Can your ERP do this? – Contract Manufacturing
Supply strategies come in all shapes and sizes – you make, you buy, you have a 3rd party make all or part for you. This third strategy is commonly known as Contract Manufacturing.
According to ThomasNet, sourcing for contract manufacturers in North America is on the rise across all sectors, with particular sourcing activity increases in aerospace and medical device manufacturing. (https://news.thomasnet.com/search?q=contract+manufacturing&searchsource=insights&searchterm=contract+manufacturing ).
There are many reasons for the rise in contract manufacturing in North America. The pace of innovation requires manufacturers to continually develop expertise and to remain nimble and agile to stay competitive. Lean margins make those strategies that avoid adding overheads and reduce the tying up of capital in new equipment or facilities acquisition very attractive. The strength of the manufacturing sector in America compounds interest (no pun intended) in contract manufacturing.
Contractual arrangements between parties can vary greatly, from full blown OEM relationships to simple outsourcing of parts of a process, to many different levels of responsibility by each party in between. One such relationship that has seen particularly high demand is that where one manufacturer owns product marketing, design, engineering, along with the customer relationship, while the production is being contracted out to a 3rd party. In some of these arrangements the manufacturer would be responsible for procurement, with parts being sent to the contract manufacturer, either directly from the supplier or with a staging stop at the manufacturer’s plant. Some parts may also be made in house by the manufacturer, then sent to the 3rd party for inclusion into production. Other supplies may be purchased and consumed directly by the 3rd party.
The decision to make via a Contract Vendor seems simple enough on the surface; you just ship material to the Contract Vendor and they ship the completed product back to you. On closer inspection there are a lot of elements that cause challenges for this arrangement. How do you track and value the material sent to the Contract Manufacturer? How do you settle the value of the goods received from the vendor when it’s a mix of a contract fee and material you already own? What are the triggers to ship material to the vendor? Do you need to drop-ship material to the Contract Manufacturer from another supplier? It is easy to imagine the potential loss of control. One single contractual arrangement might not present challenges too difficult to overcome. However, one can see that several relationships, with multiple orders, with staggered delivery dates, different material vendors, shipment sources, could quickly create chaotic conditions. Without proper tools and tracking procedures, the required visibility into material availability and inventory control may be difficult to achieve.
Flexibility is also part of the equation. Contract manufacturing relationships can be established on a fixed volume basis, or simply to handle a manufacturer’s internal production overflow. In either case, elements of the contract need to be an integral part of the MRP calculation. Some system suggested requisitions should be turned into Purchase orders quickly. Others might trigger shipments from the manufacturer to the contract manufacturer.
Finally, precise tracking procedures need to be in place to make sure visibility into materials remain reliable. A manufacturer needs to know what materials are on hand at its site, what’s on order, in transit, and in stock at a 3rd party location. When goods are received from the third party manufacturer, direct entry or back flushing may be used to consume BOM parts. And of course, your system needs to properly treat accounting entries in real time.
We are of course only scratching the surface when it comes to complexities added by using contract manufacturing relationships. If your system can’t handle these, you’ll end up with a partial view of your materials picture instead of a holistic one.
Have contract manufacturing chaos? Current or pending? Let’s talk shop.
