The debate over how to manage a procurement department and where it should be located is an ongoing one fueled by the globalization of corporations and the increasing responsibility of business units to contribute to the corporate bottom line. Depending upon a wide variety of factors to suit their specific needs, companies may make the case to operate a centralized or decentralized procurement department, or even the new hybrid—the regional central procurement department, which centralizes procurement decisions in the region where most of the operations and suppliers are located, not at the company’s headquarters.
In the world of manufacturing, there’s a particular business custom—sometimes an unfortunate one—that holds many companies back from getting the full benefit of any type of procurement operation—the practice of dictating which suppliers to use. These customers, many of which are huge, have their own specifications, their own OEMs and many times set their own prices with those OEMs, and they order contract manufacturers to purchase specifically from them.
Constraining contract manufacturers by telling them whom to use, and many times even what to pay, holds companies back from reaping not only the advantages of a procurement system (regardless of centralized, decentralized, or regional), but also the capabilities and expertise the contract manufacturer can offer.
The contract manufacturer is a hidden asset within the supply chain capable of delivering a wealth of ideas, business expertise and cost savings to those companies willing to change the paradigm under which they’ve operated for more than 20 years. In the past, companies like Hewlett-Packard, IBM, Dell and others typically used contract manufacturers as a way to offload certain manufacturing sites, along with the employees. They then turned around and bought the same product from the contract manufacturer, in some cases even guaranteeing that this would be the case before spinning off a particular division.
Today contract manufacturers can bring considerable manufacturing capabilities, extensive design expertise and solid supplier relationships to their customers, provided those customers are willing to move from a tactical “do as I tell you” relationship to a strategic partnership.
Design for Manufacturability
Years ago contract manufacturers tended to be very small operations and it made sense for their customers—who were still manufacturing products at that time—to dictate which suppliers to use. Today, now that customers are no longer manufacturing products, they no longer have the business clout or expertise they once had. It’s the contract manufacturers that now have the expertise and purchasing power, as the result of amassing extensive manufacturing capabilities, volume and streamlining their processes.
Imagine if a large contract manufacturer with a network of manufacturing facilities throughout the world, mostly in low-cost regions, could combine and leverage the volumes of key commodities and produce them at its own facilities for all of its customers. The results would include not just lower prices as a result of the volume leverage, but also better control of the product and its delivery as a result of using the contract manufacturer’s own facilities.
The advantages don’t end there, however. Contract manufacturers now offer design for manufacturability (DFM) capabilities to their customers. Because their designers reside where the manufacturing is taking place, they can develop the most cost-effective means of making a product. Contract manufacturers with very strong OEM relationships can also leverage ideas from those suppliers and incorporate them into the product engineering and design.
Contract manufacturers can be so much more than mere order-takers for their customers. They can be the strategic partner that brings manufacturing expertise, additional research and development, DFM expertise, and strong supplier relationships to the table and create even better products.
Many customers, however, are unwilling to forge such a relationship with their contract manufacturer because they see it as relinquishing control. They fear the more information they pass on to the contract manufacturer, the greater the chance it could be used to develop a new technology solely for the benefit of the contract manufacturer. However, if the customer wants to forge a competitive advantage, it needs to give up some control and mitigate any perceived risk by becoming more involved. That’s a good leader of a supply chain. Abdication of responsibility leads to loss of control and uncertainty. Fostering a collaborative relationship and contributing to the brain trust along with the rest of the supply chain provides a sustainable competitive advantage for all.
A strategic partnership may be a novel idea for customers and their contract manufacturers, but it’s one well worth considering because it shows genuine supply chain leadership.
Collaboration is the Key
Concerns about contract manufacturers becoming too powerful can be mitigated by having a streamlined meeting process which periodically brings together cross-functional teams of procurement, design and marketing individuals from the customer, contract manufacturer and key OEMs. Collaboration is the key to developing an overall sourcing strategy that best benefits the customer.
For example, the meetings can serve as forums to:
- address the customer’s concerns about using their contract manufacturers for more than just expediting orders;
- allow the contract manufacturer to explain how a sourcing strategy using its manufacturing locations will provide even greater benefit to the customer;
- encourage and reward the OEMs to participate in the process and put forth their own ideas to improve the manufacturing process. They can provide a huge competitive advantage.
Everyone can then build the key performance indicators that will measure the success of the strategy all are responsible for implementing.
If companies merely continue to operate as they have in the past, telling the contract manufacturer “here’s my order—just buy the components and assemble the product,” they’re abdicating their responsibility to their customers and shareholders to continually explore and utilize the best business processes, including procurement. Instead, companies should use the hidden asset in the supply chain and not try to control them too much. Step up, provide good leadership and give the contract manufacturer more flexibility in the sourcing strategy and take advantage of the value they have to offer.
Jimmy Anklesaria, F.C.A., LL.B., M.B.A., is the founder of Anklesaria Group Inc. He is a fellow member of the Institute of Chartered Accountants, and holds a law degree and an MBA. He is the author of Supply Chain Cost Management: The AIM & DRIVE Process for Achieving Extraordinary Results (AMACOM, 2007) and is co-author of Zero Base Pricing: Achieving World-Class Competitiveness Through Reduced All-In-Cost. Since 1985, he has taught graduate and undergraduate level courses in strategic cost management, Finance and Investments at the University of San Diego.He currently teaches a graduate course in supply chain management at the Rady School of Management at the University of California, San Diego.