Contract Manufacturing

Today’s executives are faced with many changes and trends without precedent. These changes include the need for a company to be global, grow without using more capital, respond to threats and opportunities in the economy, reduce costs, and fight for consumer thinking.

Companies must think innovatively not only to compete but also to adapt to different economic times. They are to think about “outsourcing” manufacturing, which can significantly affect bottom lines, increase the company’s chances of long-term survival, and generate substantial savings for customers.

What is manufacturing outsourcing?

Outsourcing is the business practice of contracting with a party outside the company to provide services and produce products that had previously been produced in-house by its own employees.

Outsource manufacturing or contract manufacturing is a type of outsourcing used by businesses. It involves hiring a third party to produce goods or services.

A contract manufacturer may be involved in various phases of production, such as design, manufacturing, and shipping, depending on the needs of their customer. The company that hires the contract manufacturers can provide the production details, including the total amount of product they need, the production lead time, and the quality assurance standards that must be followed.

It can help companies save money, produce more goods, and have access to more production resources.

Is Contract Manufacturing the Same As Outsourcing?

Subcontracting (contract manufacturing) is defined as a form of employment relationship that involves the hiring of an external company that functions as an intermediary between the collaborator and the company requesting the service. Usually, this modality is required to carry out projects.

Meanwhile, outsourcing proposes a relationship of only two parties: the contracting company and the company that will provide the service. In this case, the purpose of the link is for the beneficiary organization to delegate internal processes to an external company that can attend to them for an indefinite period of time.

Main differences

The main difference is that contract manufacturing is a form of outsourcing that is practiced when you do not have access to the necessary resources to manufacture the products you need while outsourcing refers to obtaining goods or services from third parties. It is usually a tactic to redistribute resources and help with cost savings.

Another important factor is the time allocated for the provision of the service. Outsourcing is used to carry out routine processes in organizations while subcontracting focuses on specific and momentary tasks that are outside the client’s area of expertise.

For a contract to be considered outsourcing:

The service must generally be contracted for more than one year, where the contracted subject has a significant degree of autonomy and acquires some of the responsibilities of the contracting party; in addition, the contracted party assumes indirect risks.
It must be associated with measurable quality parameters, and the conditions are agreed upon in the first contract.
It requires an objective quality measure. This implies that the activities of the contracted subject are controlled by the client, and the responsibility of the contracted party is exclusively for the performance of defined tasks.

The choice of either of these two methods will depend on the needs and activities of the requesting company. If the client wants to supervise the process directly or wants to keep a certain number of workers, then it is called outsourcing. Meanwhile, if the supplier is left to offer a solution beyond people, which includes automation and technology, then it is subcontracting.

When did the United States start Outsourcing Manufacturing?

The history of outsourcing in the United States dates back to around 1908 with Henry Ford’s famous black Model T car, when demand was such that his manufacturing capacity became low. He had to resort to outsourcing to third parties.

After the Second World War, companies tried to concentrate as many activities as possible on themselves to reduce reliance on outside providers. However, this strategy, which was initially effective, became obsolete with the development of technology, since the departments of a company could not keep up to date and be as competitive as independent agencies that are used to specializing in an area.

It is known that outsourcing was present in the 1940s in the United States. However, the first records of outsourcing or contracting correspond to the early 1960s, when the American company, Electronic Data Systems Corporation (EDS), which was founded in 1962 by H. Ross Perot and dedicated to information technology consulting, started to carry out long-term contracts for its industry.

Leading the internal effort was Morton H. Meyerson, who joined the company in 1966 and, by 1967, had considered and entrenched a business model that would later be known as “outsourcing,” leading to tremendous business growth for EDS.

In 1989, Kodak’s outsourcing agreement with IBM changed the way chief information officers (CIOs) viewed their own work. It was the first known successful company to designate the idea of hiring vendor companies to manage the company’s computer systems as “strategic.”

These contracts in the computer field set the standard, recognizing outsourcing in the computer industry, to later add activities such as logistics, security, and maintenance, which have begun to reach levels of development worth mentioning.

Organizations nowadays have a tendency to completely delegate some areas of the company and entire processes so that the organization can devote itself entirely to the central activity that keeps the business running and that allows it to obtain profits.

Electronic Manufacturing Services

The English term “Electronic Manufacturing Services” (EMS) is used in the electronics industry to identify companies that design, manufacture, distribute, and offer repair services, as well as guarantee components and electronic products for original equipment manufacturers.

The business model of the EMS industry is based on manufacturing, gathering raw materials, and pooling resources in fields such as design (electronic and industrial) or repair/warranty to offer added value to the final product.

EMS companies offer printed circuit board (PCB) and printed circuit board assembly (PCBA) services, cable harness assembly, electromechanical assembly, testing, prototyping, and complete manufacturing.

PCBs and PCBAs are two different parts of the same process. A PCBA is built on top of an existing PCB. The difference between them is that a PCB refers to a blank circuit board, while PCBA refers to a board that contains all the necessary electronic components to make it work as needed.

PCBAs are used in a wide range of electronic devices, such as computers, televisions, cell phones, calculators, lighting systems, medical imaging, industrial controls, and telecommunications towers, among others.

Custom cable harnesses is of great value to OEMs, as are electromechanical assembly services associated with box builds and prototyping, as well as 3D printing services, among others.

Since 1990, EMSs have become an essential part of the business economy. One of the advantages is that electronics manufacturing services can be contracted at any time in the production process and are adapted to the requirements of OEMs. That can provide companies with something as simple as design, component sourcing, product assembly, and testing, or more complex solutions that include design, component manufacturing, and an assembled prototype, which is complete design and manufacturing from start to finish.

What is driving the outsourcing trend?

The trend towards outsourcing is being driven by the current business ecosystem, where markets impose new outsourcing formulas on companies to increase their productivity, innovation, and competitiveness.

During periods of crisis, internal budget and employee cuts are common, which has led to an increase in the outsourcing of services and talents.

The need to promote business, optimize, improve flexibility, innovate, be effective and competitive, and reduce models drives new collaboration between companies or organizations with strategic intentions, where the service provider offers the necessary experience, advanced technology, and techniques for that purpose.

Likewise, the need to achieve a high degree of specialization, develop exhaustive and competitive solutions, innovate and differentiate in the market, and be at the forefront causes companies to outsource to access the best talent, resources, capabilities, and markets.

Best Countries for Outsourcing Manufacturing

Among the best countries to outsource manufacturing are the following:

ASIA is a leading destination for outsourcing. It is the largest manufacturing sector in the world, and it has skilled labor, quick problem-solving, and low wage Likewise, real estate for manufacturing facilities is cheap and efficient in its use of energy and raw materials.
Eastern Europe (CEE) is quickly becoming a significant region due to its skilled labor force, low labor costs, favorable business environment, proximity to Western Europe, and robust supply chain. The region has a well-educated and highly skilled workforce, particularly in engineering and technology. Wages in Eastern Europe are generally lower than in Western Europe and the United States, making it an attractive location for companies looking to reduce production costs. Many Eastern European countries have favorable business environments, low taxes and a pro-business attitude. Eastern Europe is geographically close to Western Europe, making it easier for companies to transport goods and coordinate production.
Mexico, with beneficial trade agreements such as the USMCA (United States-Mexico-Canada Agreement) and the IMMEX Program (Manufacturing, Maquila, and Export Services Industry), has become one of the best countries for outsourcing manufacturing. Additionally, the low cost of labor, the large population of qualified engineers, and the ready-to-use infrastructure are factors why companies choose to relocate to Mexico.

Rapid Evolution of Electronic Manufacturing Services

The intensely competitive nature of the electronics industry, the increasing complexity and sophistication of electronic products, the pressure on OEMs to reduce costs, and the shortening of product life cycles have led to a rapid growth in demand for skills, advanced manufacturing, and other connected services.

In the past, brand-name companies were able to do everything themselves and remain competitive. Nowadays, being an expert in everything takes too much time, money, and energy. So OEMs focus on what they do best: developing innovative products and services, entering key markets, and building brand loyalty.

The main contract manufacturers have achieved a great increase in their sales volume, in the number of people employed, in the range of services offered, as well as in their geographical location, that is, their presence outside of North America, Europe and, in particular, in Asia.

Initially, OEMs turned to contract manufacturers to help them overcome supply problems when faced with a surge in demand, especially in printed circuit board (PCB) assembly. Generally, outsourced manufacturers only made partial components, but as cost-cutting pressures intensified, more assembly processes were automated, outsourced capacity increased, and OEMs moved to outsource more complex manufacturing services to subcontract manufacturers.

For this reason, contract manufacturers began to offer a broader range of services to “better serve their customers.”

Keeping in mind the original design manufacturers (ODMs), who, in addition to assembly operations, also carry out product design and development and own the corresponding patents, contract manufacturers began to offer end-to-end services including product design and engineering, volume manufacturing, final assembly and testing, direct order delivery, aftermarket and support services, and global supply chain management.

Outsourcing: Reasons to Make Use of It

Business activity is undergoing major changes due to the slowdown in the world economy, which, according to the recent “Global Economic Prospects” report issued by the World Bank, is characterized by a period of low growth and high inflation.

However, new concepts are being born that startups and other companies are successfully embracing. In order to adapt to change, companies need to free up resources and better respond to changing market conditions.

Outsourcing is a way for companies to bring agility to their operations by providing the necessary flexibility to overcome economic obstacles. The arguments in favor of outsourcing are solid, and its success is based on the maximization of three key areas: resources, personnel, and processes.

Resources: Outsourcing allows companies to improve resources in such ways as increasing gross margins, freeing up cash flow for vital business objectives, reducing costs, and providing scalability.
Staff: Outsourcing routine and administrative functions allow staff to do more strategic work, increases productivity, and engages the team.
Process: Outsourcing providers can deliver processes faster and more efficiently, and therefore more cost-effectively, than managing them in-house.

In addition, there are other benefits:

Flexibility and Dynamism

Outsourcing is recommended for companies that do not need to have very fixed structures. Outsourcing provides great flexibility as it gives you the opportunity to make changes easily. It can work very well for those societies in which innovation is part of their mission or that bet on new businesses, as in the case of startups.

Cost Savings

One of the greatest benefits of outsourcing for companies is cost reduction, since outsourcing a department or task within the company will always be much cheaper than hiring people to do these tasks. You save on Social Security, extra payments, and possible sick leave.

Ability to take on more workload

When new contracts or large orders are won, organizations may resort to outsourcing to reach the numbers that their clients are asking for. In these cases, the suppliers provide assistance to reach the determined levels of production, service, etc. The processes can be scaled as long as these suppliers receive very defined guidelines for working online with the mother company that hires them and there is good communication and control.

Promotion of the free market

Organizations can change suppliers if the ones they have been working with for a long time are no longer satisfactory or are too expensive. In this way, competition increases, and companies strive to provide the best service.

Globalization

It is the last benefit of outsourcing for companies—perhaps the most controversial. When resorting to third parties for certain activities, there is no reason to be closed to local or geographically close firms. New technologies make it possible to contract with suppliers that are located in other countries or continents and that offer new techniques, systems, or processes.

Benefits of Outsourcing Electronic Manufacturing Services

The advent of digital computers and their subsequent progress and integration into the mainstream since the 1990s have played a huge role in popularizing the use of electronics.

Modern electronic devices exceed the capabilities of their predecessors, becoming more affordable, available, and diverse every day.

Thus, as the complexities associated with component miniaturization and electronic assembly continue to emerge, so will the penetration of the electronics manufacturing services (EMS) market in the coming years.

The use of outsourcing brings various benefits, among which are:

Inventory Management Optimization

When products are assembled in-house, large numbers of parts require much more time to properly manage inventory, which also opens the door for more mistakes and oversupply. Likewise, inventory workers spend a lot of time in manufacturing warehouses tracking, selecting, and distributing parts.

When an EMS supplier ships a complete electrical assembly, the company only has a number of parts to account for, improving the overall efficiency of its entire inventory.

Reduced investment in technology and equipment

For small and medium-sized businesses, making a financial investment to acquire equipment and technology to build an electrical assembly and keeping up with all the maintenance and upgrades necessary to keep production on the cutting edge comes at a huge cost.

So, it is much more profitable for a company to have an EMS manufacturer that specializes in the production of certain types of assemblies and, as a result, must keep up with the latest advances in technology and equipment.

Skilled labor

As technology becomes increasingly complex, the expertise required to design and manufacture assemblies requires a highly skilled and highly trained workforce.

Working with a qualified electronics manufacturing service provider guarantees excellent management of the technical details in the assembly of the product and therefore its quality. In this way, the internal team is free to focus on its core competencies.

Less production time

If the company’s production facility does not have the space, skilled labor, or equipment to shorten the production time of the final product, it runs the risk of not finishing first to market. Outsourcing to an EMS that offers the in-house infrastructure and skilled labor capable of quickly meeting your production needs can be invaluable in improving your time to market and enabling you to build a competitive advantage.

Improve business return on investment

When evaluating the internal costs of the company, consider some factors such as:

Acquisition of new equipment with the required maintenance
Buying the new technology and paying for the necessary upgrades
Expenses that come from additional services, insurance, and complementary labor
Having a space on the factory floor
Investment of time and money in employee training

Outsourcing electronics manufacturing services can transform your business into a highly profitable force to stay ahead of the competition; for this reason, it has had a rapid evolution.

Volume and PCB assembly outsourcing

PCB assembly is not an easy job and must be handled with expertise and care to ensure your boards work as designed. Therefore, many companies that lack expertise in this area prefer to outsource PCB assembly services.

Many OEMs have come to rely on PCB assembly fabricators who are adept at following the complicated and stringent set of processes required to produce affordable, high-quality PCBs with fast turnaround times. These fabricators handle everything from start to finish, including board fabrication, component placement, soldering the components together to the board, and finally testing to ensure they are fully functional. There are quite a few complexities involved in manufacturing PCBs.

A few decades ago, it was normal practice for large electronic equipment manufacturers to produce their own PCBs. But this practice has been discontinued because manufacturing them in large quantities consumes a lot of internal resources and also leads to an increase in the prices of the final products.

To reduce the cost of manufacturing these PCBs in-house, many companies find it better to outsource the manufacturing of PCB assemblies to outside service providers. By doing so, large manufacturers can eliminate the cost of capital expenditures as well as the cost of staff salaries and other similar expenses.

To choose the best PCB assembly company, it is important to consider these three tips.

Do not select a supplier in a hurry: the supplier must work efficiently and ensure compliance with the project schedule.
Consider experience: suppliers must have a professional team to ensure high-quality PCBs and a fast turnaround time.
Check testing services: providers must offer full testing

There are some inherent strengths when it comes to PCB assembly manufacturers, and that is that they have the manufacturing volume advantage on their side. They not only make PCBs for one electronic company but also for several. This helps them become more competitive in terms of pricing.

Low-Volume PCB Assembly

Low-Volume PCB Assembly is a bespoke solution for assembling components in relatively small batches or for low-cost prototypes with custom requirements.

This type of assembly is ideal for OEMs creating new products or startups launching a new product because, with small batch manufacturing, you can test product efficacy, make repairs or replacements, and perform any design changes deemed necessary prior to large batch production.

High-Volume PCB Assembly

High-volume PCB assembly is perfect for companies that are mass-producing a product.

For this reason, fully equipped companies must be contracted to offer high-volume printed circuit boards, and they must go through a rigorous testing process that guarantees quality.

When a large volume order is placed, costs are reduced, affecting the price of the product and making it competitive in the market. Furthermore, due to the automation of the process, the production cycle is shorter and the marketing plan is more optimized.

Outsourcing a Box Build

Today, many companies prefer to outsource the assembly of box builds, as they can rely on the experience and expertise of external assemblers. By outsourcing, you are assured that your products meet the required standards and specifications.

Outsourcing box build assembly is convenient for those companies that need to receive a finished product.

The process ranges from a single printed circuit board to a subassembly of mechanical components, cables, and wires and their installation in a protective enclosure. It includes electronic, electromechanical, final product assembly, and packaging.

Audit the Electronics Manufacturing Service ( EMS) provider

To mitigate quality risks and the cost involved, it is important to take the following into consideration:

– Audit existing and potential suppliers to ensure they deliver high-quality products, operate efficiently, and support continuous
– Develop criteria and product specifications; complete and detailed product specifications are essential for success. Product specifications should include defect details with ratings that are then linked to pass or fail determinations during quality checks.
– Requesting test products is important to determine if specifications are met and even for troubleshooting.
– Inspecting throughout production reduces supply risks and costs. Inspections can be performed at any point throughout the production process, early in the process, during and before shipment. The idea is to identify, contain and resolve problems as quickly as possible.
– Focus on and support continuous improvement (Kaizen), that is, define, evaluate, implement, document, and review the results.

Common Mistakes in Outsourcing PCB Assembly

Some common mistakes that could be costly when it comes to the decision to outsource PCB assembly manufacturing are:

Subcontracting to PCB suppliers without proper reference and in a rush. It is important to take a close look at their manufacturing facilities, their reputation in the marketplace, their experience and knowledge, and their levels of technical competence. Taking the time to complete the due diligence process will save you trouble.
Lack of communication and clear specification of the project objectives. It is essential to ensure that the subcontracted company is clear about the results and objectives it expects from the PCB assembly. Communication is extremely vital, and there shouldn’t be any missing links that you might regret later on.
Compromising quality for a low cost. Don’t compromise on quality. Many manufacturers of electronic devices and equipment, including some big names, often make the mistake of choosing low-cost products.

This is a common mistake many big names make. If you hire any foreign manufacturer, make sure you can keep a close eye on the PCB manufacturing processes and maintain contact with them at all times.

The pros of outsourcing

Some of the advantages that companies that successfully carry out an outsourcing process can enjoy are:

Quick access to state-of-the-art technology, without having to invest in it and without the need to train personnel to handle it
Decrease in investments in workspace and equipment
Reduction of operating costs
Greater agility to respond to changes in the environment
Underpinning activities that generate greater value
Intensification of capacities to generate competitive advantages
Operational efficiency
Increased profitability

Conclusion

Absolute concentration on core competencies is needed to opt for outsourcing.

Lower costs reduce personnel, liabilities, and accounting assets: Outsourcing offers a significant financial advantage by transforming fixed costs into variable and controllable costs.

Companies that partner with an outside provider benefit from the latter’s economies of scale as well as the investments it has made in technology and integration.

Speed-to-market advantage: The company can achieve a significant speed-to-market advantage by leveraging an existing solution rather than undertaking the time-consuming and risky process of developing and integrating its own solution.

Flexibility and scalability: the company must have the ability to immediately absorb fluctuations in volume, together with the ability to grow rapidly based on demand and/or new products.

Thousands of companies are recognizing the superior value that outsourcing customer service provides when managed correctly