In our latest Capital Light Assembly podcast episode, Brandon Bartneck tackles a question that many industry professionals are grappling with: Should you manufacture in-house or partner with a contract manufacturer? This is far from a straightforward decision, as numerous factors and considerations come into play. Join us as we delve into the complexities of this dilemma, exploring the benefits and drawbacks of both in-house production and working with a contract manufacturing partner.
Keywords:
- Contract Assembly
- Flexible Manufacturing
- Manufacturing Partner
- In-House Production
- Outsourcing Manufacturing
- Quality Control
- Manufacturing Cost Reduction
- Contractual Assembly
Key Takeaways:
- If the alternative is a rigid CM, producing in-house can give you greater flexibility for things like change orders.
- Traditional contract manufacturers allow you to leverage relevant, specialized knowledge and focus on your core competencies outside of manufacturing.
- Edison is a manufacturing partner that bridges the gap between traditional contract manufacturing and in-house production. We're designed to be a fast, reliable, and collaborative extension of your in-house team.
Full Transcript:
Welcome to the Capital Light Assembly podcast brought to you by Edison Manufacturing and Engineering. I'm Brandon Bartneck, Vice President and General Manager here at Edison. Covering a specific topic here, a common question you get asked, and a lot of people are asking in the industry: should you manufacture in-house, or should you work with a contract manufacturing partner? Not a simple question. There are a lot of different dimensions and considerations that go into this. I want to try to break that down. I'll talk about why you might want to consider in-house production, why you might want to consider a contract manufacturing partner, and what to make out of all this.
Benefits of Manufacturing In-House
So, we'll start with the in-house production side. So why, what are the benefits of in-house production? There are seven of these.
Design is Closer to the Product
So, your designers, naturally, assuming you're building the same building, are much closer to the production floor, this allows them to be closer to the product, especially early on during a launch, but even during production. It's great when the designers can be out there, spending time on the floor, and you have that kind of more natural communication between production and design. You can make improvements sooner; you have designers who actually understand the product and how it goes together, DFM/DFA feedback gets incorporated more efficiently, and all this stuff.
Easier to be Super Scrappy
You can be super scrappy if and when you need to be. So, when you have in-house production, you control, theoretically, all the variables (assuming that you're able to get the right people and processes and equipment and all in place). If you need to work and rush for a deadline, you can do that. If you need to throw away everything you just did and change plans, you can do that as well. You have the ability to really control your own destiny and be as scrappy or not as you'd like. And this is different than a traditional contract manufacturer, right, who has a rigid milestone-based approach. You have gates you're going through. get once you get locked in, you launch, you have these expectations and you're stuck in kind of a rigid timeline. So, you're able to be scrappier if you're doing in-house production.
There’s a Potential to Capture Greater Margin (In Absolute Terms)
So, contract manufacturers need to make money. They need to keep the lights on. There is margin to be captured, that they are capturing within this ecosystem. If you are able to produce at the same cost and quality level as your contract manufacturing partner, you can take on that margin. I emphasize the if because it's much easier said than done. You're assuming that you're going to be able to produce with that same cost and quality level without the economies of scales, without the ability to share across multiple programs, probably without the experience and skill set the contract manufacturing partner has without the focus on that specific area. If you can do it, there's things that you can capture and there's the opportunity to increase your bottom-line profitability - very challenging though.
Confidentiality Becomes Simple
So, when you work with a contract manufacturer, naturally they're building products for several different companies. If it's a poorly run contract manufacturer, confidentiality becomes a challenge. Any contract manufacturer worth its salt handles this stuff really well and takes it really seriously. They have physical as well as digital controls in place. You have a culture that prioritizes confidentiality and keeping IP between different projects is super simple if it stays within your four walls.
Flexibility
The scrappiness is kind of an element to this, but there's more to it than this. There's a reason that contract manufacturers get a bad rap for change orders and for marking up price, and for being super rigid and taking advantage when something goes wrong, and then, you know, really marks up that cost. You have delays, you have downtime that you have to pay for. If you have production in-house and you have all the resources that you need, which again there's an if there, if you have the facility if you have the people the access to the different things you need, theoretically, you can be far more flexible. Certainly, more than a traditional contract manufacturer who is known for being rigid and following kind of a set playbook and probably doesn't have the same speed of culture, or speed isn't emphasized to same degree that probably is within your company. So, flexibility is number five.
(If the alternative CM is unreliable) Better Quality and Delivery Control
You can control your own destiny when it comes to quality, delivery, and performance. And, if you're working with a good contract manufacturer, this is probably not a concern, but there's lots of bad contract manufacturers out there and by having in-house production, quality from incoming quality, to in-process quality, to end of line, and everything in between, as well as delivery rate, supply chain performance, production execution, you control your own destiny. There's no one to blame if you don't deliver, but at same time, if you do deliver like you effectively get to choose whether you deliver with how well you execute, so you get to control your own destiny.
You Care More
This is your product this is your baby. You're spending all your time thinking about this product, this launch, this company, and when something goes wrong, you're going to be more incentivized, more eager, and likely to solve that challenge. Certainly, more than a traditional contract manufacturer, where you're one of many customers, probably not one of the big customers, and you have people who, especially at the working levels, probably realistically, this is their job. They're coming in and executing. If you’ve got something that goes wrong on 5:30 on a Friday evening, are they really going to disrupt their weekend plans and come and solve it for you? Probably not. Also, I mean you hear horror stories right of people who, contract manufacturers who run out of fasteners and suddenly throw their hands up and production stops and delivery gets pushed out, and there's costs because of a simple fastener. You can control that, can prevent that if you have in-house production.
Benefits of Contract Manufacturing
With that said, it's not all bad. There are benefits of why you might want to work with a contract manufacturer. I'll break down a few of these as well.
Accelerate Time to Market
So, rather than needing to set up all of your infrastructure yourself, you have building systems, ERP system, manufacturing execution system, MES, QMS quality management system, project management systems, processes, all of this already exists. It's proven. You don't need to develop this from the ground up. You can just utilize what's already there. You can utilize the expertise, this existing system, and get to market faster than you can otherwise.
Predictable Indirect Costs Instead of Variable Direct Costs
You also can execute in a way that has more predictable cost. Rather than having a more variable, unpredictable direct cost basis, you have, once you get to a production, you have a predictable per unit cost that you're paying to your contract manufacturer. And you can plan for that more reliably than you can if you were producing in-house.
Reduced Capital Investment
So again, the infrastructure exists for a contract manufacturing partner. Rather than you needing to go and set all this up and deploy the capital to do that, you can use what's already there. This allows you to move faster, and also to be more flexible because you get to wait to deploy your capital when and where it makes most sense.
Higher Margin Potential (Net Profit Margin)
I know I mentioned profit margin on the other side, but number four, you have higher net margin potential working with the CM. So, especially if manufacturing isn't what you want to do, if you're a software company, if you are a technology company, something like this isn't going to be the highest margin activity within your business. Working with a contract manufacturer allows you to emphasize the higher margin activities. It also produces a risk. I mentioned previously, it's very hard to replicate the performance of a company that is specialized at doing this one thing really well. If that's not your core business, not your sole business, it's tough to replicate it. You know, it sounds good in theory, but it's tough to replicate. So often you're going to actually see a higher net profit margin by working with a contract manufacturer if you work with the right one.
Ability to Leverage Relevant, Specialized Knowledge
While working with a good contract manufacturer who knows what they're doing, you have this base foundational manufacturing experience extending and deployed to your technology. They are helping you to proactively identify and avoid the roadblocks that could trip you up. They're helping you make judgment calls and make planning decisions. The first time going through a launch, you're going to make a ton of mistakes. There are so many things that could go wrong, some of them certainly are going to go wrong. If you've gone through a few of these, and if you have a good understanding of what's likely to come up, you're able to ask the right question so that you can improve your odds, your judgment, your discernment, so that you are less likely to get tripped up. Or if you do get tripped up, it’s over the small stuff, not the huge stuff that's going to kill you.
Ability to Focus on Core Competency Outside Manufacturing
If you're not going into business to be manufacturer, focus on the stuff that you want to do best. Focus on the software, focus on the technology, whatever it is where you're shaking up your industry. Focus there and you're able to rely on a manufacturing partner to figure out the rest, to figure out the production processes, how you're going to build your product, do the upfront work, the failure modes and effects analysis, the control plan, develop the work instructions, develop assembly plant layout, the line layout, the process flow, all of that. They can build up the supply chain if you need to and then put together the right pieces so you can execute production in an effective, reliable manner. You can leverage all of that experience and focus on what you do best.
Greater Reliability and Performance (If You Pick the Right CM)
If you work with the right contract manufacturer, you should have greater reliability and performance than you would working in-house. You’re leveraging the skill set and experience of people who are focused on just doing this one thing really well and are passionate about the physical manufacturing of these products and can deliver and execute for you.
Bridging the Gap Between Outsourced Manufacturing and Traditional Contract Manufacturing
So there are pros and cons on both sides, right? And really kind of one of the interesting things and the reason I'm here, the reason Edison is here is there’s a dichotomy that has served the industry. You can either do this in-house production or work with a contract manufacturer and you have to pick it's black or white. You have to pick between the two and you have a trade-off decision to make.
Edison tries to thread the needle, that’s the difference here, and I think we do it really well. What if you're launching a product where you don't want to deploy a ton of capital upfront. You want to be able to focus on your core competency. You want to leverage an experienced automotive manufacturing team and foundation, but you need flexibility, you need speed, and you need people who really care about your product and want to be transparent and fast and collaborative.
That's where we've come in. We are designed to be that fast, collaborative extension of your in-house team as a production partner, right? The people who are going to work closely with your design team so that you do get that closed loop and that fast feedback while working together – the people who are going to be right next to you on your side of the table working to solve the hardest manufacturing problem. That's what excites me. That's why I'm here. I mean, yeah, the traditional contract manufacturers serve a lot of great needs. For a lot of companies, it make sense for you to build in-house, but there's this messy middle where there's a significant need and we have a lot of fun serving that and being that contract manufacturing partner. So, if you need any help, shoot me a note at brandon.bartneck@edison-mfg.com. Thanks!
