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How to Streamline Your Supply Chain Utilizing Vertically Integrated Contract Manufacturers

How to Streamline Your Supply Chain Utilizing Vertically Integrated Contract Manufacturers

If your product is a relatively large, complex instrument or machine, and you outsource or are considering outsourcing as part of your manufacturing strategy, it may make sense to consider procuring content at the integrated assembly or module level.

This strategy has the potential to reduce the resource burden of your purchasing function, which means less manpower and time to procure fewer individual BOM line items. The day-to-day expediting and supplier interface can be focused on fewer, more strategically important suppliers. This scenario provides for deeper collaboration with key suppliers and allows supply chain personnel to dedicate more time to work on problem areas.

In addition to the benefits for front end planning and purchasing departments, buying at higher level, vertically integrated assemblies can also have a very positive impact on your factory floor. With less material coming in from fewer sources, there is less to receive, track, inspect, kit, stage, store, and handle. The manufacturing floor can be simplified, while the costs associated with all the handling and tracking of individual parts can be reduced.

How Individual Parts Procurement May Add to Costs

Supply chain organizations tasked with getting the lowest possible price for each individual part may be inadvertently adding to costs by pursuing a strategy that requires the procurement of thousands of individual part—and the requisite labor, overhead and time associated with doing so. One way to ensure that part costs are as low as possible while procuring at the high-level assembly level is to work on a collaborative, “open book” basis with suppliers. With fewer individual parts to order, supply chain personnel and suppliers can work together to identify the COGS drivers that are in the bill of materials, and then reduce those costs by implementing design or sourcing changes.

To fully realize the benefits of this strategy, it is critical to choose the right supplier/partner who has the technical sophistication and business systems, experience, and capabilities to handle the large high-level portions of your product.

From a technical capabilities standpoint, the supplier should ideally have:

  • An engineering department able to assist with DFM, product design evolution, documentation support, and ECO design changes. Technical resources are also critical if high-level functional testing is required prior to shipment.
  • The capability to control and track material internally using an ERP system.
  • In-house capabilities in key areas such as fabrication, machining and assembly for products requiring specific skill sets, or facilities such as vacuum chambers or clean room assembly.
  • A well-developed supply chain organization and supplier base in order to optimize the value they can offer.
  • A good track record working on technically sophisticated programs, and one that has been in business for a long period of time.
  • Has the financial ability to procure large amounts of material at once and, if required, provide inventory management services.

Ultimately, the strategy of procuring materials at a higher level of integration can allow the equipment manufacturer to leverage the capabilities of their contract manufacturer to increase their own throughput, while simultaneously requiring fewer resources and collaborating to create value throughout the supply chain.

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