1. Outsourcing low volumes frees up overhead resources
Low volume contract manufacturers use a specialized cross-trained team to optimize efforts across all customers. The OEM, however, is not always so lucky. Purchasing and management overhead for low volume products is extremely hard to manage efficiently. CMs however, can keep overhead employees at a swift pace, filling productivity gaps with other customers’ work. In this manner, no one is paying for downtime.
2. Shared real estate across product lines
Much like above example wit personnel, CMs are able to use their space flexibly. Ramp up and ramp down is less likely to cause a rift in production, since machinery and space is shared across customer product lines. There’s not point in an OEM putting brick and mortar around space that might sit idle at a slow time. This will drastically cut into profits, making an otherwise viable product line look like a dud on the books.
3. Vertical Integration saves on in house process development
A good low volume contract manufacturer will have some level of Vertical Integration to aid in manufacture. This might mean in house machine shop, sheet metal fabrication center, welding, mechanical assembly or an array of other processes. For the OEM to provide the same level of vertical integration, there is a dramatic risk of underutilization combined with a huge capital equipment expenditure. CM’s on the other hand will be likely to optimize the process with all of their existing inhouse equipment. By leveraging this efficiency, the cost savings are passed to the OEM. Typically, this also includes all the skilled labor and management it takes to set up a manufacturing cell.
4. Taking advantage of rate disparity
When choosing a good CM, many OEMs are going to be looking at companies that are much smaller than themselves. Time and time again, we’ve seen the large OEM’s with rates of $150-300/hr house rate. When utilizing a smaller CM with more reasonable rates, there is an immediate direct cost savings. These kinds of disparities ensure that a large OEM can still find an extremely capable Contract Manufacturer for their product without sacrificing Quality.
These four reasons are just the tip of the iceberg as to why OEMs should consider outsourcing to low volume Contract Manufacturing firms. Stay tuned as I will present some more compelling arguments in future articles. For more information, give me a call at PEKO Precision Products or click below