How do You Minimize Inventory Damage by an Outsourced Manufacturer? Five Points

Situation: A company uses outsourced manufacturing but is concerned about inventory damage by the manufacturer. Tests have been established to assure both visual compliance and functional performance, overseen by a company employee. Still the company is receiving too many unacceptable parts. How do you minimize inventory damage by an outsourced manufacturer?

Advice from the CEOs:

  • It is perfectly acceptable for a vendor of consigned materials to bear the risk of product that is not to specification.
    • In any contract for manufacturing, require that the vendor carry insurance to cover the full cost of materials and processing in case of damage either during manufacturing or shipping.
  • It sounds like this is a new opportunity and situation for the company. In the process they have not guaranteed that both cost and risk are covered.
    • There is no point in assuming all this risk.
    • For future opportunities like this, take on the work as a time and materials project at an appropriate hourly rate for the market, and with a significant mark-up to cover risk as the project is transferred to a contract manufacturer.
    • Another option is to take on the project under a project management contract, and to bill engineering separately.
  • This situation sounds familiar for an evolving project. In the future try to unhitch the manufacturing piece from the engineering. Engineering should be more profitable, which will allow the company to more successfully manage the project into early manufacturing.
  • Strategically, this could be a good move for the company provided they partner with a reliable vendor to facilitate early stage manufacturing. One option for paying sub-vendors is to pay for yield – particularly if early stage work has a high failure rate.
  • If the market opportunity is there do two things:
    • Set up an organization with professionals who know early stage manufacturing.
    • Be aware this group will have a different culture and approach compared to design engineers.

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