Contract Manufacturing: Can your ERP do this?
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.
Walk through any modern production facility and you’ll likely see a mix of activities-some handled in-house, others managed by outside partners. This blend is no accident. According to ThomasNet, sourcing for contract manufacturers in North America is on the rise, especially in sectors like aerospace and medical device manufacturing. Companies are turning to contract manufacturing for a variety of reasons, and the trend shows no sign of slowing down.
The Forces Driving Contract Manufacturing
Manufacturers today face a steady stream of challenges. Rapid innovation means that expertise must be constantly updated, and staying competitive often requires quick shifts in production methods or technology. At the same time, profit margins are tight. Investing in new equipment or expanding facilities can tie up valuable capital, making it harder to adapt if market conditions change. Contract manufacturing offers a practical alternative: it allows manufacturers to access specialized skills and capacity without the long-term commitment of major capital investments.
The strength of the North American manufacturing sector also plays a role. With a robust network of suppliers and skilled labor, it’s easier than ever for companies to find reliable partners who can handle everything from simple assemblies to complex, highly regulated products.
What Contract Manufacturing Really Means
Contract manufacturing isn’t just about outsourcing. The term covers a wide range of arrangements, from full-scale original equipment manufacturer (OEM) partnerships to more targeted outsourcing of specific components or processes. Some companies hand over entire product lines, while others contract out only the parts of production that fall outside their core strengths.
One model that’s increasingly common involves the original manufacturer retaining control over product design, engineering, and customer relationships, while a third party handles the actual production. In this setup, the manufacturer might supply some or all of the materials, either shipping them directly to the contract manufacturer or routing them through their own facilities first. In other cases, the contract manufacturer sources and uses materials independently.
The Details Matter: How Materials and Responsibilities are Managed
Every contract manufacturing relationship is unique, and the division of responsibilities can vary widely. Sometimes, the manufacturer is responsible for procuring all materials, which are then shipped to the contract manufacturer for assembly or processing. These materials might come directly from suppliers or make a stop at the manufacturer’s own plant for inspection or staging.
In other cases, the contract manufacturer takes on a larger role, sourcing and purchasing materials themselves. There are also hybrid models, where some materials are supplied by the manufacturer and others are handled by the contract manufacturer. This flexibility allows companies to tailor arrangements to their specific needs, but it also adds layers of complexity to the process.
Tracking Materials: Where the Challenges Begin
At first glance, contract manufacturing might seem straightforward. The manufacturer sends materials to a partner, who then returns finished goods. But as anyone who has managed these relationships knows, the reality is more complicated.
One of the first challenges is tracking and valuing materials sent to the contract manufacturer. How do you account for inventory that’s no longer on your premises, but hasn’t yet been transformed into finished goods? What happens when the finished product includes both your own materials and components sourced by the contract manufacturer? Settling the value of these goods requires careful accounting and clear agreements.
There are also logistical questions to answer. When should materials be shipped to the contract manufacturer? Are there triggers in your production planning system that automatically generate these shipments, or is the process more manual? And if you’re drop-shipping materials from another supplier, how do you ensure everything arrives on time and in the right quantities?
Complexity Grows with Scale
A single contract manufacturing relationship might be manageable with spreadsheets and regular check-ins. But as the number of contracts, orders, and suppliers increases, so does the potential for confusion. Multiple orders with staggered delivery dates, different material vendors, and various shipment sources can quickly lead to a tangled web of dependencies.
Without robust tracking tools and clear procedures, it’s easy to lose sight of where materials are, how much inventory you actually have, and when finished goods will be ready. This lack of visibility can lead to delays, stockouts, or excess inventory-none of which are good for business.
Flexibility is Built In, But Needs to Be Managed
One of the reasons contract manufacturing is so appealing is its flexibility. Companies can set up relationships based on fixed volumes, or use contract manufacturing to handle temporary spikes in demand. This makes it easier to respond to market changes without overextending internal resources.
However, this flexibility only works if it’s properly managed. Contract terms need to be integrated into your materials requirements planning (MRP) system, so that requisitions, purchase orders, and shipments are all coordinated. Some system-generated requisitions may need to be converted to purchase orders quickly, while others might trigger shipments from your facility to the contract manufacturer.
Communication and Clarity: The Foundation of Success
Clear communication is essential in any contract manufacturing relationship. Both parties need to understand their responsibilities, from procurement and quality control to logistics and delivery schedules. The contract should spell out product specifications, timelines, pricing, payment terms, and intellectual property protections.
Regular updates and transparent information sharing help keep everyone on the same page. This is especially important when changes occur-whether it’s a shift in demand, a delay in materials, or a quality issue that needs to be addressed. Open lines of communication make it easier to resolve problems before they become bigger issues.
Keeping Track: Why Accurate Data Matters
Accurate tracking is at the heart of effective contract manufacturing. Companies need to know what materials are on hand at their own sites, what’s on order, what’s in transit, and what’s in stock at the contract manufacturer’s location. When finished goods are received, inventory and accounting records should be updated in real time.
This level of visibility is essential for making informed decisions about production, inventory, and procurement. It also helps prevent errors that can lead to costly delays or quality issues. Whether you use direct entry or backflushing to consume bill of materials (BOM) parts, your system needs to handle these transactions accurately and efficiently.
Technology Makes a Difference
Managing contract manufacturing relationships is much easier with the right technology. Modern enterprise resource planning (ERP) systems can automate many of the processes involved, from generating purchase orders to tracking inventory across multiple locations. They can also provide real-time visibility into materials, production status, and financial data.
However, not all ERP systems are created equal. It’s important to choose a system that can handle the specific complexities of contract manufacturing, including multiple suppliers, variable contract terms, and complex logistics. The right system can help you maintain control over your operations, even as you expand your use of contract manufacturing.
Pitfalls to Watch For
Despite its many advantages, contract manufacturing isn’t without risks. Loss of control over quality, delays in delivery, and miscommunication about responsibilities can all cause problems. Without proper oversight, it’s also possible to lose track of materials or end up with incomplete or inaccurate records.
To avoid these pitfalls, it’s important to establish clear processes for monitoring performance, resolving issues, and updating contracts as needed. Regular audits and reviews can help ensure that everything is running smoothly and that both parties are meeting their obligations.
Why a Holistic View Matters
Ultimately, contract manufacturing works best when you have a complete, up-to-date picture of your materials, production, and inventory. Partial or outdated information can lead to poor decisions and missed opportunities. A holistic approach-supported by clear contracts, effective communication, and the right technology-helps ensure that contract manufacturing delivers the benefits you expect.
Bringing It All Together
Contract manufacturing is reshaping the way products are made in North America. By allowing manufacturers to access specialized skills and capacity without heavy investments, it offers a flexible, cost-effective way to meet changing market demands. But to make the most of contract manufacturing, companies need to pay close attention to the details-from tracking materials and managing contracts to maintaining clear communication and using the right technology.
If your current systems aren’t up to the task, you may find yourself struggling with incomplete information and unnecessary complexity. Taking the time to review your processes and invest in the right tools can help you build stronger, more productive contract manufacturing relationships-now and in the future.
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