Contract manufacturing risk mitigation and risk management

By Mark Zetter

Contract manufacturing risk mitigation and risk management concerns are on the minds of contract manufacturing executives just as much as these same concerns are on the minds of OEM executives engaging with their contract manufacturing partners.

Contract manufacturing risk mitigation and risk management for the contract manufacturer involves the contract manufacturer distributing the amount of risk he takes on and lowering his cost of doing business. (READ: How to drive cost out of your manufacturing product portfolio)

To help achieve this, it’s in most contract manufacturers’ best interest to take on and manage as many OEM outsourcing product programs as possible.

As contract manufacturing business development wins more OEM programs, the risk of the contract manufacturer not being able to recover his investment decreases because similar outsource product manufacturing programs often have similar startup support requirements.

Outsourcing product program startup support requirements, or investments, for outsource manufacturing programs include NRE expenses (non-recurring engineering) and ENRE expenses (extended non-recurring engineering).

ENRE expenses can include four items, among others:

  • cost of starting a program
  • pipelining materials
  • seeding inventory and distribution channels, and
  • managing component liability

The risk management equation below emphasizes components of the decision process when contract manufacturers assess risk mitigation and risk management, where:

N = Number of products / programs the contract manufacturer wins from the OEM each year

NRE = CNRE = Non-recurring engineering expenses (NRE)

ENRE = CENRE = Extended NREs (ENRE)…contract manufacturer’s ‘cost’ of starting a program; pipelining materials, seeding inventory and distribution channels, and managing component liability

Voli = Product life cycle sales volume i

TP = Transfer price (the amount it ‘costs’ the contract manufacturer to manufacture the OEM product vs. the ‘price’ the contract manufacturer sells the manufactured product to the OEM customer)

CRE = Cost of recurring expenditures (excludes CENRE)



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Meanwhile, there are four factors that can jeopardize a contract manufacturer’s profit and also jeopardize the OEM-contract manufacturing relationship. These four factors are:

  • Late time-to-market (TTM)
    Late TTM can be either the contract manufacturer’s fault or the OEM’s fault
  • Limited flexibility
    Limited flexibility can either be contractual or supply chain distribution-based
  • Weak products
    The OEM either does not judge the product market properly or the contract manufacturer produces poor quality products
  • Surprise supply chain stoppages
    Supply chain ‘bubbles’ are created in the pipeline. These pipeline bubbles can be due to the product retailer, channel distributor, the contract manufacturer, the supplier or vendor or, the OEM

The net value on all of this is it is in everyone’s interest to help manage all of the above.

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