Contract Manufacturing has become increasingly prevalent across multiple industries these days, particularly in the electronics sector. Take Apple, for instance, which relies on its contract manufacturers to produce a significant portion of its products. While product owners handle the research and development, the manufacturing execution is outsourced to these trusted partners.
There are two major types of Contract Manufacturing: Consignment and Turnkey. In Consignment manufacturing, the product company procures all the necessary materials and delivers them to the contract manufacturer. On the other hand, in the outsourced model, it is the responsibility of the contractor to handle the procurement of raw materials and deliver the finished products.
Inventory management poses a significant risk in both models. Mishandling inventory at the contract manufacturer's site can lead to an inventory shortage, severely impacting the entire supply chain operation.
When it comes to Material Requirement Planning (MRP), while these systems excel at planning company-owned inventory, accurately forecasting the inventory requirements of the contract manufacturer may be challenging. This is primarily due to the inability to explode the Bill of Materials (BOM) to the sub-component level for an accurate estimation of material needs.
Ensuring inventory accuracy at the contract manufacturer's site can be achieved through frequent cycle counting and inventory verification. However, this becomes more challenging when dealing with global outsourced manufacturing.
Naturally, supply chain planners have several crucial questions in mind:
Does my contract manufacturer possess sufficient inventory to fulfill the demand on time?
Have they planned their material requirements accurately and placed the necessary orders?
What portion of their current inventory is allocated for my products?
How much inventory is currently available, and how much is on order, awaiting delivery?
What percentage of inventory is still under quality inspection?
Moreover, it is imperative for supply chain planners to have global visibility of their inventory, extending beyond their own locations and encompassing the entire supply chain network.
By addressing these key concerns, businesses can enhance the structure and effectiveness of their contract manufacturing relationships, fostering a streamlined and dynamic supply chain.
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