Manufacturing is challenging for companies of all sizes. There is the juggling of lead times, sourcing of components, qualifying alternative parts, approving vendors, implementing design changes, passing regulatory safety tests, keeping scrap rates low, and of course meeting lead times and demand. This means many problems can arise in the production and distribution of a product, no matter the size of the manufacturer.

Although by nature they bring a fresh approach to solving old problems, smaller and younger OEMs may not have the manpower to dedicate distinct personnel to things like documentation, reverse logistics, procurement, or technical support. Nor do they have large spaces for the warehousing of supplies, components or finished goods. Plus, these companies are typically learning how the entire product realization process works as they go, which could very easily lead to costly mistakes that force some promising OEMs to ultimately shut down.

On the other hand, some larger companies with multiple locations world-wide, can be less agile and can be obstructed by their many information systems that may not all talk to each other, thus requiring extra investment and time put into custom programming for ERP, CRM, collaboration, and PLM systems. Large companies can also face increased regulatory scrutiny even if they are not in a highly regulated industry. Big companies that are publicly owned are also under constant pressure to deliver strong growth year after year in order to satisfy their shareholders.

Problems faced by organizations of all sizes include: the scalability of both their production throughput and their distribution networks, exploiting the opportunities of ecommerce, losing focus on core innovation and strategy by becoming sidetracked with logistics & short-term planning, controlling personnel costs (wages, training, benefits, equipment, & space), and minimizing the costs of parts and raw material in order to defend profit margins.

As OEMs struggle to juggle this complicated multi-dimensional matrix of issues related to manufacturing and distribution, contract manufacturing is increasingly seen as an all-encompassing solution.

Contract manufacturers who also provide distribution and logistics services can help their OEM customers meet many of the above-mentioned challenges in key areas:

Procurement (buying & planning): Since they typically place larger orders with parts suppliers in order to obtain parts for all of their customers, contract manufacturers have much more leverage within their vendor base than their customer would have if they were sourcing on their own. Thus, contract manufacturers can secure lower costs and shorter lead times for parts, alleviating a key pain point for OEMs. But that is not the only benefit contract manufacturers bring to procurement: outsourcing buying & planning removes the distraction associated with qualifying vendors and approving alternate parts, both of which can be vital to avoiding or shortening the duration of an internal parts shortage.

Distribution: by providing climate controlled warehousing space, buffer stocks of both parts and finished goods can be stored, ready to be consumed or shipped. This can be in addition to, or as a substitute for, the OEM’s own warehousing facilities. The flexibility to go either route is one of the key reasons companies both big and small will outsource their distribution logistics to contract manufacturers.

Production: OEMs just launching a product generally benefit from contract manufacturers that have lower minimum order quantities (MOQ’s), and larger established companies turn to contract manufacturers for quick turnaround time and competitive production costs. Both gain a significant advantage from the ability of contract manufacturers to efficiently ramp up and wind down production volume when needed. For companies whose products experience wild swings between peak demand and normal sales volume, this on-demand production scalability makes them much more nimble in the marketplace.

Whether its relieving bottlenecks by providing smart supply-chain management, augmenting an OEM’s own manufacturing capacity, or handling warehousing and inventory management, contract manufacturers are providing the solutions manufacturing companies need to stay lean and competitive.