs of companies engaged in outsourcing agree that companies go to outsourcing and contract manufacturers to enable them to focus on certain aspects of their operations like research development, and marketing, rather than focusing their energies on production which can be passed on to contract manufacturers, who already have the equipment, facilities and know-how to produce goods that the company requires. In order to achieve successful company and contract manufacturer relationship, the experts said that a clear understanding and formal agreement on product stipulation is essential. Communication should also be kept open. The main thrust should be that of the integrity and reputation of the contract manufacturer to be hired and the quality of the work they possess. Products manufacturer should adhere to your company standards (Natural Products Insider, 2007).
The contract manufacturer should be able to provide products that have the right quality and quantity delivered at the right time. It is an essential agreement factor if a successful partnership with the contract manufacturer will be fulfilled. Contract manufacturer should also work closely with the company that hired them, assisting in collaborating with them to produce the best product possible, the Natural Products Insider (2007) states. It was also mentioned that a good contract manufacturer stays up-to-date with the current GMP practices and trends. Up-to-date facilities and machinery are also essential to provide the best products in the chosen industry. Certification should also be kept current by contract manufacturers to assure the clients and customers that they adhere to set standards by government and governing agencies that handle their industry professions wherever they may be located. It was also noted that especially for pharmaceutical companies it is essential for contract manufacturers to have state-of-the-art laboratories and trained specialists that will provide quality service to their clients, making sure that their products will be of high quality. Using these facilities to make sure that the raw materials are of essential quality and processing of these materials and eventual end products pass quantitative and qualitative tests (Natural Products Insider, 2007).
Contract Manufacturing Organization Requirements
This part of this study shall be presenting the different requirements that contract manufacturers must meet before they enter into a business with original equipment manufacturers so as to ensure its success. It is through this that the entire production process, and of course, the business shall properly run. In the same manner, the researcher also recognizes the different subtopics that this part shall contain in making sure that the impact of the risks (of outsourcing) are minimized if not avoided.
The contract manufacturing organization requirements that shall be discussed in detail in this particular section are the following: (a) contract agreement; (b) manufacturing quality agreement; (3) potential problems and risk analysis; and (4) the keys or factors that are essential in maintaining a good relationship between the original equipment manufacturers and the contract manufacturers. The following factors are considered to be of great importance to the discussion: (a) clear contract manufacturing agreement; (b) client involvement; (c) management’s involvement; (d) scheduled team meetings and lastly; (e) the role of the project manager.
Contract agreement, according to Venture Outsource (2008), is very important to businesses for this could help them in making the best decisions and at the same time, come up with strategies to better protect their profits. Venture Outsource (2008) also mentions that there are often four distinct types of outsourcing contracts and these are the following: (a) fixed materials pricing model; (b) component cost pricing model; (c) cost plus pricing model; and (d) return on invested capital pricing model. The organization gives importance to establishing the differences between the two so as the businesses would be properly guided on what is best for them.
In the course of the relationship that exists between the original equipment manufacturers or OEMs and the contract manufacturers, both sides enter into a mutual understanding that both of them need to earn money. In the same manner, each party also begins to understand that they must be both profitable whilst earning money, Zetter (2008) notes. The author also gives importance to the motivation of the contract manufacturer before accepting the business opportunity being offered by the OEMs so as to ensure that the former is performing according to the standards placed by the latter. In the same way, it is only through this motivation that they quality of the product or program being outsourced is assured. Venture Outsource (2008) then recognizes the importance of the well written contract agreement between both parties to ensure the success of their business and at the same time, prevent problems and other conflicts from threatening their position and their market. However, Venture Outsource (2008) recognizes the difficulty that comes with having to produce a contract agreement most especially in the field of contract manufacturing.
It is because of this that Zetter (2008) also pushes for clearly written contract agreements so as to ensure the roles of both the original equipment manufacturer or OEMs and most importantly, the contract manufacturers in the business relationship that they entered. Zetter first recommends including a clear statement of the contract manufacturer’s commitment to seeking ways that could reduce the cost of manufacturing the products of the original equipment manufacturers. They could do so through the use of methods that may include the elimination or replacement of certain components listed on the bill of materials, securing alternate sources for particular product materials based on leverage the contract manufacturer has in the global technology chain and finally, the improvement of the product assembly and test methods, Zetter (2008) explicitly discussed.
The aforementioned recommendation was seen to be something very important since although the cost of doing business may be higher in the beginning of the outsourcing business relationship, the contract manufacturer is also seen to increase their knowledge and skills over time. As a result, their efficiency as a business partner increases, thus involving them in the process that could eventually help the OEMs, after all, they are part of this business relationship.
The contract then, according to Zetter (2008) must not just require the contract manufacturers to participate in finding ways to reduce the costs of the business but must also include certain provisions that could reward the latter for their efforts. Zetter (2008) also provides an example of this situation that OEMs may find reasonable to include in the contract agreement that they will be entering in with contract manufacturers:
Meanwhile, for cost reductions identified through the contract manufacturer’s internal efforts, these savings could likely be split between the contract manufacturer and the OEM: with 25% of the cost reductions, or savings, retained by the contract manufacturer for a period of, say, six months, and the remaining 75% of cost savings / reductions being applied directly to the OEM customer’s production cost by way of a quarterly price reduction. Then, following the initial six month period for a ‘specific’ cost reduction, the OEM customer owns 100% of the cost savings.It’s also a good idea to get the contract manufacturer to agree to a cost savings or, cost reduction, target or percentage, on a quarter-by-quarter basis.
Zetter (2008) further states that it is important to measure the process of the cost reduction, setting it to an acceptable target at three to five percent for certain materials. OEMs should also be able to identify quarter-over-quarter cost reduction targets for both labor and overhead as soon as the production of their product or program is in full produttion. In the same manner, they should also be encouraged to pursue further reductions in the following areas, as again identified by Zetter: (a) standard electronic components; (b) custom electronic components; (c) printed circuit board costs; (d) sheetmetal/ enclosure fabrication costs; (e) box build/ systems integration/ mechanical assembly work and; (f) contract manufacturer rates for assembly and test. These should then be measured on a quarterly bases and examined how much had been reduced per each area.
Once again, there are four types of contracts that are used in outsourcing and these may be properly examined to ensure that the best decisions are made for the different businesses who would undergo in this form of strategy. This could guarantee them their profits and at least, help in minimizing the risks that could possibly haunt their businesses upon their engagement in contract manufacturing and outsourcing. Balancing the components that constitute these kinds of contract is necessary so as to ensure that what the businesses would adopt shall be appropriate for their situation or the circumstances where they are in.
The first type of contract according to Venture Outsource (2008) is fixed materials pricing models. This kind of contract is said to be relatively simple to manage for both parties engaged in the outsourcing relationship: the OEM and the contract manufacturer. This is because this particular type of contract does not require a large amount of overhead costs for the contract manufacturer as well. Furthermore, it is also said to fit the programs of OEMs with regard to outsourcing because of the following factors (Venture Outsource, 2008): (a) similar types of product lines; (b) similar product testing requirements and (c) similar manufacturing volumes.
Using this type of contract, the contract manufacturer will be able to determine the business development that they would undergo and at the same time, the acquisition cost required by the program o the OEM through the use of the samples of the products provided by the latter. On the other hand, component pricing models, according to Venture Outsource (2008) are more appropriate for those businesses with a mix of mid-level and high-level technology consumer products. In this type of contract, it is the contract manufactures who determine the percentage they need to make a profit (Venture Outsoure, 2006a) and at the same time, keeping their cost below the price that they charge the OEMs.
Cost plus pricing models are the third kind of contracts that are used in outsourcing. These are also more commonly known as fixed profit pricing models. In this particular type of contract, the contract manufacturer reveals and openly discusses the costs of their part in the outsourcing program of the OEMs. As a result, both parties enter into an agreement regarding the fixed percentage of profit that the contract manufacturer would receive based on the money they allocate for the production of the OEMs’ products.
Return on invested capital pricing models or simply ROIC are constructed in sch a way that negotiations and other processes would be based upon the costs of the activities undertaken by the contract manufacturer. For this kind of situation, it is very easy for contract manufacturers to require the OEMs to accelarate their payment terms for the benefit of the former. Because of this, this kind of contract is best suited for OEMs moving from a fixed-asset business modelt to a total variable-asset business model, Venture Outsource (2008) notes. They futher state that it must be remembered that in every contract agreement, both contract manufacturers and OEMs have their own purposes for entering the business relationship. Nonetheless, it must still be remembered that contract manufacturers stay in the business to help in increasing the profits of the OEMs and at the same time, help in reducing their costs. As a result, this must always be highlighted in all contract agreements that would be drafted between OEMs and their contract manufacturers. The latter part of this study would provide the other regulations that OEMs are required to adhere to in the event that they engage in outsourcing.
Manufacturing Quality Agreement
As it has been earlier discussed, outsourcing often results to the failure to retain the quality of the product being outsourced. It is because of this that many researchers have given importance to an agreement between the contract manufacturers and the OEMs to ensure that the quality of the product is not compromised just because of outsourcing.
O’Korn (2007) first gives importance to the template to be used by both parties who would make use of the outsourcing business strategy. It is through this that both parties would have a common understanding of the differnet provisions stated in both the contracts and of course, the promise of the contract manufacturers to produce products according to the standards (with regard to quality) set by the OEMs. The author suggests six areas where the contract must focus on where the manufacturing quality agreement would be highly emphasized. These are the following: first, tech transfer activities wherein it would be clearly stipulated who will be responsible for conducting the activities related to the production of the outsourced products. In the same manner, it must also be clearly stated who among the two parties will shoulder the costs of these processes. Through this, the doubts of the contract manufacturers could be removed. These doubts and the fact that they may shoulder all the costs of production may eventually lead them to producing products that are substandard. Secondly, exclusivity must be guaranteed in agreements pertaining to quality. It is also through this that the contract manufacturers do not have any competitors that are also producing the same commodities. Generally, the inability of OEMs to guarantee the contract manufacturers of their exclusivity would help in alleviating the antitrust issues that the latter have towards them .
The third factor to be considered is the changes to specifications or manufacturing process. Normally, O’Korn (2007) notes that the changes to specificiations and the entire manufacturing process may mean additional costs for the contract manufacturers or the OEMs. Logically, these changes are ordered by the OEMs so as to ensure that the quality of their products are assured even though the production processes are already in the hands of another firm. It is then highly encouraged that these be included in agreements especially those pertaining to the retaining the quality of the product. The specifications of the OEMs must be clear and at the same time, must vow that they would shoulder some of the expenses that may come along with their request to alter the manufacturing process.
Regulatory and Quality Issues must not be disregarded (O’Korn, 2007). More often than not, this particular factor are not incorporated into quality agreements and are only discussed at the later part of the business deal. O’Korn (2007) warns that this might be a very unfortunate decision for the attention of both parties is focused only to how they will produce the said products irregardless of its quality. Unfortunately, the parties may also be immensely involved in the production thus forgeting that they have not established quality issues that may place them in a negative light during the inspection of the FDA (Food and Drug Administration).
It is also highly recommended that provisions be included in manufacturing quality agreements that deal with products that do not conform to the standards set in place by the OEMs. Also, provisions regarding the other measures of conformity must be made clear to avoid confusion between the contract manufacturers and the OEMs, O’Korn (2007) notes. This is also related with the possibility of recalls that must also be included in agreementns pertaining to manufacturing quality. Through the inclusion of the aforementioned factors, both OEMs and the contract manufacturers could determine their actions so as to ensure the quality of their products and the strategies they could undertake in the event that some fails to comply with the standards they have set in place or those that should be recalled because of their defects.
Potential Problems and Risk Analysis
As earlier mentioned, there are many problems and risks that are often associated with outsourcing. Problems include the loss of the differnet products quality since they are now beind manufactured by a third party, Axelrod (n.d.) states. Usually, the commitment of the external staff is significantly lower than the internal staff making them manufacture the products at a lesser quality. It is because of this that much efforts had been made to ensure the efficient performance of the external staff such as the use of SLAs to monitor them. In the same manner, OEMs who subject themselves to outsourcing also face problems with regard to the loss of control since some parts of the business process or its entirety now belongs to the contract manufacturers.
Aside from the aforementioned, the businesses of the OEMs and their contract manufacturers also pose a lot of risks to the new environment where they are located in. As a result, risk management becomes of great importance in the new business context where they are in. Members of the oil and gas industry are subject to different kinds of risks as they outsource their services to other countries. Generally, they are faced with social and environmental responsibilities for their presence in other nations generally threaten a lot of factors such as the environment and the society. It is because of this that it is highly recommended by researchers such as Davis and Hong (2004) that both OEMs and contract manufacturers share the same responsibilities for the risks that come with their businesses.
Project risk, for Zhao (2005) is an uncertain event or condition. If this particular event or condition takes place, then it may either have a positive or a negative effect on the objectives of a certain project. Risks could also cause unfavorable outcomes to the final cost of the project and the scheduled achievements. However, one could look at them more positively by looking at them as opportunities that could produce higher savings for the companies. One must also remember that risks are not facts but uncertainties (Zhao, 2005). It is an essential part of forecasts that predicts uncertainties that would greatly affect the cost and schedule of the project, positively or negatively.
Risk management for Kohlmeyer and Visser (2004) is all about the proper way of managing projects in an efficient way though the application of a risk management process. In the same way, the incorporation of risk management processes in a certain company could positively affect the situation inside an organization which carries out projects and practice them on a daily basis.
Risk management is essential to organizations become conscious of the need to improve their resources- its control and use. This is essential as they try to survive as they are in the midst of a tight competition. Project management then, according to Kohlmeyer and Visser (2004), is an approach being applied by the different organizations in their hopes to improve the use of their different resources in order to improve their operations. In addition, they also mention that project risk management goes beyond the identification, evaluation and treatment of risks. For most companies, it has even in fact been one of the most important aspects of the overall process of project management.
Project management, according to Heldman (2005) is also important in dealing with the following:
- To ensure that corporations do not lose sight of their goals and objectives as they move on with their project
- To ensure that the results of the project would help in the improvement of a certain organization’s ability in completing its mission. The result of project risk management should show an improvement of a process previously applied.
- To ensure that adequate funds are available, including those that could be used to address risks.
- To track down implementing that would be very important in making sure that quicker, better and cheaper objectives are met.
- To apply the appropriate risk management principles throughout the project.
- To examine if corporations are taking corrective action to prevent and fix problems instead of simply allocating money and time into them.
- To analyze whether or not changes in the environment such as new IT systems or new leadership helped in creating risks that are yet to be managed.
In Zhao’s article Marrying Risk Register with Project Trending (2005), he mentions that project managers believe that the managing of risks is very important to their jobs as part of their work is to work with changes that certain factors may bring into their companies. Taking these changes into consideration would be very important as change would remain constant and shall exist in a certain company without end. Also, changes bring certain risks into the companies for these are two concepts, though contradicting, that significantly influence the different projects of a certain company.
Risk management is very essential to the companies belonging to the oil and gas industry whose investments usually exceed the one billion dollar benchmark, taking so many years to accomplish. The different risks that these companies usually encounter are the following:
- Market risks which include unexpected changes in interest rates, exchange rates, stock prices and commodity prices.
- Credit/default risks
- Operational Risks that include equipment failures and even fraud
- Liquidity risks that often include the inability to pay bills or sell commodities at the prices being dictated.
- Political Risks
Political risks is basically one of the major problems encountered by the members of the oil and gas industry especially those companies who operate in different countries as they acquire drilling rights and explore more sources for oil.
Keys to a Good Relationship
The different researchers mentioned in the earlier parts of the study dealt with the importance of good relationships for those who engage in outsourcing. The development of a good relationship between the OEM and the contract manufacturer may guarantee the success of their business. It is through the establishment of effective relationships that communication also plays a very important role. Through this, Zetter (2008) notes that both parties would be able to let each other know of their needs and at the same time, to keep the flow of operation smooth and orderly. Venture Outsource (2008) provides a list of ten ways by which a contract manufacturing can be ruined. These are the following: (a) the ineffective evaluation of prospective contract manufacturing partners; (b) the casual way (instead of opting for a more strategic way) in choosing their contract manufacturing partner; (c) beginning the partnership too late in their product’s life cycle; (d) the incomplete, inaccurate or late request for quotation; (e) lack of planning before engaging in contract negotiations; (f) the failure of decision makers to adhere to the contract manufacturing plan of the company; (g) the inadequate identification of contractual needs and requirements; (h) inadequate measurement of the contract manufacturer’s performance; (i) micromanaging the contract manufacturer; and lastly, (j) the failure to actively manage the relationship between the OEMs and the contract manufacturers. It is because of this that the researcher gives importance to the following factors that are needed for the establishment of efficient and open relationships between the OEMs and their contract manufacturers: (a) a clear contract manufacturing agreement; (b) the involvement of the clients; (c) the involvement of the management; (d) scheduled team meetings; and finally, (e) the extraordinary role of the project managers.
Clear Contract Manufacturing Agreement
As it has been earlier mentioned, a clear contract manufacturing agreement is very important for both parties engaged in outsourcing. This is because this guarantees the establishment of good relationships between the two. It is through this that OEMs could properly communicate what they want with their contract manufacturers, to assure that the way by which their products are manufactured do not compromise the quality of the latter and their reputation. On the other hand, this could also guarantee the contract manufacturers that the OEMs would remain engaged in the businesses. As a result, this could help in minimizing the risks that usually comes with outsourcing and contract manufacturing. According to Walewski and Gibson (2003), based on the lawyers that they have interviewed, contracts and contract language were viewed by many owners, contractors, designers, and investors as the most important method to control and allocate international project risks. Most importantly, this could also help in the establishment of a good relationship between the two.
Venture Outsource (2008) mentioned the inadequate identification of contractual needs and requirements and the inadequate measurement of the contract manufacturer’s performance as two of the factors which negatively affects the relationship between both parties. However, this may be prevented with the development of a clear contract manufacturing agreement especially when provisions regarding the two are incorporated therein. Auerbach (2006) lists the following provisions that should be listed in the contract manufacturing agreement that are necessary to ensure the efficiency of such. These are the following: (1) the products and specifications; (2) the rights of the contract manufacturers to product changes; (3) the raw materials and the costs to be shouldered by both parties; (4) packaging; (5) ingredients; (6) production volumes; (7) ordering procedures; (8) passage of title; (9) shipping terms; (10) payment terms; (11) inventory segregation; (12) sales to other customers; (13) yields and wastage rate; (14) physical stock take; (15) procedures that must be undertaken to control quality; (16) issues and actions regarding intellectual property; (17) conflicts of interest; (18) record keeping; (19) forecasts; (20) demurrage; (21) requiring the contract manufacturers to provide information about their customers; (22) warranty; (23) insurance; (24) liability; (25) dispute resolution; (26) confidentiality; (27) term; (28) costs; (29) rights to audit and inspection; and finally, (30) GST.
Client involvement is essential in ensuring the establishment of a relationship between the contract manufacturers and the OEMs. Many researchers recognize that the client involvement is necessary to ensure the success of the businesses for this would harmonize the interests of the businesses and their clients. According to Iverson (2000), the client has the minimum dependency, and therefore the maximum leverage with a contractor at the outset of the relationship. The contractual structure that both parties establish at the start of their relationship greatly determines the impact the product development cycle and the greater market dynamics have on the outcomes within the relationship. As a result, researchers such as Iverson (2006) give importance to the establishment of a long term contract structure rather than a sequential series of contracts due to the mutual dependency that may develop as the products develop.
Through this, contract manufacturers and OEMs would be guaranteed of the exclusivity of the client. When the client guarantees the contract manufacturer of exclusivity, they are guaranteed that they would no longer lose these clients to their competitors. To sum it all up, Neal (2006) mentions that involving the customer is necessary for:
good contract manufacturer is willing to listen to the customer and provide accurate lead times and delivery dates. With a better understanding of the customer’s business model, we can strive to tailor our service to each customer’s specific needs. We want the manufacturing process to be the most reliable part of their business
Many researchers also give importance to the involvement of the management in the entire business process so as to ensure that they would not loss control over the parts of their business process or its entirety. According to Zetter (2008), one of the best ways to ensure that the OEMs would not lose their control over their contract manufacturers is to establish open communication lines. It is also through this that they are assured of the quality of their products. As a result, the development of manufacturing alerts for the key people in both the internal and external staff is very important. Through this, they keep each other updated with the progress of the manufacturing process.
In the same manner, Davis and Hong (2004) also give importance to monitoring the different stages of their product’s life cycle so as to ensure that proper strategies and other steps must be incorporated for their production to be successful. In the same manner, they must also be actively involved in the risk management strategies to prevent the latter from the negatively harming their manufacturing process. Furthermore, the involvement of the management would show the contract manufacturers that the OEMs are committed to their businesses thus preventing the former from taking full control of the entire company. Through this, they would be able to know their clients’ product mix well and at the same time, be informed of the new and innovative materials, their packaging options and other formulations to help their bysinesses grow.
Scheduled Team Meetings
Scheduled team meetings are also important to maintaining the relationship between the contract manufacturers and the OEMs. It is also a vital part of the OEMs’ management of their contract manufacturers as well as the processes they handle in manufacturing the products. As it has earlier pointed out by Zetter (2008) this could help the OEMs in monitoring the stages where the production of their products are in. During team meetings, issues regarding costs, processes and the like must be considered to properly manage the entire business production.
The Project Manager
The project manager must be carefully chosen so as to ensure that he or she will function according to the demands of the OEMs and the needs of the contract manufacturer. He or she must also serve as the bridge between the two parties, informing the OEMs of the status of the businesses that the contract manufacturers are handling. In the same manner, the project managers must also be actively involved in risk management so as to ensure that the production is functioning smoothly.
Without a doubt, more and more businesses are now outsourcing their businesses to other locations abroad due to the fact that it guaranteed lower production and product costs, Walewski and Gison (2003) notes. It is because of this that many risks are now being included in their businesses and of course to the societies where they outsource. As a result, adhering to governmental regulations where the OEMs are located and where the contract manufacturers are based is of vital importance to ensure the success of their businesses. Furthermore, this is said to guarantee the trust of the clients to patronize their businesses which are free from flaws and at the same time, adheres to the regulations set in place by the different governmental agencies.
Revelatory Compliance Requirements: Regulatory Issues and Contract Manufacturing and the Agreement between contractor and client to meet regulations
Adhering to regulatory issues with regard to contract manufacturing is very important for both OEMs and their contract manufacturers, Tim Gamble (2006), vice president of sales and marketing at Redmond, Washington-based Nutraceutix Inc. notes. This could assure them of an edge over their competitors. Pathak (2006) notes that it is very important for both the contract manufacturers and their sponsors to put controls in place to ensure and monitor the effectiveness of their measures. They could resort to the development of robust quality systems that are said to reduce compliance issues. They could also devise ways by which they could rigorously supervise the members of their staff to ensure that they are adhering to their compliance measures. Manufacturers, especially in those industries where the safety of the customers are very important, are responsible for the following, as outlined by Pathak (2006): (1) ensuring the identity, purity, strength, quality, potency, safety and efficacy of the product; (2) ensuring that the manufacturing process of the products adheres to the provisions of the application and the applicable regulations stipulated in the 21 Code of Federal Regulations; (3) using adverse event, and product complaint reporting systems; (4) developing and validating the production process; and (5) reporting changes to the production process.
Organizations must be able to comply with these regulations for their non-compliance may greatly affect the perception the public has towards them. This is because their inability to conform may be known to the public through information legislation. Their compliance also assures their clients of the safety of their products. In the same manner, Pathak (2006) mentions that their compliance allows their organization to remain profitable, reduce the long-term cost of their goods, and finally, be a positive contributor for the good of the society by keeping people employed.
Undoubtedly, their non-compliance to regulations may be very costly, depending on the degree, repeatability and nature of their non-compliance. Regulations only deal with what should be done whilst how these should be undertaken remain in the hands of the sponsors or the OEMs. Both the contract manufacturers and their sponsors must also be committed to the development of Corrective and Preventive Action procedures or CAPA. This could help in suggesting solutions to the problems that arise during investigations into manufacturing and testing errors that had been found during the inspection, Pathak (2006) notes. These procedures could help in correcting the problem and prevent in from recurring, thus assuring the public and their customers that their quality of their product is re-established and at the same time, inform them that they are now complying with the standards set in place by the FDA.
It is also suggested that contract manufacturers and OEMs come up with a compilation of the quality attributes of the products they manufacture. Through this, they could have immediate access to the complaints, recalls, returned products and all the necessary information that they may need in ensuring the quality of their future products and help in ensuring that the they would prevent these mistakes.
The researcher gives importance to the analysis of the electronics industry of the United States of America for the businesses in this particular industry are seen to be the number one outsourcers. This is because of the fact that they are already losing both their technological and market leadership in the world as its electronic companies drop out of consumer product markets now that Japan has taken the lead (The U.S. Electronics Industry, 1995). The analysis of the said industry shall involve the following sub topics: (a) the market shares of the industry leaders; (b) the types of contract manufacturing and research firms; (c) supply and demand, including strategic tools, time to market, identification of outsourcing partners, financial considerations, the preferred providers and finally, the suitable alternatives that these companies have.
In the same manner, it would also provide a brief background of the markets, considering the current environment, the trends, together with the concerns and potential problems. Furthermore, it would also provide a brief description of the contract manufacturing market, their open option and the trends that often come with the onset of the era of globalization.
Intel, Sun Microsystems and HP are some of the industry leaders of the electronics industry of the United States of America. These are three companies which are said to hold the greatest amount of market shares in this particular industry. Nonetheless, they are still subject to the forces of outsourcing in the hopes of reducing the costs of their production whilst retaining the quality of their products. Outsourcing and contract manufacturing strategies had been very popular among the members of the American electronic industry for the share produced by these firms had significantly fallen by fourteen percentage points since 1985, the article The U.S. Electronics Industry (1995) reports.
It can no longer be denied that North America, even though they had been the leader and one of the innovators of the electronic industry is losing its market share to foreign-owned and foreign-based manufacturers. As a result, they now resort to low cost, high technology manufacturing infrastructure through contract manufacturing. The aforementioned leaders of the American electronic industry has maintained their large research and development departments outside the country so as to ensure that they are properly informed of their options and where to engage in businesses to stay alive despite the competition (Quinn, 2007). They often focus their research and development to obtaining the necessary people that could help in their business by assuring that competent engineers take over the manufacturing processes.
The aforementioned strategy is important to ensure that their time-to-market is assured since they could no longer afford to introduce their products at a slower rate due to the fact that product development in electronics is increasingly consumer-driven. According to the report published by the HP Electronics Industry Solutions (2007), the windows of opportunity required to seize revenue are growing shorter together with the product lifecycles. Because of this, time-to-market becomes a very important factor of profitability. Thus, constant innovation is very important so as to remain competitive despite the lag being experienced by the American electronic industry.
This is also one of the reasons why members of the American electronic industry outsource. Through their contract manufacturers, they are able to produce more products thus improving their products’ time-to-market as the sponsors focus on research and development while the contract manufacturers take care of the production.
Perhaps, it is the Asian market that is the popular choice for IT outsourcing for all the members of the American electronics industry. Among the Asian countries, China and India remain the most popular because of cheap labor. It is because of this trend that Quinn (2007) notes that the IT outsourcing industry in Asian markets is very promising. However, there are still some problems that must be solved for these to be successful.
One of the problems faced by OEMs in the Asian region is the fact that it suffers from a lack of proficiency in the English language. In the same manner, the Chinese and Indian companies also fail to establish and adhere to quality control procedures that had been set in place by the original equipment manufacturers or OEMs. Secondly, the infringement of intellectual property rights in China is another problem identified by most businesses belonging to the American electronic industry.
Evidently, the software industry is also seen as one of the biggest targets of counterfeiters in China. This is proven by the discrepancy in legitimate software sales and the demand for personal computers. Apparently, the People’s Republic of China ranks six when it comes to the demand for personal computers, yet ranks twenty-sixth for legitimate software sales. Woodie (2007) reports that Microsoft is one of the biggest victims of counterfeiters as the company discovered a Chinese syndicate, based in the southern Guangdong province is selling their software which included fake versions of Windows Vista, Windows XP, Windows Server, Office 2007 and Office 2003. These counterfeits are then being imported to other countries all over the world in different languages.
Intel also faced the same problem with the Shenzen Donjin Communication Technology Co. in the People’s Republic of China. Although the results of this settlement are confidential, this major counterfeiting problem is said to have affected the software industry and the investments of Intel in China. During the past twenty years, Intel invested 1.3 billion dollars in China for research and development. At the same time, they employ about 6000 people to build their semiconductor plant. Apparently, their computer chips are being pirated and sold by the Shenzen Donjin Communication Technology Inc under the Intel brand.
It is because of this that many OEMs failed to see the credibility of China as the outsourcing destination despite the fact that it provides cheap labor. They then turn to India instead who also provides cheap labor, a skilled workforce who have completed higher levels of education and finally, are proficient in the English language.
According to the article entitled The U.S. Electronic Industry (1995), the United States of America used to lead the world electronic industry and was also the technology innovator in the last decade. It is because of this that they became very strong in the marketplace, catering the different countries all over the world. However, it can no longer be denied that they are already losing both their technological and market leadership in the world as many of its electronics companies drop out of consumer product markets (The U.S. Electronics Industry, 1995).
The competitiveness of the global environment requires the different companies to first introduce products at a high quality with the lowest price. However, according to the National Advisory Committee on Semiconductors (1992, as cited in The U.S. Electronics Industry, 1995),
At the beginning of a decade that promises unprecedented growth in global high-technology markets, the U.S. firms competing in these markets are experiencing disturbing weaknesses. Many high-volume electronics products, from low-cost goods to highly complex merchandise, are already manufactured overseas. In addition, concern is growing about the ability of U.S. firms to remain competitive in markets where they traditionally have been strong, such as low-cost segments of the computer and office equipment markets. Across the entire world electronics markets, the share produced by U.S.-owned firms has fallen by 14 percentage points since 1985. The market share loss translates to more than $100 billion in lost revenues, given the size of the current world electronics markets.
Furthermore, the American businesses are also said to lag behind the Japanese companies in terms of manufacturing. This is because of the presence of a more sophisticated and flexible electronic assembly equipment of the companies. In the same manner, the manners by which the Japanese package their products also play a very important role. According to the report of the MCC/Sandia on electronic packaging (1993, in the U.S. Electronic Industry, 1995), the Japanese packaging and assembling technologies are more superior than their North American counterparts in terms of miniaturization and cost effectiveness.
The U.S. Electronic Industry (1995) then gives importance to the development of a low cost and high technology manufacturing infrastructure through a commitment to manufacturing products, more particularly in consumer electronics. It is suggested that they identify emerging high volume consumer electronic products and at the same time, participate greatly in manufacturing these systems. Furthermore, the members of the American electronic industry must also focus on research and development and only rely to their contract manufacturers for the production of their products.
Outsourcing and contract manufacturing are very important parts of the world economy which had been made possible through globalization as well as the growth of the internet and advancements in the information society. Globalization plays a very important role as this makes the world borderless, allowing companies to enter their other countries easily. On the other hand, the growth of the internet and the different advancements in the information society also facilitates the transfer of data and other pieces of information between the OEMs and their contract manufacturers.
This paper looked into the outsourcing and contract manufacturing as the popular strategies that had been adopted by most businesses to reduce their overhead costs, most especially in labor. In the same manner, the study also analyzed how the management of relationships between the contract manufacturers and their sources can be very important to ensure the success of the businesses. This paper then analyzed the American electronics industry as they engage in outsourcing due to the fact that they are losing the place they use to have in the global market.
The study showed that both contract manufacturing and outsourcing are indeed very important for most businesses as this significantly reduce their overhead costs. In the same manner, this could also accelerate their products’ time to market and at the same time, allows them to focus more on research and development whilst giving the task of manufacturing and production to the external staff. Through this, they not only accelerate their time to market but also allows them to produce more thus answering the demands of their customers. Simply put the engagement of businesses in outsourcing and contract manufacturing significantly increases their profit.
The researcher recommends future studies to concentrate on looking into the exact figures that result from the decision of one business to engage in contract manufacturing and outsourcing. They could provide figures that could show how they have significantly lowered their overhead costs through their strategies. In the same manner, statistics could be shown to present how their profits increased because of outsourcing and contract manufacturing.
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