Contract Manufacturing: Components of Profitability

Want to get the most from your company's outsourcing services? Here's how.

Want to get the most from your company's outsourcing services? Here's how.

Focusing on a company's core products and services makes sense. Sure, we want to be all things to all customers, but the truth is that this tactic is not necessarily in anyone's best interest. Thus, the concept of outsourcing was born and is evolving into Laborgistics, which, according to Bloomington, Ind., and El Paso, Texas-based IOS-International Outsourcing Services, is the ability to employ people and technology in unique combinations to address a wide range of solutions.

The term Laborgistics, coined by IOS-International Outsourcing Services, stands for a process of seamless integration to provide flexibility and reliability of outsourcing services. There are several elements that must combine in order for this process to work, and they include ally selection, efficiency, convenience, flexibility, definition, global capabilities, quality, innovation, security and redundancy.

For example, in packaging and other contract manufacturing, the right formula of technology, raw materials sourcing and components can make it easier and more cost-effective for customers to have it all done by one provider. This way companies don't have to source their own raw materials or provide warehousing or shipping.

An outsourcing provider should be able to source raw materials and components, such as metal stamping, injection molding and electronic components, then provide assembly, manufacturing and packaging for distribution in the United States and abroad. Reliability and convenience are important, and a secure environment where customer records and inventory management and other data are proprietary is required.

Keys to Profitability and Success

* Ally Selection
While it's important to trust your instincts, checking references and requesting a plant tour, or meet and greet, will help in the overall evaluation process. Check the financial foundation and security practices of your prospective ally. A long-standing business that has customer testimonials to back it up, as well as the security systems to keep proprietary information safe, is important. Big name companies, established companies, a diverse client base and strong executive infrastructures are all part of the big picture. When checking references, talk to a current customer in both the small and large categories and two former customers.

Developing a relationship with them through calls and visits, and witnessing first-hand their capabilities, infrastructure and the quality of their employees, will hone their ability to serve your needs through their resources.

* Efficiency
Profitability comes from cost cutting, rather than top-line growth. In an article written by Kathleen Goolsby from, she states that it's difficult to consistently come up with great, innovative ideas that appeal to your market. Instead, leveraging the process and source expertise of your provider with your company's own core strengths can create a unique symbiotic business relationship where efficiency is the result of that new process.

Every company has its own budget and finite dollars to spend in creating and distributing products; therefore financial resources and personnel should be directed toward the area where a company shines, not to areas that can be successfully handled by an outsourcing partner.

* Convenience
A comprehensive, single provider is preferred over multiple vendors for various outsourcing needs. Finding an outsourcing company with turnkey operations is critical. Having an outsourcing partner with professionals trained in specific areas managing the process enhances accuracy and quality. They have resources that allow them to do the job more efficiently, and these cost savings are passed on to customers. Simplification prevails.

* Flexibility
It is important to have a flexible, contractual agreement with a vendor. Supply and demand and technology changes must be accounted for because they constantly fluctuate. No one saves money with excess inventory in a warehouse or by having customers who are waiting for delayed shipments.

* Definition
Define the scope of work and related pricing. Knowing the grand total and what it includes helps end users of outsourcing services save money and pass along savings to their own customers. A defined scope of work with corresponding pricing is essential.

When comparing quotes, be sure to get the total landed cost. This should include component sourcing, inventory, service lead times, change controls, warehousing, distribution and transportation to your plant or to your customer's facility. Make sure the outsourcing company shows bottom-line figures that include all components of the process.

* Global
Assessing your partner's global capabilities, connections and understandings of duties/tariffs can be an important component affecting profitability. Even if your company is not doing offshore outsourcing now, working with a bigger player to keep your options open later is recommended.

* Quality
Nothing is accomplished if services provided through an outsourcing partner are marginal, unreliable or inconsistent. Saving money is not the bottom line; the goal is happy customers. When outsourcing core activities like raw materials sourcing or subassembly, quality becomes even more paramount.

One company manufactures high-end outdoor furniture for the retail and commercial markets and upholstered furniture for the commercial market with total annual sales of $400,000,000.

With upholstered furniture accounting for $70,000,000 of yearly sales, it's a big chunk of the company's business. Sometimes the misconception prevails that a company loses some of its quality control when using an outsourcing partner. No company wants to lose control of a part of its business affecting its profit. The right outsourcing services provider has checks and balances in place, including internal and external certifications, to be accountable to its customer, and them to their customers.

For this company, its outsourcing services provider currently manufactures upholstered furniture for distribution and sources all materials and components with the exception of fabric. When researching a provider it's important to look for comprehensive capabilities and resources for providing full turnkey, cost-effective services, and the quality control parameters to ensure good and on time products.

* Innovation
Outsourcing frees up resources such as cash and management to focus on innovation and growth. This is your internal research and development effort. When looking for an outsourcing provider, look for someone like-minded. Their own innovation and technology complement yours. You will have access to vast resources and experienced personnel in specialized areas through your provider.

* Security
Security and continuity are top concerns as components of control. With privacy issues so important right now, confidentiality is critical. Firewalls and a variety of software-related controls are now commonplace, but management of the process is also a piece of the security network.

Instead of one person managing an entire process and seeing all forms in their entirety, a sound outsourcing provider should provide dissemination of components of the data capture process so that data does not reside in one place, viewable by one person. The images are reduced to snippets and scrambled so that the data captured is kept secure. The technology brings it all back together so that the captured data is formatted and transferred to the customer.

* Redundancy
Going hand-in-hand with security, redundancy is another quality to seek in a provider. If the unthinkable happens and a provider, offshore or in the United States, is struck by natural disaster or, worse yet, a terrorist act, there must be back-up records to continue business operation.

Having digitized, image-scanned records reduces risks associated with moving paperwork, such as transportation problems, weather delays, fraud, theft and terrorism. With multiple plants, a provider should have an infrastructure to allow for duplication so that one plant can take over for another with minimal interruptions to service.

From ally selection to creating back-up systems for established processes, profitability happens when key components mesh with the seamless integration of contract manufacturing.

SIDEBAR: Size Doesn't Matter

It is becoming a competitive advantage for smaller companies to also take advantage of outsourcing. The little guy can jump on board, too, while still maintaining control and product and service quality with the right provider.

There is more at stake, though, since a decision to outsource affects the bottom line proportionately even more. Finding a reliable company that will operate in smaller volume requires investigative time and effort, and some larger providers will turn them away.

As industry consolidation is becoming more the norm, supply chain functions are held accountable for wringing out inefficiencies. Mergers and acquisitions happen for strategic reasons, but in a free economy an entrepreneurial person can make up market share on some need not being met because of the larger players. Smaller players can keep them honest and stay in business by ramping up their own strengths in customer service or other areas such as more specialized or lower quantity orders of products.

With the evolving market, global trade allows the lowest possible resulting cost. The trend toward offshore outsourcing is here to stay, so learning how to work the logistics chain from supplier to customer's customer is critical to staying in business. Those who lead in accomplishing this will dominate the marketplace in 2005 and beyond.

About the Author: Laird Carmichael is executive vice president of IOS-International Outsourcing Services LLC. With a BS in mechanical engineering from the Georgia Institute of Technology, Carmichael began his career with General Electric on the Manufacturing Management Program. While with GE he successfully operated several manufacturing plants over 15 years. Then in 1989 Carmichael joined SAFT, a division of French based Alcatel, in U.S. Senior Management in the United States and Mexico.

Carmichael has since operated several successful offshore manufacturing operations in various products and processes. He was president and part owner of a contract manufacturing company and GM of Mexican operations for a private equity company. Carmichael is an active officer and board member of several trade organizations.