The contract manufacturing industry is selling itself short by not leveraging the benefits strategic sourcing has to offer, such as obtaining top-quality resources, turning fixed costs into variable costs and increasing controls over unit pricing. Currently, the contract manufacturing industry remains largely focused on cost-plus or rate-of-return models -- resulting in negligible strategic benefit. By employing strategic outsourcing principles, the contract manufacturing industry's customers and vendors will be able to realize true business improvements that bolster both the success of their business and the industry as a whole.

Frequently in the contract manufacturing industry, third-party transactions turn into nothing more than out-tasking, where a third party performs the activities that the customer would have provided for itself, under the similar basic conditions. Many times, the customer believes they are entering a strategic outsourcing transaction, but the result is anything but.

As an example, say your company has decided to outsource its internal manufacturing to a third-party provider with the goal of obtaining strategic outsourcing benefits. Whether you've engaged Flextronics, Jabil Circuit, Foxconn, Plexus, or one of the other many providers, your vendor has committed to being a "strategic partner" that will enable your company to transform its business through benefits such as its global footprint, sophisticated systems, cutting edge manufacturing processes, world-class facilities and state-of-the-art training.

However, during the course of negotiations, it becomes apparent that a strategic outsourcing opportunity -- in the truest sense -- was never in the offing. Rather, it has become a cost-plus arrangement, whereby the vendor takes little to no risk and your company has few, if any, opportunities to obtain a strategic, competitive benefit. Strategic outsourcing was not designed to achieve this result, and customers should demand more.

Applying Strategic Outsourcing Correctly

When well executed, strategic outsourcing involves the outsourcing vendor utilizing its scale, purchasing power and lower wage locations to reduce its own costs as well as the vendor capitalizing on its ability to perform functions in a more efficient and effective manner by deploying technology, methodology, and leverage across multiple customers. A true strategic outsourcing model provides customers value-driven results that they would likely never be able to produce on their own. For example, vendors are able to deploy technology, resources and infrastructure across several customers, shifting resource allocation and corresponding costs to more closely align with each customer's demand -- an inherent impossibility when a customer provides itself the services.

In strategic outsourcing, the vendor is providing two critical elements: 1) a customer-driven defined result (rather than a mere activity) and 2) certainty of costs and terms during the contracted period. When the outsourcing vendor can achieve these results more effectively, it reaps the rewards of its innovation, efficiency, and expertise. Yes, there is some risk, but that is the nature of business --and the vendor is able to quantify, manage and price in those risks. Other industries have been doing this effectively for years, and in the process have been able to escape the commoditization of certain offerings, increase revenues and even expand margins.

Current Contract Manufacturing Pitfalls

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