New report highlights industrial materials as a critical cost driver
Fort Worth, TX — October 14, 2004 — A new research report from the industry analyst firm Aberdeen Group highlights best-in-class practices for effective management of multi-tier supply chains, including managing the supply of material to contract manufacturers.
Aberdeen's "The Outsourced Manufacturing Strategy Benchmark Report" cites loss of visibility and control of industrial material inputs as a critical issue for enterprises outsourcing manufacturing.
"Best-in-class enterprises are two to seven times more likely to achieve above-average to dramatically better performance in revenue, profit and return on invested capital," said Chris Jones, Aberdeen's senior vice president of value chain research and author of the report.
Aberdeen's research takes aim at a critical business trend impacting a significant cross-section of the manufacturing sector:
"As enterprises attempt to gain better control of their contract manufacturers' performance and continue to find ways to drive down costs, they are deploying emerging solutions to manage multi-tier networks, not just the contract manufacturer," reports Jones.
In other words, he explains, they exert their mass to gain improved pricing across their extended supply chain network. "This approach gives enterprises the opportunity to use scale for the contract manufacturer to drive down material/component costs for the contract manufacturer and ensure their availability as well as ensuring compliance to material or component standards," Jones said.
According to the Aberdeen research, there are several good reasons for managing some or the entire supply base upstream of the contract manufacturer.
"First, in many cases material costs such as steel, plastic resins and electronic components can be the largest cost component of a product," according to Jones. "Enterprises can leverage their size to negotiate prices or buy those materials for the contract manufacturer, further reducing the end product cost."
Second, the report goes on to say that enterprises need to ensure the availability of strategic materials for their contract manufacturers. "There are a number of examples right now, like steel, which point to the critical need to leverage scale to ensure preferential treatment for smaller contract manufacturers, to guarantee product availability," the report states.
And third, materials purchases should not be arbitrarily piecemealed out to a network of contract manufacturers. Instead, Aberdeen suggests materials should be managed across the portfolio of contract manufacturers to maximize the purchasing leverage to drive down costs and ensure availability.