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Turnkey Outsourced Contract Manufacturing Versus Consignment Manufacturing

In the quest to remain agile and relevant in the business environment, companies are finding it essential to adopt disruptive technologies to stay flexible and competitive in business. Outsourcing the manufacturing of electromechanical and hydraulic products or sub-assemblies offers companies the ability to do so. However, a business confronts two challenges when deciding to outsource, choosing an outsourcing process and partner, and deciding whether to outsource. Turnkey and consignment manufacturing are two of the most common outsourcing practices. Let’s look at how small and mid-sized companies can compare and choose between the two outsourcing methodologies.

TURNKEY CONTRACT MANUFACTURING

In this model, the outsourced manufacturing partner, has complete control of all production processes. Functions handled by the outsourced partner would include material acquisition, component and product assembly, product testing, after sales services, and warranties. The outsourced partner can also provide R&D, product design, engineering and other manufacturing design services. With the turnkey outsourcing, a small or mid-sized company would outsource all production related tasks to a third-party partner.

Many innovative companies favor the turnkey outsourced production model. It creates an opportunity for the company to concentrate on their core competencies i.e. customer sales and marketing efforts rather than on technology and capital intensive manufacturing processes. The turnkey production model also allows startups avoid risks, incur less operating overheads, and distribute products rapidly satisfying the market demand. 

CONSIGNMENT (BATCH) CONTRACT MANUFACTURING

The less popular model would be Consignment Manufacturing. This model is also known as “partial” outsourcing. Consignment manufacturing of products offers companies the ability to retain some of the in-house controls over the manufacturing and supply chain processes. Under the consignment model, purchasing, shipping, and inventory departments oversee materials acquisition, sorting, packaging, and delivery to an outsourced partner for final product assembly. 

Sometimes existing businesses prefer this model when trying to augment staffing during high production times. Several factors dictate why companies may opt for this model. First, they lack understanding of the availability of flexible outsourced turnkey manufacturing partner that process small quantities or specific product specifications. Second, they have already invested in in-house production facilities.  

WHICH IS BETTER?

The less popular model would be Consignment Manufacturing. This model is also known as “partial” outsourcing. Consignment manufacturing of products offers companies the ability to retain some of the in-house controls over the manufacturing and supply chain processes. Under the consignment model, purchasing, shipping, and inventory departments oversee materials acquisition, sorting, packaging, and delivery to an outsourced partner for final product assembly. 

Sometimes existing businesses prefer this model when trying to augment staffing during high production times. Several factors dictate why companies may opt for this model. First, they lack understanding of the availability of flexible outsourced turnkey manufacturing partner that process small quantities or specific product specifications. Second, they have already invested in in-house production facilities.  

WHAT ARE THE COST BENEFITS?

Besides other advantages of turnkey outsourced manufacturing such as enhanced business processes, faster product delivery, and quality assurance, manufacturers can lower or eliminate supply chain costs and overhead expenses incurred in normal product manufacturing. Businesses employing the consignment model may overlook or fail to appreciate the implication of these hidden cost factors.  

Determining the actual costs of materials’ management either under the turnkey or consignment model requires an evaluation of all the production supply chain’ assumed risks, hard costs, and operational overheads. Supply chains involve wide-ranging managerial procedures such as accounting, inventory control, packaging, receiving, management purchases, and supplies costing.  

In assessing whether to adopt either model, a company needs to evaluate the following points:

1.Perform a thorough evaluation of expenses incurred in managing the company’s inventory. For example, the company’s hard costs include inventory replenishing costs, inventory costs, and personnel.

2. Assess the recruitment and retention costs of staffing. Sometimes inventory management requires only temporary staffing, the company has three options to consider the acquisition and management of part-time staff, hiring a single person to perform multiple inventorying procedures (likely with no experience), or outsourcing inventory procedures to different consultants with a significant increase in operating expenses.

Company’s significant cost savings arise from three areas: 

Receiving/Packaging

By adopting the consignment model, companies outsource product assembly manufacturing processes to their manufacturing partner. Consignment outsourcing consequently necessitates some in-house manufacturing of products or components pushing up in-house production costs drastically inclusive of labor, shipping, and warehousing costs as components must be delivered to the manufacturing partner on a “just in time” basis.

Contract Manufacturing Partners have the necessary infrastructure to manufacture the end product while spreading supply chain and logistical costs over several products and customers. Additionally, by increasing production costs, the consignment model may result in the duplication of production efforts at every stage, particularly when prepared components do not meet the CMP design specifications or manufacturing processes. In these instances, a manufacturing partner has to readjust materials or return components to the company resulting in loss of time and increased operating costs. Problems with packaging and parts quality can cause delays in production lines and assembly schedules by requiring a CMP to receive, test, and prepare components for prior to assembly. adopting the consignment model, companies outsource product assembly manufacturing processes to their manufacturing partner. Consignment outsourcing consequently necessitates some in-house manufacturing of products or components pushing up in-house production costs drastically inclusive of labor, shipping, and warehousing costs as components must be delivered to the manufacturing partner on a “just in time” basis.

Labor Costs and Inventory Financing

A key advantage to considerer, since a manufacturing partner can spread inventory funding and labor expenses over several projects, a contract manufacturer’s costs per product are less than that of a company or a single product. Businesses that use a flexible manufacturing partner enjoy economies of scale and inventory financing advantages that assist the management of a company’s cash flow. 

Making the Decision

The RG Groups recommends turnkey contract manufacturing as the ideal model for adoption by startups and small to mid-sized tech companies. It offers an increasing number of companies with in-house production departments focus on their business. Providing them considerable cost savings in labor and inventory costs while allowing the flexibility to focus on innovation and critical competencies, the turnkey manufacturing model offers companies a viable outsourcing methodology for use in the manufacture of products or components.

Please contact Ed Stum Executive Vice President, RG Manufacturing Services, to have a free evaluation of your outsourcing options and a recommendation to improve your manufacturing business model.

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