BEST PRACTICES IN OUTSOURCED MANUFACTURING:
Are You Making the Right Decisions?
Introduction ........................................................................... 3
Chapter 1: How much of your production process
should you outsource? .......................................................... 4
Key factors in your decision-making process .............................. 5
Option A: outsource purchasing, inventory and assembly ............. 6
Option B: outsource assembly only ............................................. 8
Recap .................................................................................... 11
Tips for making it work ............................................................ 12
Chapter 2: Two ways to lower supply chain costs—
which is right for you? ........................................................ 14
Key factors in your decision-making process ............................ 15
Option A: reduce costs with your current supplier ...................... 16
Option B: pursue a new outsourcing strategy ............................ 19
Recap .................................................................................... 22
Tips for making it work ............................................................ 23
Chapter 3: Two ways to optimize your production for
multiple product lines ......................................................... 25
Key factors in your decision-making process ............................ 26
Option A: stick with your current supply chain to optimize costs .......27
Option B: find the best supply chain for each product line .......... 29
Recap .................................................................................... 31
Tips for making it work ............................................................ 32
Chapter 4: Should you move manufacturing closer
to customers? ...................................................................... 34
Key factors in your decision-making process ............................ 35
Option A: find suppliers close to your customers to avoid
international delivery costs ...................................................... 36
Option B: work with your current CM to find other ways to cut costs .....39
Recap ..................................................................................... 41
Tips for making it work ............................................................ 42
Conclusion ........................................................................... 43
Table of Contents
Best Practices in Outsourced Manufacturing
Adopt an outsourcing strategy that’s
right for your business
Outsourcing presents opportunity, but there are
also risks and challenges for OEMs to consider.
The “right” manufacturing outsourcing strategy
is different for every organization, so assess your
internal strengths and resources before adopting
an outsourcing strategy.
Companies looking to take full advantage of the benefits of
outsourced manufacturing face a variety of challenges— from
securing the best pricing to creating an approach that works
across several different product lines.
Through years of working with original equipment manufacturers
(OEMs) and contract manufacturers (CMs), Arena has identified
trends and industry best practices associated with success in
outsourced manufacturing. This guide examines several of those
to help you determine an outsourcing model that increases
company revenue, minimizes errors and unnecessary costs,
optimizes product quality and inventory levels, and ultimately
speeds your time-to-market.
Best Practices in Outsourced Manufacturing
How much of
your production
process should
you outsource?
BEST PRACTICES IN OUTSOURCED MANUFACTURING
When preparing for production, should you outsource
purchasing, inventory management and assembly, or
just assembly? This chapter discusses the pros and
cons of each option and offers suggestions to help
you in your decision-making process.
Your manufacturing milestone:
you’re a start-up getting ready for production.
And now you have a decision to make.
Should you outsource purchasing, inventory management
and assembly, or just assembly?
Weigh the options before making a decision.
Outsource purchasing, inventory
and assembly to your contract
manufacturer.
Outsource assembly only.
AOPTION BOPTION
AOPTION BOPTION
Chapter 1
How much of your production
process should you outsource?
• Importance of IP protection
• Organizational core competencies
• Cost of purchasing errors and rework
• Capabilities of BOM and change management systems
• Operational efficiency
• Required business systems
• Budget
BEST PRACTICES IN OUTSOURCED MANUFACTURING .................................................................................................................................................................................................. 5
Outsource purchasing, inventory
and assembly to your contract
manufacturer.
Outsource assembly only.
AOPTION BOPTION
AOPTION BOPTION
Key factors in your decision-making process:
This can work for you when:
Option A:
Outsource purchasing, inventory and assembly.
• You have a simple product.
• Your product has a stable design.
• You can trust your supply chain partners.
• You have few employees or lack in-house expertise.
Focus on core
competencies by
outsourcing other parts
of the process
Mitigate sourcing and
shortage issues
Leverage economies of
scale for better deals
HOW MUCH OF YOUR PRODUCTION PROCESS SHOULD YOU OUTSOURCE? ..................................................................................................................................................................... 6
Less control of supply
chain
Decreased IP security
Fewer opportunities for
supply chain innovation
Less visibility into actual
part costs
Potential RisksPotential Benefits
.................................................................................................................................................................................................................................................................................
Outsource purchasing, inventory and
assembly to your contract manufacturer.AOPTION BOPTION
Outsource purchasing, inventory and
assembly to focus on core competencies.
The major benefit of delegating purchasing and inventory to
your contract manufacturer (CM) is that your in-house team
will have more time to focus on design and engineering.
Purchasing and inventory can be very resource-intensive, and
assembling and training a team to manage this work in-house
takes time away from product maintenance and development.
Pushing these responsibilities to a CM gives your internal team
a chance to develop expertise and strength in other areas.
Empower your CM partners to purchase the
parts they need.
Outsourcing purchasing, inventory and assembly to your
contract manufacturer also addresses sourcing and shortage
issues. It makes a lot of sense to have your contract
manufacturer find and purchase the parts that they will
ultimately be using. Because CM teams are often more
specialized than original equipment manufacturers (OEMs),
they are typically in the best position to ensure that they have
what they need in order to do their work.
Use your CM network to take advantage of
volume pricing.
A third reason to outsource purchasing and inventory to your
CM is that this move can help you reduce costs by leveraging
quantities of scale. Your CM may be doing similar work for other
customers using the same components. If your CM purchases
all the parts together, he or she can get volume pricing and can
pass the savings along to you.
The major benefit of delegating
purchasing and inventory to
your contract manufacturer is that your
in-house team will have more time to
focus on design and engineering.
.................................................................................................................................................................................................................................................................................
Outsource purchasing, inventory and
assembly to your contract manufacturer.AOPTION BOPTION
HOW MUCH OF YOUR PRODUCTION PROCESS SHOULD YOU OUTSOURCE? ..................................................................................................................................................................... 7
This can work for you when:
Option B:
Outsource assembly only.
• You have a highly complex product mix.
• You have security concerns.
• You are confident in your ability to leverage a diverse,
competitive supply chain.
Maintain flexibility and
control
Empower innovation
internally
Develop skills in-house
Reduce supplier
management costs
Inability to get volume
pricing
Decreased focus
on specialized core
competencies
Additional management
responsibility
Potential RisksPotential Benefits
.................................................................................................................................................................................................................................................................................
Outsource assembly only.AOPTION BOPTION
HOW MUCH OF YOUR PRODUCTION PROCESS SHOULD YOU OUTSOURCE? ..................................................................................................................................................................... 8
If you want it done right, do it yourself.
If maintaining control and flexibility is important to you, you will
probably want to handle purchasing and inventory yourself.
Managing a supply chain can be a lot of work, but if you can
develop it as a core competency, it becomes a competitive
edge. (Just look at what Tim Cook did for Apple.)
Develop competencies in-house to increase
opportunities for innovation.
New substitutes cut in on your market share. In today’s world
of rapid iteration and innovation, you may find competitors
emerging much earlier in the product lifecycle than you
expected. Often, a sound business model and production
process can mean the difference between success and failure.
If you outsource this task you can miss a good opportunity
to innovate.
Managing a supply
chain can be a lot of
work, but if you can develop
it as a core competency, it
becomes a competitive edge.
.................................................................................................................................................................................................................................................................................
Outsource assembly only.AOPTION BOPTION
HOW MUCH OF YOUR PRODUCTION PROCESS SHOULD YOU OUTSOURCE? ..................................................................................................................................................................... 9
Avoid CM markups and fees.
Another reason to keep purchasing and inventory in-house
is that outsourcing these processes can be pricey. Not only
do most contract manufacturers charge a mark up, but also
they may not work as hard to get you the best deal. When
you outsource purchasing, you have less control of the buying
process and can’t be certain that your total part cost is as
low as possible. Even if working with a CM results in volume
pricing, it is likely they will only pass the savings on to you if your
business represents an important revenue stream for them. (Can
you really blame them for wanting to keep the margins?)
Don’t pay more to do more work.
Even if you pass off purchasing and inventory to your supplier,
you will still need to manage change, communicate design
and tell your contract manufacturer what to buy. You end up
managing the hard part of the task – passing off POs and
inventory management to your contract manufacturer – but still
paying a high price for your CM.
.................................................................................................................................................................................................................................................................................
Bring purchasing in-house to protect your IP.
Lastly, there is inherent risk in giving a partner so much access
and visibility into your supply chain. If your product comes with
a lot of security concerns and you outsource purchasing and
inventory, you may unintentionally be giving too much power,
product knowledge and control to your CM.
When you outsource
purchasing, you have less
control of the buying process and
can’t be certain that your total part
cost is as low as possible.
Outsource assembly only.AOPTION BOPTION
HOW MUCH OF YOUR PRODUCTION PROCESS SHOULD YOU OUTSOURCE? ....................................................................................................................................................................10
You may want to outsource purchasing, inventory and assembly if:
Consider managing purchasing, inventory and assembly in-house if:
Recap
• Your product is stable in its design and not very complex.
• You have a partner that you really trust.
• You are just getting started and don’t have in-house expertise (or want to develop it).
• You have a highly complex product mix or a highly complex product.
• You have IP or security concerns.
• You are confident you can leverage a diverse supply chain as a
competitive advantage.
HOW MUCH OF YOUR PRODUCTION PROCESS SHOULD YOU OUTSOURCE? ..................................................................................................................................................................11
Tips for making it work
If you decide to turn over purchasing and inventory management to a vendor, make
sure you only work with people you trust. By outsourcing such an important part of
your operation, you create a great deal of operational dependency. This can make you
more vulnerable, so keep an open eye, be flexible and be ready to change if needed.
When you outsource purchasing, inventory and assembly, you lose a potential
core competency or competitive advantage. So you must decide if this fits with
your company’s strategic goals. If you decide your supply chain isn’t a competitive
differentiator, than move forward cautiously.
If you are a small company and are outsourcing these key processes because you
lack the skills in-house, be ready to increase your staff and take over if needed. If
you are a large company looking to focus more on engineering and design, do some
testing and take it slow if you are considering changing your model.
HOW MUCH OF YOUR PRODUCTION PROCESS SHOULD YOU OUTSOURCE? ..................................................................................................................................................................12
Proceed with Caution
• Only turn purchasing and
inventory management over
to people you trust.
• Before outsourcing, think
carefully about whether
purchasing, inventory and
assembly are competitive
advantages for you.
• It may make sense for small
companies to outsource—
but be ready to step in
if needed.
Option A:
Outsource purchasing, inventory and assembly to your
contract manufacturer.
If you decide that your purchasing and inventory should be managed
in-house, don’t panic when mistakes are made. Mistakes are
inevitable, and this is a normal part of business maturity. You will
undoubtedly encounter supply chain breakdowns and errors, so create
a Plan B.
No matter what you decide in this situation, make sure you are
depending on the right people. Whether you in-source or outsource,
its important to carefully select people with the right skill sets and
industry knowledge.
HOW MUCH OF YOUR PRODUCTION PROCESS SHOULD YOU OUTSOURCE? ..................................................................................................................................................................13
Word to the Wise
• Don’t panic if mistakes are
made —they’re normal.
• Have backup plans for supply
chain breakdowns.
• Leverage the right people.
• Nurture the skill sets
you’ll need to step in
if necessary.
Option B:
Outsource assembly only.
Two ways to
lower supply chain
costs. Which is
right for you?
If you’re looking to lower manufacturing costs,
should you cut a deal with your current supply chain
partner or find a cheaper supply chain partner? This
chapter discusses the pros and cons of each option
and offers suggestions to help you in your decision-
making process.
Your manufacturing milestone:
your first-to-market product is being
undersold by fast-followers. You need to
find a way to cut costs.
And now you have a decision to make.
Should you work with your current supply chain to lower costs or
should you find a cheaper supply chain partner?
Reduce costs with your
current supplier.
Find a lower-cost supplier.
Weigh the options before making a decision.
BEST PRACTICES IN OUTSOURCED MANUFACTURING
AOPTION BOPTION
AOPTION BOPTION
Chapter 2
Two ways to lower supply chain
costs —which is right for you?
• Cost of conversion—In addition to implementation costs,
consider the potential cost of production gaps, scrap and rework
errors and overtime labor costs.
• Risk of change—Can you handle the risk of making a big
change to your supply chain?
• Effectiveness of your new product introduction process—
Does it make sense to work with your current supplier to improve
this process for future releases?
• Supplier availability and resources—Does your current
supplier have the bandwidth and/or desire to help you with a
cost-reduction effort?
• Lean, Six Sigma, 5S, TQM—Have you already implemented one
of these cost-cutting business strategies, or is there potential to
save money by improving your internal processes?
BEST PRACTICES IN OUTSOURCED MANUFACTURING .................................................................................................................................................................................................15
Key factors in your decision-making process:
Reduce costs with your
current supplier.
Find a lower-cost supplier.
AOPTION BOPTION
AOPTION BOPTION
This can work for you when:
Option A:
Reduce costs with your current supplier.
• You will be introducing new product lines with similar
assembly requirements in the future, and can flush out
production-related issues for them now.
• You can potentially cut costs in other places by
implementing lean initiatives throughout your business
and supply chain.
• Your supplier has bandwidth to reduce costs and is willing
to work with you.
• You fear a large change is too risky for you at this time.
• You are mid-production and can’t afford any setbacks
or delays.
Minimal risk
No surprises
Leverage an established
partnership
Opportunities to optimize for
future release and a baseline
for improvement
Available resources to focus on
quality and governance issues
TWO WAYS TO LOWER SUPPLY CHAIN COSTS —WHICH IS RIGHT FOR YOU? ...................................................................................................................................................................16
Your supplier may be unwilling
or unable to cut costs
There is less opportunity to
innovate
You could miss out on a
chance to revitalize your
business
Potential RisksPotential Benefits
.................................................................................................................................................................................................................................................................................
Reduce costs with your current supplier.AOPTION BOPTION
Adaptation is safer than starting from scratch.
Evolution is safer than revolution, so in many cases, working
with your current supplier is the least risky and most efficient
way to reduce costs. Although it may be tempting to start fresh
with a new supplier—especially if there has been tension over
decreasing profit margins—pursuing a whole new strategy can
be hard to pull off smoothly.
Leverage your current partnership to cut costs.
If you have had a good relationship with your supplier you
can leverage it—and any other learning experiences you’ve
had with them—to refine your production methods without
disrupting business. It might be easier than you think to
reduce costs with your current supply chain because they are
invested in your success. Since they depend on the money
from your orders, they have some natural incentive to help
keep things running smoothly.
Establish a baseline for improvement with your
current supplier.
Working with your current supplier also gives you the
opportunity to pursue cost-reduction sharing. If you’ve been
with your current supplier for a while and know their costs, you
can quickly establish a realistic baseline for improvement.
It may be tempting to start
fresh with a new supplier—
especially if there has been tension
over decreasing profit margins. But
pursuing a new partner can be risky.
.................................................................................................................................................................................................................................................................................
TWO WAYS TO LOWER SUPPLY CHAIN COSTS —WHICH IS RIGHT FOR YOU? ...................................................................................................................................................................17
Reduce costs with your current supplier.AOPTION BOPTION
Avoid production stoppage by staying with your
current supplier.
Moving production to a new supplier can be a headache. You need
to sort out various quality and governance issues. Also, it may take
longer than you think to end things delicately with your current
supply chain—especially if you will be running multiple supply lines
over multiple products. You may also be surprised by the level of
management intervention and resources required to get everything
set up. If your current supplier is willing to work with you, cutting the
ties may not be worth the hassle.
Will you like your new supplier’s new ideas?
Additionally, a new supplier means new ideas and surprises along
the way—for better or worse. Will the new supplier’s ideas mesh
with yours? Will you be able to resolve problems quickly enough to
keep the line moving?
.................................................................................................................................................................................................................................................................................
Moving to a New Supplier Can Be Risky
• Sorting out quality and governance issues
is complicated.
• Disengaging with current supply chain can be
complex, especially if multiple supply lines over
multiple product lines have been used.
• Involving management extensively is
often necessary.
TWO WAYS TO LOWER SUPPLY CHAIN COSTS —WHICH IS RIGHT FOR YOU? ...................................................................................................................................................................18
Reduce costs with your current supplier.AOPTION BOPTION
In the long run, the only way to avoid the headache of
sourcing, managing and problem-solving with a new supplier
is to stick with your current supplier. If you demonstrate your
loyalty to your current supplier now, it may help you if you need
to negotiate additional price cuts down the road.
This can work for you when:
Option B:
Pursue a new outsourcing strategy.
• You are well established and have a highly mature product.
• You are at a stable place in your company and
product lifecycle.
• Your current supplier is unable or unwilling to cut costs
any further.
• Your team is up for a challenge and can put additional
resources into change management.
• You understand how your product is designed and
manufactured well enough to explain it to a new set
of vendors.
• You have little opportunity to cut process costs internally
by adopting Lean, Six Sigma, 5S, TQM or other
strategies.
• You have access to a competitive supplier landscape
where sourcing is not prohibitive.
Kick bad habits to the curb
See real change
Demonstrate to other
suppliers that you’re serious
about cutting costs
Find a supplier in a more
ideal location, with better
technology
Increase your ability to
innovate
Increased risk of production
stoppage
Decreased stability
New and unexpected problems
to manage
Additional resources needed to
source, manage and problem-
solving with a new supplier
Potentially burned bridges with
your old supplier
New supplier may be unable to
help you cut costs
Potential RisksPotential Benefits
.................................................................................................................................................................................................................................................................................
TWO WAYS TO LOWER SUPPLY CHAIN COSTS —WHICH IS RIGHT FOR YOU? ...................................................................................................................................................................19
Pursue a new outsourcing strategy.AOPTION BOPTION
Your supplier may not be motivated to help you.
If your suppliers work with larger clientele, it might be more difficult
to get what you want out of a continued relationship—especially
if your supply chain doesn’t seem to care about your business.
Investing more time and money into a partner relationship only
makes sense if your partner is willing to meet you halfway. If you
don’t have the size, clout or relationship to get your supplier’s
attention, you may not be able to implement the changes you want.
Prove you’re serious about cutting costs.
Even if you are decently satisfied with your current supplier, you
may want to consider looking into other options. Introducing a
new supplier sends the message to your old suppliers that you are
serious about cutting costs—and may even convince them to put
more effort into streamlining your production.
If your margins
have been steadily
decreasing and your supply
chain has already made all
the cuts they can, there isn’t
much you can do to improve
your current situation without a
major change.
.................................................................................................................................................................................................................................................................................
TWO WAYS TO LOWER SUPPLY CHAIN COSTS —WHICH IS RIGHT FOR YOU? ...................................................................................................................................................................20
Pursue a new outsourcing strategy.AOPTION BOPTION
Take your business to the next level.
By moving to a new supplier, not only is there potential for
monetary benefits, but you can also improve your business in a
variety of ways. If you take the time to shop around and find a
more tech savvy supplier, you can utilize their new technology
and equipment to speed production, improving your edge.
Additionally, if you find suppliers in areas where the cost of labor
is much cheaper, you might be able to save money without
making many dramatic changes to your process.
Create competition in your supply chain and get
the best deal.
You can create greater competition in your supply chain and
stronger options for sourcing by increasing your supplier
network. If suppliers are competing for your business they may
be more willing to expose hidden margins that your current
supplier may not be telling you about.
.................................................................................................................................................................................................................................................................................
Drop dead weight and take advantage of an
opportunity to innovate.
Finally, starting fresh with a supplier can breathe new life into your
business. When you are starting something new, you are forced
to look at your status quo operation and refine it as you deploy
with the new partner. In some cases the new supplier may be
equipped to help you expose better or more refined processes.
There is a huge benefit in getting a new set of eyes onto your
product and production methods.
With all the possible benefits, working with a new supplier can be
a risk, but it’s often a rewarding risk to take.
TWO WAYS TO LOWER SUPPLY CHAIN COSTS —WHICH IS RIGHT FOR YOU? ...................................................................................................................................................................21
Pursue a new outsourcing strategy.AOPTION BOPTION
One big reason to change
suppliers is that starting fresh
with a supplier can breathe new life
into your business.
You may want to work with your current supplier to cut costs if:
• You will be introducing new product lines with similar assembly requirements in the future, and can flush out
production-related issues for them now.
• You can potentially cut costs in other places by implementing lean initiatives throughout your business and supply chain.
• Your supplier has bandwidth to reduce costs and is willing to work with you.
• A large change is too risky for you at this time.
• You are mid-production and can’t afford any setbacks or delays.
You may want to find a lower-cost supplier if:
• You are well-established and have a highly mature product.
• You are at a stable place in your company and product lifecycle.
• Your current supplier is unable or unwilling to cut costs any further.
• Your team is up for a challenge and can put additional resources into change management.
• You understand how your product is designed and manufactured well enough to explain it to a new set of vendors.
• You have little opportunity to cut process costs internally by adopting Lean, Six Sigma, 5S, TQM or other strategies.
• You have access to a competitive supplier landscape where sourcing is not prohibitive.
Recap
TWO WAYS TO LOWER SUPPLY CHAIN COSTS —WHICH IS RIGHT FOR YOU? ...................................................................................................................................................................22
Tips for making it work
If you’re going to stay with your current supplier, you need to work
closely to integrate industry best practices like Lean and TQM into your
strategy. To ensure you don’t become supplier-dependant, always be
ready to reassess and make changes proactively.
As you move forward with your current supplier remember that it’s one
thing to make a smart plan, but it’s another thing to execute it well.
This is where you will need to be vigilant—don’t expect your supplier to
implement change independently of you.
Throughout your changes, remember to focus on your product. Don’t
get so caught up in adding a lot of new technology and processes that
you forget to simplify. If the product doesn’t get made faster, better or
cheaper, it’s not worth doing.
TWO WAYS TO LOWER SUPPLY CHAIN COSTS —WHICH IS RIGHT FOR YOU? ...................................................................................................................................................................23
Option A:
Reduce costs with your current supplier.
If you move forward
with your current
supplier, remember that
it’s one thing to make a
smart plan, and another
thing to execute it well.
If you decide to leave your current supplier, don’t rush the decision. You should
evaluate many suppliers in many geographies. Don’t assume that outsourcing
overseas is automatically the best solution. It’s also important to remember that as
products mature and become obsolete, other products will emerge. You need to
balance your supply chain to fill both needs. Execution is critical.
Also, keep in mind that once you break the news to your current supplier, they will be
less motivated to help you, which can make the transition painful. As with any other
breakup, you may notice your calls go unanswered, your voicemails aren’t returned
and your product deliveries are treated less urgently. Understand your supplier’s
motivations, and find ways to compensate them.
No matter what you decide, don’t be fooled into thinking there’s a magic bullet.
You should always be evaluating new options for all of your products.
TWO WAYS TO LOWER SUPPLY CHAIN COSTS —WHICH IS RIGHT FOR YOU? ...................................................................................................................................................................24
Leaving Your
Current Supplier?
• Don’t rush your decision.
• Don’t assume that outsourcing
overseas is automatically the
best option.
• Evaluate many suppliers
in many geographies.
• When you tell your current
supplier, they’ll be less
motivated to help you.
Option B:
Pursue a new outsourcing strategy.
Two ways to
optimize your
production
for multiple
product lines
When introducing a new product, should you work
with your current supply chain to optimize your part
costs for multiple products, or add additional supply
chain partners to optimize quality and efficiency for
the new product? This chapter discusses the pros
and cons of each option and offers suggestions to
help you in your decision-making process.
You’ve hit a key milestone: you’ve
developed a new, cutting-edge product
and want to begin manufacturing
it alongside your more stable and
easy-to-manufacture product lines.
And now you have a decision to make.
Should you work with your current supply chain to optimize
your part costs for both products, or add additional supply chain
partners to optimize quality and efficiency for the new product?
Stick with your current supply chain
to optimize costs.
Find the best supply chain for
each product line.
Weigh the options before making a decision.
BEST PRACTICES IN OUTSOURCED MANUFACTURING
AOPTION BOPTION
AOPTION BOPTION
Chapter 3
• Available resources—Do you have the time and money
required to manage multiple supply chain vendors for each
product line?
• Organizational priorities—Would you rather optimize
your process for design or for cost?
• Supply chain lifecycle—Does your current supply chain
have room to mature along with your product lines?
• Supplier relationships—Will your current supplier help
you optimize for each product line? Does your current
supplier see you as a priority customer?
• Risk—Can you handle the risks that come with adding a
new supplier?
BEST PRACTICES IN OUTSOURCED MANUFACTURING .................................................................................................................................................................................................26
Key factors in your decision-making process:
Stick with your current supply
chain to optimize costs.
Find the best supply chain for
each product line.
AOPTION BOPTION
AOPTION BOPTION
Two ways to optimize your
production for multiple product lines
This can work for you when:
Option A:
Stick with your current supply chain to optimize costs.
• You have high-volume, low-complexity products
that share similar tooling, raw materials or
assembly procedures.
• Your organization lacks the resources to manage new
supply chain partners.
• Your current supply chain partner can offer diverse
solutions and has room to grow.
• You are confident in your ability to source back-ups if
something happens to your current partner.
Simplicity
Reduced part costs from
volume purchasing
Reduced management costs
and required resources
Opportunities to build upon an
established relationships
Decreased stability
Lost opportunity for
innovation
Increased dependence on
your current supply chain
partners
A team that isn’t the best fit
for the new product
Potential RisksPotential Benefits
.................................................................................................................................................................................................................................................................................
Stick with your current supply chain
to optimize costs.AOPTION BOPTION
TWO WAYS TO OPTIMIZE YOUR PRODUCTION FOR MULTIPLE PRODUCT LINES ...............................................................................................................................................................27
Work with one supply chain to reduce
errors and simplify.
Having a single supply chain keeps things simple. Managing
fewer personalities and hand-offs throughout the production
process can reduce errors and lighten the load on your
management team.
It can be risky to outsource to a new supplier, and you may not
get the level of service you were promised in the initial sales pitch.
Although a new supplier may make big promises, you already
know what you can expect from your current supply chain.
It’s less risky in the short term to stick with what you know.
Use your current supplier to take advantage
of economies of scale.
Increasing your volume with your current supplier can result
in a significant cost reduction thanks to volume pricing. If you
use similar parts across all your product lines, working with a
single supply chain makes it much easier to determine your
part overlap. Coordinating purchasing to get incentives based
on your larger volume is also an option.
New isn’t always improved.
If you do add a second supply chain, not only do you lose the
opportunity for volume pricing, but also costs can add up quickly.
There are not only the initial set-up costs, but also the added
management costs that you incur even after the new supplier
is up and running. Multiple supply chains can be the best way
to optimize product design, but the stress of managing multiple
chains can sometimes take your focus off the product.
It can be risky to hand
things off to a new supplier.
You may not get the level of
service you were promised in
the initial sales pitch.
.................................................................................................................................................................................................................................................................................
TWO WAYS TO OPTIMIZE YOUR PRODUCTION FOR MULTIPLE PRODUCT LINES ...............................................................................................................................................................28
Stick with your current supply chain
to optimize costs.AOPTION BOPTION
This can work for you when:
Option B:
Find the best supply chain for each product line.
• Your current and new product lines have very different
components and manufacturing processes.
• Your management team has the availability to take on
additional responsibilities.
• Your customers are very quality-sensitive.
• You’d like to reduce your overall supply chain risk.
• You don’t have strong relationships with your current
supply chain partners.
Reduced supply chain risk
Better matched supply
chain partners
Aligned competencies for
each product
Better delivery times and
higher quality
Increased flexibility and
innovation
Less opportunity for
volume pricing
Additional set-up and
management costs
Increased complexity
Potential RisksPotential Benefits
.................................................................................................................................................................................................................................................................................
Find the best supply chain for each
product line.AOPTION BOPTION
TWO WAYS TO OPTIMIZE YOUR PRODUCTION FOR MULTIPLE PRODUCT LINES ...............................................................................................................................................................29
Diversify to minimize long-term risk.
Although there is inherent risk in making a big change like adding
a supplier, a diversified supply chain reduces your risk in the
long term. By having more than one supplier to rely on for your
sourcing needs, you limit your risk should one of them go out of
business, run out of product or have other issues that could have a
ripple effect on your productivity.
The grass just might be greener after all.
Adding a new product line is the perfect chance to try working
with another supply chain, especially if you haven’t been happy
with your current team or have been working with them for a long
time. Who knows? If the new suppliers really impress you it may
make sense to bring all your business to the new supplier when
your product reaches maturity.
Choose the best to get the best results.
The notion of “best” for each line implies obvious gains. Having
suppliers whose competencies are matched with the needs of
your product can lead to faster delivery, higher quality and lower
cost. All of this can lead to increased customer satisfaction and
increased profits.
Take the opportunity to innovate.
The prototype and early production phases are a great time to
shake things up. There are few times in your company lifecycle
that you have the opportunity to really innovate, so make the
most of them when they come. Even if you are happy with your
current supplier, adding a new supply chain freshens things
up and allows you to flush out new ideas for your product and
process. By sticking with one supplier, you miss the opportunity
to find a new and better way to do things.
Adding a new product line
is the perfect chance to try
working with another supply chain—
especially if you’ve worked with your
current team for a long time.
.................................................................................................................................................................................................................................................................................
TWO WAYS TO OPTIMIZE YOUR PRODUCTION FOR MULTIPLE PRODUCT LINES ...............................................................................................................................................................30
Find the best supply chain for each
product line.AOPTION BOPTION
You may want your current supply chain to manage your new product line if:
• Your internal management team lacks the availability and competency to take on new supply chain partners.
• You have high-volume, low-complexity products that share similar tooling, raw materials, or assembly procedures.
• Your current supply chain partner can offer diverse solutions and has room to grow.
• You are confident in your ability to source back-ups if something happens to your current partner.
Consider working with a new supply chain team to manage your new product line if:
• Your new and current product lines have very different components and manufacturing processes.
• Your management team has the availability to take on additional responsibilities.
• You can’t afford a slip in quality.
• You’d like to reduce your overall supply chain risk.
• You don’t have strong relationships with your current supply chain partners.
Recap
TWO WAYS TO OPTIMIZE YOUR PRODUCTION FOR MULTIPLE PRODUCT LINES ...............................................................................................................................................................31
Tips for making it work
If you utilize your current supply chain partner for a new product introduction, it may make sense
to use the new product as a bargaining chip for better terms, or as a way to demonstrate your
faith in your partner and improve the relationship. Remember, happy supply chain partners do a
better job and ultimately create a higher level of customer satisfaction.
If you stay with your current supply chain, think it through first. Don’t put all of your eggs
in one basket just because it is the path of least resistance. When you have a positive
relationship with your supply chain, it’s easy to assume there’s nothing better out there. But it
may be a worthwhile investment to perform your due diligence and explore the potential of a
new supply chain.
If you diversify, start small—the less you gamble, the less you can lose. Whenever you are
dealing with new partners, you should be careful about how quickly you invest. Put your toe
in the water to see how it feels before you jump in.
TWO WAYS TO OPTIMIZE YOUR PRODUCTION FOR MULTIPLE PRODUCT LINES ...............................................................................................................................................................32
New Product as
Bargaining Chip?
• Try for better terms.
• Use the new product to
show your faith in your
partner and strengthen
your relationship.
• Loyalty is good, but
don’t put all your eggs
in one basket.
Option A:
Stick with your current supply chain to optimize costs.
If you are planning to make the investment in a new supply chain, consider how many
units will have to be sold to recover your sunk costs. Don’t rush into a new manufacturing
environment without making sure there is potential to recover your upfront costs. Keep
your eyes open for the sales pitch. While a new supplier will make big promises to get
your business, it’s important to bring the sales pitch down to cold hard facts.
If you decide to leave your current supplier, don’t rush the decision. You should
evaluate many suppliers in many geographies. You need to balance your supply chain
to fill both needs. Execution is critical.
You need to understand that once you break the news to your current supplier, they
will have less of a motivation to help you, which can make the transition painful. As
with any other breakup, you may notice your calls go unanswered, your voicemails
aren’t returned, and your product deliveries are treated less urgently. Understand your
supplier’s motivations, and find ways to compensate them.
No matter what you decide, don’t be fooled into thinking there’s a magic bullet.
You should always be evaluating new options for all of your products.
TWO WAYS TO OPTIMIZE YOUR PRODUCTION FOR MULTIPLE PRODUCT LINES ...............................................................................................................................................................33
Different Product,
Different Supply Chain
• Will the unit volume of your
new product allow you to
recover the upfront costs
of a new supply chain?
• Evaluate many suppliers
in many geographies.
• Don’t assume that overseas
is always the best option.
Option B:
Find the best supply chain for each product line.
Should you move
manufacturing
closer to
customers?
When selling products overseas, should you mitigate
the cost of international delivery by manufacturing
closer to customers or should you cut costs another
way? This chapter discusses the pros and cons of
each option and offers suggestions to help you in your
decision-making process.
You’ve hit a key milestone: you’ve
expanded your market reach and are
selling across the globe.
And now you have a decision to make.
Should you mitigate the cost of international delivery by
manufacturing closer to customers or should you cut costs
another way?
Find suppliers close to your customers
to avoid international delivery costs.
Work with your current CM to find
other ways to cut costs.
Weigh the options before making a decision.
BEST PRACTICES IN OUTSOURCED MANUFACTURING
AOPTION BOPTION
AOPTION BOPTION
Chapter 4
• Quality—Will a decrease in product quality ultimately cost
you more?
• Logistics costs—Will a global supply chain reduce or increase
your logistics costs?
• Cost of international management—Are you equipped to
manage multiple supply chain partners across the globe?
• Communication—Will you be able to keep lines of communication
open across a complex and global supply chain?
• Supply chain resources and relationship—Will your current
supply chain support you as you expand?
• Taxes, tariffs and fees—Will you incur any new taxes, tariffs or
fees? Can you eliminate any by manufacturing closer to customers?
BEST PRACTICES IN OUTSOURCED MANUFACTURING .................................................................................................................................................................................................35
Key factors in your decision-making process:
Find suppliers close to your
customers to avoid international
delivery costs.
Work with your current CM to find
other ways to cut costs.
AOPTION BOPTION
AOPTION BOPTION
Should you move manufacturing
closer to customers?
This can work for you when:
Option A:
Find suppliers close to your customers to avoid
international delivery costs.
• You have a mature product.
• You have a well-documented and well-managed product.
• You feel comfortable in your ability to deal with and
manage risk.
• You have several companies competing to address your
manufacturing needs.
• You don’t count manufacturing as one of your core
competencies or the core drive of your product’s value.
Lower shipping, freight and
logistics costs
Increased supply chain
efficiency
Improved customer
relationships
Fewer barriers to foreign
markets
Decreased stability
Less control over quality
Increased supply chain
complexity
New social and geo-political
challenges to navigate
Potential RisksPotential Benefits
.................................................................................................................................................................................................................................................................................
Find suppliers close to your customers
to avoid international delivery costs.AOPTION BOPTION
SHOULD YOU MOVE MANUFACTURING CLOSER TO CUSTOMERS? .................................................................................................................................................................................36
Increase the efficiency of your supply chain.
Distributing your manufacturing across the globe can make
your entire supply chain more efficient because it allows you to
lighten the load for your current supply chain partners.
By passing some of the total workload to the new international
manufacturers, you can ultimately make your whole team more
efficient and achieve faster turnaround times.
Achieve better customer relationships.
You may also find that being physically close to your customers
improves your relationship with them. For example, if a
customer has quality check points during the manufacturing
process, your nearby location could dramatically reduce the
cost of business on both sides. If your product has security or
quality issues to manage – or a lot of custom features – your
customer may also appreciate that some of the manufacturing
is done close to the point of delivery.
Manufacturing close
to customers reduces
shipping and logistics
costs—and those aren’t
the only benefits.
.................................................................................................................................................................................................................................................................................
SHOULD YOU MOVE MANUFACTURING CLOSER TO CUSTOMERS? .................................................................................................................................................................................37
Find suppliers close to your customers
to avoid international delivery costs.AOPTION BOPTION
Minimize tariffs and other barriers to
foreign markets.
Consider the tariffs and restrictions associated with shipping
to some countries. Developing a global supply chain can help
cut some of these additional costs. Plus, businesses in some
countries (like China) will only buy from you when a percentage
of the product is produced in their country.
Consider your long-term goals.
There is an argument to be made for keeping things the same
to maintain stability, but the trade off could be leaving money
on the table. Also, while sticking with your current strategy is
less risky in the short term, building a global supply chain can
reduce your risk in the long run since currencies and availability
of raw materials fluctuate depending on region.
.................................................................................................................................................................................................................................................................................
Why Manufacturer
Near Customers?
• Lower shipping and logistics costs.
• Improve supply chain efficiency.
• Strengthen customer relationships.
• Minimize tariffs and fees.
SHOULD YOU MOVE MANUFACTURING CLOSER TO CUSTOMERS? .................................................................................................................................................................................38
Find suppliers close to your customers
to avoid international delivery costs.AOPTION BOPTION
This can work for you when:
Option B:
Work with your current CM to find other ways to cut costs.
• Your product is immature.
• You can’t afford a reduction in quality.
• You are dependent on a competency owned by
your current suppliers.
Maintain control over
product quality
Avoid the hassle of setting up
a new system
Avoid short term risk
Higher shipping, freight
and logistics costs to ship
internationally
Less access to some
foreign markets
Less opportunity for innovation
Potential RisksPotential Benefits
.................................................................................................................................................................................................................................................................................
Work with your current CM to find other
ways to cut costs.AOPTION BOPTION
SHOULD YOU MOVE MANUFACTURING CLOSER TO CUSTOMERS? .................................................................................................................................................................................39
Maintain your current supply chain and cut costs
another way.
In spite of the advantages there are reasons why you might not
want to move parts of your supply chain across the globe. A local
supply chain gives you better control over product quality. If you are
in an especially quality-sensitive industry, such as medical device,
quality control may be more important than ease of distribution.
Also, the risk of production stops and errors increases when you
are further away from your supply chain. So if you move your
manufacturing, you will have to invest in remote management
resources to ensure quality.
You may not have the resources to develop a
global supply chain.
Additionally, you should consider what else is going on in your
organization and where you are in the production schedule. It takes
time and energy just to set up a new domestic manufacturer—let
alone manage the new team—once travel, new customs and other
socio-political challenges are added to the mix. If you have other
organizational changes to manage simultaneously, or if you are
getting close to kicking off your next production cycle, you may be
asking for trouble by making major manufacturing changes.
There are other ways to cut costs.
Remember, moving your manufacturing close to customers isn’t
the only option for cutting manufacturing costs. You can also save
money by optimizing what you’re already doing. For example, if
your current domestic manufacturers have the bandwidth to handle
the new demand, you may be able to leverage quantities of scale
and save money.
A local supply chain
gives you better control
over product quality. This is
especially important if yours is
a highly-regulated industry.
.................................................................................................................................................................................................................................................................................
SHOULD YOU MOVE MANUFACTURING CLOSER TO CUSTOMERS? .................................................................................................................................................................................40
Work with your current CM to find other
ways to cut costs.AOPTION BOPTION
You may want to consider moving your manufacturing close to
customers if:
You may not want to develop a global supply chain if:
Recap
• You have a mature product with strong documentation and management.
• Your core competency isn’t manufacturing the product.
• You have a lot of competing providers that can meet your manufacturing needs.
• You are in a position where you can take a manageable risk.
• Your product is immature.
• Your concerns over the cost of poor quality are greater than the potential savings from shifting.
• Your current manufacturers hold a great deal of power in your relationship.
SHOULD YOU MOVE MANUFACTURING CLOSER TO CUSTOMERS? .................................................................................................................................................................................41
Tips for making it work
If you decide to make the move and develop a global supply chain, a little bit of planning upfront
can prevent a huge headache later on. So be sure to put in your due diligence. Also, make sure
to check the political ramifications of the move, as well as taxes and tariffs domestic and abroad.
These factors can help you make the “go” or “no-go” decision.
Remember that making a big change to your supply chain can be risky, and it can take a while for
things to settle. If this is your first stab at a move of this magnitude, start small and grow it out.
If you decide to keep things the way they are, see if you can optimize your procedure by
leveraging economies of scale or adopting business improvement practices like TQM, Lean or
Six Sigma. Also don’t hesitate to revaluate often. Just because you made the decision to stay
local two years ago doesn’t mean that it is the right decision for life. The sooner you can refine
your process domestically, the sooner you will have the option to go international.
SHOULD YOU MOVE MANUFACTURING CLOSER TO CUSTOMERS? .................................................................................................................................................................................42
For More Information
Harvard Business School Case
Study, Arcor: Global Strategy and
Local Turbulence
Harvard Business School Article,
Are you ready to go global?
Option A:
Find suppliers close to your customers to avoid international
delivery costs.
Option B:
Work with your current CM to find other ways to cut costs.
Equip yourself with the right tools to
achieve outsourcing success
Whether you outsource to a small team down the street or to multiple contract manufacturers (CMs) across
the globe, real-time, accurate supplier communication is key. With centralized access to BOM data and
change history, you can eliminate incorrect builds and obsolete or excess inventory.
Arena BOMControl centralizes product information and project details—including design files, BOMs, items,
costs, vendor information, ECOs, compliance status, schedules and tasks —so OEMs and CMs can access
up-to-date information, anytime and anywhere.
Arena PDXViewer—a free cloud application—provides a single, standardized format for sharing build
packages across the supply chain, enabling you to get the right data to the right people—fast.
Learn more about how Arena makes outsourcing easier at www.arenasolutions.com.
Best Practices in Outsourced Manufacturing
For more information,
contact Arena at www.arenasolutions.com
or call us at 1.866.937.1438.
Like what you see?
FORWARD THIS TO A FRIEND4
C O N N E C T W I T H U S
EBOOK#1-08132012
