Advantages of successful contract manufacturing
In the course of globalization and digitalization, the competitive pressure for manufacturing companies is increasing. Many production companies are faced with the challenge of managing increasing product complexity and having to deliver individual requirements in ever shorter timeframes, with high quality. Particularly in economic crisis situations such as the Corona pandemic, massive disadvantages such as supplier dependencies, cut-off supply routes and delivery bottlenecks become apparent in traditional procurement processes. These can massively restrict the ability to act. To cope with the demands, many companies and manufacturers look for external solutions to manufacture their products and buy partially processed materials or sub-assemblies from other companies. When companies rely on external facilities for production, they use contract manufacturing.
Contract manufacturing is also referred to as the "extended workbench", or external work. A contract manufacturer is a company that offers the production of components as an external contract manufacturer. In this process, a company establishes a contract between itself and a manufacturing company to have a specific quantity of a product produced over a specific period of time.
This includes services such as CNC milling or activities such as sub-assembly, where you ship all finished assemblies for assembly. Any necessary rework and packaging are also part of classic contract manufacturing.
Contract manufacturing is used, for example, when a production company does not have its own manufacturing capacities or has exhausted them. The second main "conventional" alternative for procuring parts is precisely this in-house production, which is, however, associated with disadvantages such as high acquisition costs for additional machines, regular maintenance costs, and the ongoing shortage of skilled workers.
Capacity planning, or Capa planning for short, is the basis for the complete order organization. The term is understood to mean the classification of all available resources in terms of expected capacity requirements. This can refer to the realization of projects or the operation of production. Capacity planning is not limited to resources, but can also be applied to the machine or personnel resources. The goal of successful capacity planning is the optimal utilization of all resources over a defined period of time, in order to achieve the highest possible efficiency. The necessary capacity requirements are compared with the available capacity, and capacity leveling is carried out.
There are many potential reasons for contract manufacturing. If a company has exhausted its own production capacities, and bottlenecks arise as a result, contract manufacturing can provide rapid compensation. In addition, for cost reasons, it may make sense to outsource a company's own production and commission a contract manufacturer to do this. If the situation arises that a certain manufacturing process does not exist in-house, contract manufacturing is also an interesting solution.
Lower labor costs.
More remote production processes are also feasible.
No fixed costs due to production machines.
Master order peaks.
Fast order processing.
Flexibility, high precision, and fast turnaround time have become essential in the production of custom components. This can become a challenge. With contract manufacturing, you can respond flexibly; both in terms of time, order size, material, and the process itself.
When contract manufacturing takes place in another country, production can often be carried out at a lower cost. In addition, the country itself may have an interest in building up know-how, and therefore further promoting contract manufacturing.
If the external company has built up machinery and know-how specifically geared to its processing, it can usually carry out the work more efficiently than the customer. This, in turn, leads to a higher quality of the parts, and even shortens the machining time.
For most machining steps, companies need special production machines. If companies only use these for certain parts, it is not worth investing in these machines because they also have to maintain them. With contract manufacturing, the costs can be planned and foreseen, without a plant investment on your part.
You are probably familiar with this: In some months, your production has more orders to process than in others. In order to cope with these order peaks, you can of course hire more employees and buy more machines, but how do you deal with these (superfluous) capacities during periods of fewer orders? With contract manufacturing, you can handle order peaks without adding your own capacity.
In addition to the advantages mentioned so far, with contract manufacturing, you benefit from very fast order processing by the contract manufacturing company. With the expert knowledge there and suitable machines, processing can be carried out quickly. At the same time, you have the capacity to carry out other processing steps. This means your end product reaches the customer even faster.
Contract manufacturing is a complex process that involves many different facets. Modern ERP systems such as MONITOR G5 support you in all your processes, both as an ordering company and as a contract manufacturing company. This is the only way to maintain an overview. Below, we'll show you how MONITOR G5 supports you in contract manufacturing.
For the ordering company, subcontracting is an operation in a production order that is sourced from an external supplier. The work center linked to the operation must therefore first be classified as a subcontracting operation in MONITOR G5.
The system then automatically creates a subcontract order when a production order is created that contains a subcontract. This also applies when an existing production order is rescheduled, or an internal operation is rescheduled and subcontracted in the event of a temporary shortage of capacity. The order can then be printed or e-mailed to the supplier. Material to be staged that is delivered from the warehouse but is still in the possession of the subcontracting customer is also part of the subcontract order. It is also possible to create collective purchase orders to facilitate management and reporting.
You can confirm purchase orders related to subcontract manufacturing in MONITOR G5 in the same way as regular material purchases. If the date is updated in connection with the confirmation of the purchase order, the system asks whether the entire production order should be rescheduled according to the new delivery date for the operation to which the subcontracting refers.
Contract manufacturing companies also benefit from MONITOR G5. The daily work of subcontracting companies is characterized by, among other things:
Low order coverage.
High price pressure.
Low quantities and decreasing repeat orders.
A high number of inquiries.
Exact specifications of delivery dates with short lead times.
Want to learn more about how the MONITOR G5 ERP system can help you implement contract manufacturing? Download our product brochure here, or make an appointment directly for a software consultation with our ERP experts!
In a volatile business world, contract manufacturing offers many advantages that enable companies to produce flexibly, quickly, and cost-effectively. Especially for complex products, it helps modern manufacturing to stay competitive.
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