Selecting an OEM service provider is a critical business decision.
Since we’ve been doing it for over 30 years, we’ve pretty much seen and heard it all when it comes why we were selected as the OEM of choice, and even why we were not selected.
Below are the 10 most common misconceptions that businesses have when selecting an OEM service provider.
10) “Choosing the correct contract manufacturing partner makes everything easy.” Contract manufacturing, a tough, competitive, low-margin business – must be actively managed. OEMs that get the results, they want are the ones that structure their own operations to effectively manage outsourced manufacturing.
9) “It’s all about finding the lowest cost supplier.” In most cases, the EXW price only covers about 70% of the total supply chain. Often, you’ll find that the lowest cost ends up costing an extra 5% when less visible costs, internal and external, are considered. Plus, lots of OEM factories, as a matter of procedure, will pass off other costs, not included in the quote, in the form of different fees etc.
8) “My stakeholders would prefer a ‘Tier 1’ OEM provider.” Actually, the ‘tiers’ were created by financial markets to explain differences in valuation across the industry. It has more to do with size than the ability to manufacture a great product (‘Tier 1’ basically means ‘The Biggest’). Typically, you’re not going to need a ‘Tier 1’ manufacturer, unless you have a project of that scale. Best to go with a size-appropriate factory.
7) “I don’t want to use my competitor’s contract manufacturer” Why not? Isn’t that proof that they do good work? Besides, using your competitor’s OEM provider isn’t the same thing as running your product down the same line with the same support staff. You should find the most broadly compatible manufacturer for your project and then let your sales and marketing team go to work.
6) “My OEM ‘partner’ should be willing to invest in my business.” What does this mean for your OEM provider? That they should lose money to build your products? What advantage does is bestow on you if your supplier is losing money on your behalf? When you think about #9 above, this statement becomes even more ludicrous, as very rarely will a contract manufacturer lose money.
5) “A vertically integrated contract manufacturer will get me the best prices and lead times.” Really? Have you actually compared, mathematically, the best in class ‘dis-integrated’ suppliers with vertically integrated counterparts? Sometimes this is true, but usually it’s the result of oversimplified reasoning and not real analysis. If this statement were universally true, then why did so many OEMs ditch this model way before outsourcing became all the rage?
4) “R&D should manage production of their outsourced product.” Manufacturing, and managing it, are professions that require skilled professionals. Outsourcing allows people to do what they do best. Why fight that by forcing R&D to also become factory foremen?
3) “The bigger the contract manufacturer, the lower margin they’ll take on my product.” Maybe…but probably not. Typically, the biggest contributor to minimally viable margins are labor influenced costs like labor, indirect labor, facilities etc. These things don’t qualify for economy of scale discounts like materials costs. Can you imagine telling any laborer in any field that you’ll let them work more hours if they take a cut to do so?
2) “Whoever makes the best presentation should get the job.” Maybe they should get the job, but certainly not because they made the best presentation. Don’t let the talented sales and marketing team blind you to the lack of talent in the manufacturing team, which is what you’re going to be buying. Be sure to do due diligence and check references for the operations team.
1) “Only the most technically competent partners will do.” Yes. Technical competence is a very important factor most of the time. But it’s a mistake to have a singular focus on technical competence when selecting your contract manufacturer. Typically, this is because people will place the burden of choosing a supplier on the R&D department (see #4). To ignore the rest of the complexities involved in a business relationship as complicated as contract manufacturing is a recipe for disaster.