How Contract Manufacturers Help Reduce an OEM’s Total Cost of Ownership

October 31, 2019
How Contract Manufacturers Help Reduce an OEM’s Total Cost of Ownership

OEMs face increasing challenges to remain competitive in the global marketplace.   Customers demand more and greater value. Companies with worldwide reach offer competitive products and force lower profit margins. Ever-advancing technology creates shorter product lifecycles and increased product updates. 

Costs of all types are escalating — and resources are stretched thin. This difficult business environment forces companies to rethink their business models and adopt new strategies, particularly as it relates to managing Total Cost of Ownership (TCO).

Assessing TCO associated with manufacturing capital equipment is uniquely challenging since a true evaluation may be skewed by the omission or inaccurate measurement of cross-functional costs. It is also difficult for many OEMs to capitalize on the efficiencies and cost savings of the global economy for both component supply and direct manufacturing costs.

Leveraging the expertise and support of a strategic outsourcing partner is pivotal in overcoming these obstacles and achieving the full cost benefits of simplified logistics, improved product quality, and product lifecycle management. 

Further, a contract manufacturer specializing in high mix, low- to mid-volume assemblies has the experience and insights necessary to assess, address, and oversee the three basic elements of TCO:

  • Direct costs
  • Indirect costs
  • Risk factors

Direct Costs

Generally speaking, direct costs reflect the logical flow of product introduction, starting with the program and engineering management, proceeding through manufacturing, and concluding with quality assurance and scrap.

Direct costs include obvious elements that are invoiced and, thus, easy to track. The paper trail and experience from past product design cycles allow for reasonably accurate cost estimation prior to new product development.

For complex high mix, low- to mid-volume assemblies, TCO direct cost elements and the corresponding contract manufacturer responsibilities include:

Cost Element

Responsibilities

 Program management

  • Coordination, timelines, and logistics
  • Documentation maintenance and updating
  • Action item tracking and management

 Manufacturing engineering

  • Systems engineering
  • Component and system-level test engineering
  • Prototyping
  • Build instruction development/maintenance
  • Regulatory compliance management
  • Sustaining engineering
  • Service requirements (FRU definitions and management, regression testing, etc.)

 DfM engineering

  • Process efficiencies
  • Component-level design enhancements
  • Testing efficiencies
  • Common component use assessment
  • Continuous improvement initiatives

 Operational resources

  • Global procurement resources
  • Order processing
  • Receiving and inspection
  • Consistency program development and implementation

 Manufacturing resources

  • Labor utilization
  • Materials: Raw, WIP, finished goods
  • Inventory turns management
  • Manufacturing test development
  • Shipping logistics
  • ISO and CGMP requirements

 Quality resources

  • Process improvements
  • Inspections
  • Data collection and analysis
  • Root cause analysis

 Scrap and rework

  • IM fallout
  • Design errors, rework, and updates
  • Manufacturing errors

 Service

  • Warranty repair
  • Field replacements and upgrades
  • Technical support
  • Testing and diagnostics

 Capital expense

  • Manufacturing equipment
  • Design engineering equipment
  • Manufacturing test equipment

 

Indirect Costs

Costs that are not immediately evident — indirect costs — tend to be omitted from the initial decision-making process. If they are included, they are often miscalculated.

Many OEMs lose market share due to not anticipating the indirect costs and possible issues that arise from them, such as being slower to market with new technologies.

A contract manufacturer focused on the details of a build have a firm grasp on indirect costs and how to manage them:

Cost Element

Responsibilities

 Managing technology

  • Researching current technology building blocks to capture the constant change in available technologies
  • Assessments regarding product-specific feasibility of new technology
  • Maintain relationships with technology providers
  • Continued education consuming resources

 Lost opportunities

  • Extended time to implement product improvements
  • Lost traction to competitors
  • Lost opportunity costs

 Development cost

  • Can be reduced by the contract manufacturer’s experience and expertise through leveraging of in-depth application understanding
  • Resources focused on non-core activities

 Supply chain management

  • Vendor relationship and logistics management
  • Utilization of global procurement for best possible pricing

 Serial tracking and device history records

  • Revision control and tracking
  • Material change control
  • Root cause analysis
  • FDA compliant record keeping and retention

 Training

  • Training personnel in new areas:
    • Manufacturing
    • Process and final inspection
    • Testing
    • Support

 Sustaining engineering

  • Expertise specific to platform and components
  • Value engineering services to ensure competitive advantage
  • Legacy support and service for units in the field
  • Field support ongoing process/rework management

 Operational focus and flexibility

  • Increased size means decreased agility
  • Bureaucracy limits quick and decisive responses
  • Maintain focus on core competencies

 Real estate

  • Warehousing and fulfillment facility
  • Handle logistics of inventory and burden costs

 

Risk Factors

Risk is an additional cost that is often overlooked or calculated incorrectly since OEMs are vulnerable in areas with which they are not familiar. For example, it would be difficult and costly for an OEM of highly specialized equipment to acquire and retain staff with expertise in regulatory compliance.

Nor is it likely that the OEM would have personnel dedicated solely to planning a long-term roadmap for the existing off-the-shelf component of their product — an area where technology can transition at a steady and exaggerated pace.

Not being able to hire or dedicate select experts does not excuse OEMs from the need to comply with regulations, but it does create substantial risk. Working with a contract manufacturer mitigates these concerns along with:

Risk

Factors

 Supply interruption

  • Natural disaster events
  • Catastrophic supplier facility failure
  • Global logistics

 Tool ownership

  • Potential lost tooling costs
  • Non-transferable tooling risks

 Fluctuations in demand

  • Inventory logistics (over/under stocking)
  • Lead time oversight
  • Supplier management requiring management of fluctuations at the source                        

 Labor

  • Managing labor force size
  • Employment entitlements
  • Interruptions in labor availability

 Material obsolescence

  • Material management
  • Roadmap management
  • Replacement component diligence/validation

 Legal issues

  • Liability: product, personal, regional, and regulatory

 

Of course, like any business- and product-specific assessment, the lists used aren’t inclusive, but those compiled by OEMs are likely quite similar.

It brings the make-vs-buy question into sharp focus, and more specifically the long-term practicality of maintaining manufacturing operations in-house.

GMI Solutions: An OEM’s “Virtual Division”

GMI operates as a virtual manufacturing division of our OEM partners — delivering efficient, cost-effective total system solutions that are focused on lowering the OEM’s TCO in key areas of impact: 

  • Contained overhead through lower and consistent fixed operational costs that are independent of market cycles.
  • High level of attention based on GMI’s focus on capital equipment assembly and testing.
  • Maximized resources and ROI by redirecting company resources toward strategic higher-value activities that offer a greater return on investment and potential competitive advantages.
  • Elimination of capital equipment expenditures due to the development of in-house technologies that solve OEM challenges without burdening them with massive upfront costs.
  • Cost-effective staffing and training since managing and budgeting for these resources shifts away from the OEM.
  • Seamless global procurement and production backed by fully capable ISO 13485 based, wholly-owned manufacturing facilities in both North America and Asia.

A partnership with GMI Solutions allows OEMs to concentrate on core competencies, drive down overall product costs, improve responsiveness to changing market conditions, and make costs more predictable. The result? A lower total cost of ownership. Find out for yourself by requesting a FREE pricing review on your outsourced capital equipment or manufactured products. Click the button below to get started.

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