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Outsourcing to contract manufacturers can be an effective strategy to achieve high performance in the high-tech industry—but only if companies absorb the lessons of the past.
During the 1990s, with demand for technology seeming on an indefinite upward spiral, many technology original equipment manufacturers (OEMs) outsourced manufacturing aggressively. When the IT market collapsed in the early 2000s, contract manufacturers found themselves holding large amounts of unsold inventory for which, in terms of standard agreements, the OEMs were liable. These write-downs punished OEM financials for a number of years.
In recent years, such partnerships have become more flexible to avoid such calamitous write-downs, but few companies have made the systemic changes needed to really manage the risk. In addition, many companies are only just beginning to experiment with outsourced manufacturing and risk falling into the same trap.
For OEMs, a move to outsourced manufacturing seeks primarily to reduce fixed assets (and therefore depreciation) on the balance sheet, while pushing working capital to the outsourced manufacturer. In an ideal contract manufacturing situation, everyone wins: the OEM focuses on what it is good at (R&D, design, innovation and perhaps final assembly and test), while the contract manufacturer exercises its specialty of profitably producing large volumes in low-cost regions. However, two significant problems often get in the way:
To avoid a repeat of the write-down problems experienced in the early 2000s, OEMs need a way to integrate off-balance sheet inventory into their own supply chain operations. There are many issues that affect the complexity of this challenge. However, the solution invariably entails four actions:
Several technology advances can help build the needed collaborative environment. Accenture has considerable experience in helping companies use technology to overcome business challenges, and we understand the dynamics of outsourcing business processes like nobody else. Contact us to find out how we can help your organization develop a contract manufacturing strategy that enables high performance.
March 9, 2011
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