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Finding CMs with the Proper Capabilities
By Mark L. Casey | November 2, 2007
A Google search of “contract manufacturing” will yield an intimidating and overwhelming bounty of results. Various business resource sites will provide lists of suppliers offering every conceivable manufacturing service. If you need a good group of potential manufacturers, how do you artfully identify and evaluate them?
First of all, let’s do a little classification. We can classify contract manufacturers in many different ways. For example, we can classify CMs by the industries they serve. Some CMs are known as EMS providers because their factories are geared toward Electronics Manufacturing Services. Other CMs produce clothing, health supplements, pharmaceuticals, food, pet supplies, etc. It is safe to say that any products that can be manufactured in-house by an OEM can also be manufactured on a contract basis by a CM.
Once we have selected the CMs for our industry, we can then focus on further classification to find the best fits for our sourcing needs.
Example: Electronics Manufacturing
Let’s use the EMS industry as an example. It is common to classify EMS CMs into revenue tiers. While differences exist among CMs in the same tier, there are many commonalities among these peer suppliers within each tier. These commonalities allow us to focus in on the suppliers within a specific tier. How do the tiers differ? We will segment EMS CMs into three tiers, but this is an arbitrary choice. We could easily further classify into additional tiers by revenue.
Tier 1 – These firms are the largest CMs in the world. They are usually public companies, though not always. They are all global firms with manufacturing facilities in many different regions. These players are above $1 billion (USD) in revenue, and the largest of the large are nearing $20 billion (USD). In fact, Foxconn (Hon Hai) is much larger even than that. They serve the largest OEMs in the world. Even healthy and established public OEMs may not be a fit for the volumes needed to fit these Tier 1 CMs. Their factories are production facilities that excel at “high volume, low mix” production. It is not uncommon for these factories to serve just one or two high volume customers. In addition to manufacturing services, these CMs have a tremendous amount of capability in supporting services like engineering, testing, agency certification, etc. Obviously, if your firm is a Dell or a Cisco, these Tier 1 manufacturers are perfect. If you are a small firm, start-up firm, or entrepreneur, this is not going to be a fit for you. The CM’s salespeople may be nice, but you will have trouble getting beyond a polite first inquiry.
Tier 2 – This is the massive middle of the EMS CM world. This is the tier that could be broken down into many different sub-tiers. We are basically throwing all of the EMS suppliers that are not Tier 1 or Tier 3 into this bucket. The includes CMs from $10 million (USD) to nearly $1 billion (USD). That is a lot of variation. Many of these CMs have global capabilities and aggressive pricing like the Tier 1 suppliers. Many of them also have a strong customer focus and are fairly friendly to new firms and entrepreneurs, as long as they have protections in place so that they do not assume their customers’ business risks. Because of their positioning in the middle tier, they often market themselves as offering the best features of both of the other two tiers.
Tier 3 – Let’s call these firms the “mom & pop” shops. These are small firms that excel at “high mix, low volume.” They are usually flexible and are more willing to work with entrepreneurs and start-up firms. They do not have the resources of the other two tiers and cannot usually leverage lower cost labor in other parts of the world, but they serve a valuable purpose. The challenges in this tier will be along the lines of making sure their capabilities line up with your needs. Assuming a Tier 3 supplier has the capabilities you need, and can manufacture your product for a price you can live with, they should be able to take you from product launch into low volume production. When your product really takes off it will strain the CMs ability to handle it and will probably need to be transferred to a Tier 2 supplier.
Beyond the classification by revenue, we must look at the suppliers’ factory locations, services offered, equipment set, quality certifications, and many other factors to ensure we are speaking with the right CMs. Of course, gathering all of this data requires time and effort. In a future article we will explore the best ways to research the specific firms and gather the data needed to narrow the field and start focusing in on our best potential suppliers.
Topics: Contract Manufacturing, Electronics Manufacturing, Services | 1 Comment »
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April 16th, 2008 at 9:16 am
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