Contract Manufacturing Supporting Inventories

Posted by Land Link Traffic Systems on Nov 18, 2021 7:42:49 AM

The Covid virus has presented production challenges for global manufacturing. Food, chemical and personal products companies, among many more, struggle to meet retail demand.

When consumers started raiding grocery store shelves many food processors saw demand for certain products spike. Packages of comfort foods, for example, flew off the shelves faster than they could be restocked. In many cases manufacturers could not keep up with orders.

Businesses have outsourced manufacturing and fulfillment tasks for decades. But, in recent years this practice has gone a step further: outsourced manufacturing has become the norm due, most recently, to Covid related labor and material shortages.

Contract manufacturing is a larger trend for companies going asset-light and outsourcing parts of their operations. At face value, the trade-off appears straightforward; what you sacrifice in operational efficiency, you reap the rewards financially. Best of all, contract manufacturing often has little impact on brand identity. Companies such as Nike and Apple may not physically produce the shoes and iPhones that they lend their name to, but they’re still world-renowned for them. 

Advantages and Dis-Advantages of Contract Manufacturing

Contract manufacturing is by far the standard form of outsourced manufacturing utilized by companies across the globe in need of secondary manufacturing services. Contract manufacturing is utilized by companies from Apple to Tesla to scale their production to levels that would be otherwise impossible in-house.

Contract manufacturing is a vital component of the manufacturing industry. CM's make it possible for companies and start-ups with limited resources to manufacture products. In addition to that, they provide specialized, technical manufacturing insight an in-house team may not.

As with any operational model, contract manufacturing has significant pros as well as cons. Overall, CM's create more opportunities all-around for emerging technologies who, by their nature, want to limit capital investment in the initial stages.

Among the primary advantages of contract manufacturing is cost savings. Avoiding lengthy and capital-intensive lease obligations frees up financial resources for other use.  CM’s also tend to have experience in the latest technology applications offering an asset not previously enjoyed. Since CM's build products for a versatile selection of companies, they have valuable in-depth knowledge into product build for various niches. CM's have the experience to spot potential risks and flaws within the design early on.

There are some disadvantages to a CM. Namely loss of control. As with any business deal, without proper research, you could end up outsourcing to less than competent provider. To find the perfect CM, you’ll need your team to conduct thorough research into a partner that fits your precise needs. By the time you realize you CM is not fit for the project your usually already in production and heavily invested.  Another significant disadvantage of contract manufacturing is the risk of your intellectual property being stolen. When you outsource your manufacturing, you give dozens of workers access to your intellectual property.  You risk your intellectual property being leaked. You also risk the possibility of your intellectual property being misused meaning your supplier would use it to their own advantage with them potentially becoming your competitor.

There are also challenges such as communication and production limitations. But if a provider is properly vetted these threats and challenges can be mitigated and effectively managed.

Will The Trend Continue

Covid made contract manufacturing a necessity. It’s likely to level off as manufacturing returns to pre-Covid levels...perhaps.

Experiences during Covid may accelerate a business development trend that is otherwise unrelated to the virus. Brand owners are deciding that they don’t need to manage demand all on their own. Sourcing and managing specific aspects of  manufacturing can be more operationally and fiscally effective than in-house production.

Brands are rethinking their Logistics planning as well. Covid has proven how thin and vulnerable their supply chains can be, so you’re seeing more strategic discussion on that issue. For help in your Logistics planning contact Land Link Traffic Systems today.  We can help.  

It seems clear that Contract Manufacturing is here to stay. I would infer from this research that the most important step in outsourcing your manufacturing is to critically vet your proposed CM’s.

Stay Safe Everyone.

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Michael Gaughan
Technology Officer
Land Link Traffic Systems


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