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What's so hot about contract manufacturing.

What's So Hot About Contract Manufacturing

At their customers' urging, a growing number of custom molders are diversifying into what's called "contract manufacturing." As a growing number of domestic OEM customers find it tougher and tougher to manufacture profitably, they are turning to their molders for help - especially when the product is composed predominantly of plastics parts. Increasingly, custom molders are accepting total responsibility for assembling, testing and packaging subassemblies or complete products. In some cases, they're even responsible for shipping a product that's ready for use to their customer's customer.

All this requires a broader range of skills and resources than most molders have traditionally offered. So what is drawing molders to this type of business? And what does it take to get involved?

Leading contract manufacturers in the plastics processing field indicate there are benefits for both OEMs and molders. The biggest benefit for an OEM is that contract manufacturing enables it to reduce its time-to-market, increasing its chances of making a profit. In many industries, but particularly in technical fields such as business equipment and health care - where contract manufacturing is proliferating, product cycles are short. Introducing a product before the competition can mean the difference between profit or loss.

Contract manufacturing shortens time-to-market by reducing bureaucracy and overhead. Says Ray Burns, v.p. of marketing at Mack Molding, Inc. in Arlington, Vt., "One of our projects is the Sun 386i workstation for Sun Microsystems. By contracting with us for the workstation, Sun issues just one purchase order rather than 70. It interacts with one supplier, not 70. And by handling everything under one roof we simplify the process and substantially reduce Sun's time-to-market over any other conventional manufacturing methods." "Besides," asks Burns, "why invest in the physical plant for a product that is seasonal, low-volume, or high-risk, when you can capitalize on our existing resources for more cost-effective production?"

Production costs less with contract manufacturing because the contract manufacturer typically has less overhead than its customer. According to Gordon Lankton, president of Nypro, Inc. of Clinton, Mass., which specializes in health-care products and business equipment, "Enormous companies with 30,000 employees are finding the bureaucracy required to manufacture involves costs far above those of buying subassemblies. Those costs aren't always obvious."

Contract manufacturers often also offer a higher level of service than an OEM can obtain by manufacturing in-house or by collecting parts from a number of suppliers and assembling them itself. That's because a contract manufacturer spreads the costs of its facilities, equipment, and services across its entire customer base. Other benefits include the advantage of paying on delivery and not having any inventory before that time. "Contract manufacturing has an enormous impact on inventory. These days, no one likes inventory," says Lankton. "With companies like Nypro providing subassembly, it means large companies can eliminate all of that inventory."


If contract manufacturing has plenty of benefits for the OEM, what's in it for the molder? Terry Minnick, president of Pro Corp. in Florence, Mass., a business-equipment contract manufacturer for IBM and Eastman Kodak, says there are plenty of incentives for molders. "Contract manufacturing lets you make more money," he says. "Any value you can add to a part enables you to increase your profits. Profits increase incrementally as the value-added increases," he says. "And contract manufacturing is a great way to separate yourself from the rest of the pack. We've separated ourselves from the shoot-'n-ship molders."

Mack Molding's Burns says that firm, too, got into contract manufacturing because it saw an opportunity to differentiate itself from the rest of the custom molding world. In fact, some people see contract manufacturing as a potential means of survival in a highly competitive environment. Says Lee Jamison, v.p. of marketing at business-equipment, automotive, and health-care contract manufacturer UFE, Inc., Stillwater, Minn., "By getting involved now we're assuring that we'll still be in business in years to come. Contract manufacturing is growing, it's a trend. For example, our customer, a Minnesota Fortune 500 office product supplier currently outsources the manufacturing of 16-17% of its sales volume. And its goal is to make that 30% by the year 2000."

"We're seeing a change from customers wanting only custom molding to wanting much more," says Jamison.

Nypro's Lankton sees contract manufacturing as a way of obtaining long-term customers. "There are benefits in it for us. This is not a one-shot deal. Once you're known and proficient, you become a partner with the customer and you have the inside track on that subassembly forever," he says. "With contract manufacturing increasing the way it is, in five years from now it may be the subcontractor that has the knowledge of the product and not the ultimate assembler of the product. There are advantages in that. We're constantly pushing customers in the direction of contract manufacturing of subassemblies."


Contract manufacturing is part of a trend toward reduced supplier bases that grew out of the Just-in-Time philosophy. For JIT inventory reduction to work, it necessitates eliminating the traditional customer-supplier adversarial relationship. It does away with multiple sourcing and competitive bidding. Instead, Fortune 500 and other large companies are whittling down their supplier bases to as few suppliers as possible. And they're establishing much closer, long-term relationships with those few that remain. They've learned that a short-term relationship based on competitive bidding isn't necessarily the best way to do business.

A molder who develops the kind of customer relationship entailed in contract manufacturing has a pretty big foot in the door. "It's really a partnership," says Pro Corp.'s Minnick. "Once you've obtained the initial job, if you continue to do a good job, the relationship tends to go on forever. We started with one job for IBM. Based on the quality of that work, we've been able to leverage it into jobs for five different IBM site."


Burns at Mack Molding says contract manufacturing "Is only for the biggest players, because of the overhead requirements." An example of what might be required is provided by another project at Mack, the Fisher-Price Sportscar, a project for which Mack molds 72 parts, sources and purchases some additional 150 parts from both U.S. and overseas suppliers, and fully assembles the car for shipment directly to Fisher-Price customers.

To implement manufacturing, Mack undertook a 125,000-sq-ft expansion in 1989, opening a new plant in Pownal, Vt., to broaden its assembly capacity and strengthen its capability for total product manufacturing. The Fisher-Price toy car required setting up a 120-ft-long assembly line with 20 main stations and additional substations. "This requires a higher level of working capital than ordinary molding," says Burns. "We have to support a higher level of production, and that has to be funded in some fashion."

Jamison agrees that the investment cost can be a barrier to entering the business. "But sometimes customers will invest in equipment for the contractor or help with financing," he says. "We even have some assembly equipment that's owned by the customer."

Liability is another financial issue, particularly in the health-care market, where Nypro and UFE do a lot of their business, making such critical products as fetal-monitoring devices. "We have multimillion-dollar product-liability policies," says Nypro's Lankton. "If there's a problem with the product, our customer would probably be sued first. Then they'd probably go after us. But we haven't had that experience yet."

Aside from money, lots of expertise in lots of different areas is also required. Contract manufacturing necessitates a larger staff with expertise in such things as assembly, purchasing, testing, systems, and other skills. For example, Pro Corp.'s Minnick (material requirements planning) system and someone to manage it in order to schedule all those parts you're out-sourcing that will be coming in. How many plastics processors even have MRP? There are significant barriers to entering this business."

At Mack Molding, the move to contract manufacturing has brought major changes primarily to three areas of the organization - "Purchasing, quality, and testing," says Burns. "On the Sun 386i workstation, for example, our responsibility is the central processing unit and peripheral box. For these two units alone, Mack molds 15 parts and out-sources and assembles a total of 247 other items ranging from ultrasonic inserts and circuit-board brackets to fans, wiring harnesses, labels, and screens. Our purchasing department had to hire someone with skills in buying these parts because we weren't familiar with them. And many of these parts have to be obtained overseas," adds Burns, "so the purchasing person has to have some expertise there."

Mack's quality-control department also faced new challenges. People there had to learn to inspect and understand a lot of new incoming materials, many of them metals rather than plastics. Testing gained a whole new meaning at Mack. For example, a stereo speaker that Mack builds and ships directly to its customer's customers has to be inspected for sound quality. "We have to hook it up to some custom test equipment for speaker systems. To do this we had to build a sound booth," says Burns. Not many processors keep that kind of expertise on hand.

Pro Corp.'s Minnick says purchasing and engineering are the areas where his company has been affected most. "We've got all kinds of parts coming in here, from metal stampings to electronic components. You need additional help to source these parts, not the person who is buying the resin. And you need a broad range of engineering capability besides your plastic processing engineers. You need engineers who know about assembly, secondary operations, plant layouts and time studies, things like that."

Many of the additional people and systems for contract manufacturing must be put in place prior to obtaining a contract, which can itself be a complicated process. "UFE has made sizable investments in time, people and money to develop the systems and expertise needed for contract manufacturing," says Orv Johnson, UFE's president. "And we've been through exhaustive selection audits. Simply comparing quotations from a variety of contract manufacturers doesn't identify the best supplier. Fortune 500 companies typically assess a number of areas when auditing for contract-assembly services."

Evaluations usually include an audit of management systems for quality and productivity improvement. To evaluate quality, customers often ask for an explanation of what occurs from the time and out-sourced component arrives in the plant until the time the finished product is sent to the customer. Or they ask for documentation that verifies that the product meets specifications.


Contract manufacturers like to get involved with their customers early in the product development cycle. This helps to eliminate false starts and other misunderstandings. Says Lankton, "Contract manufacturers often act as a technology bridge. The customer has a concept, an idea of what it wants its product to accomplish. But often it's the molder who translates those ideas into a finished product. Communication is important at all levels from top management to engineering technicians."

Burns at Mack concurs: "Our involvement with the customer often starts at the design stage. Early design interaction often makes the difference between an on-time startup that hits the market window, and a difficult one that results in multiple mold sampling and costly production delays."


Most contract manufacturers employ an interdisciplinary project team approach to management. Teams typically include a design engineer, an assembly expert, a quality-control manager, a purchasing agent, and others as needed for specific projects.

At Mack, personnel are typically dedicated to customers, not product lines. "We're a manufacturing branch of our customers," says Burns. "Engineering, sales, purchasing - all have personnel dedicated to specific customers."

But at UFE, project teams are market-oriented, whether it's medical, office products, or automotive. "With this market orientation, team members not only bring their experience as a quality engineer or manufacturing engineer, they also bring a concern for the specific issues facing a particular market," says Jamison.

Nypro also emphasizes a team approach. Lankton says the biggest personnel requirement by far is for assembly engineers. "You need a whole staff of assembly engineers. Their function is to make sure the product is designed for assembly. You don't want a product design that can't be assembled. Let me give you an idea of how it works: Typically the customer has a concept, a basic idea of a product's function. Before the design gets very far there's talk with Nypro about moldability, cost reductions and assembly. These considerations go into the design. There's a lot of interfacing between individuals. Once we get a feel for what the assembly will require, we assemble a team - tool engineers, assembly engineers, q-c engineers, someone from the sales department, and one or two others, depending upon the requirements of the program. That team chooses a leader and carries the project forward in conjunction with the customer. Our management team meets frequently with the customer's management team," says Lankton.

Once a product is up and running the project team usually breaks up. Lankton says that then Nypro's "constant-improvement team" might take over to see how manufacturing costs can be further reduced. Contract manufacturers know they can't quit while they're ahead if they want to stay ahead. Mack is working with Sun to further optimize its computer workstation by squeezing cost out of the manufacturing process. Steps have been taken to reduce cost through material selection changes and more advanced automatic assembly equipment. And more will be done to trim the cost of purchased parts through secondary suppliers. "Everyone is concerned with the same thing, at both the customer and Mack," says Burns. "It's a team approach. Even though the Sun project is well under way, there are still quarterly meetings between Sun's team and Mack's team. It's a way of increasing everyone's sense of ownership in the project."


Of course, there's risk in contract manufacturing. Slow sales of the Fisher-Price car have led to reduced manufacturing orders, so Mack isn't making as much money on the project as it had hoped. Says Burns. "We have no control over market acceptance of our customer's products. We recognize the risks entailed in this type of business and just accept them. This experience hasn't turned us off to the concept."

PHOTO : Contract manufacturers get involved with customers in the product development stage. Early design interaction can mean the difference between meeting a target startup and costly delays. Here, a Nypro design engineer confers with a customer about a new product.

PHOTO : Mack Molding molds 15 structural foam and injection parts for Sun Microsystems' Sun 386i workstation, and sources and assembles a total of 247 parts.

PHOTO : Molded and non-molded parts are used to build this ear-irrigation kit (above) assembled and packaged at UFE Inc. Tubing and packaging are sourced; molded parts come from UFE's molding shop. Mack Molding built its own soundroom to test the ADC SoundShaper Speaker System (right), which it fully manufactures and ships directly to ADC distributors and retailers.

PHOTO : Contract manufacturing projects are managed by interdisciplinary teams. Some contract manufacturers dedicate teams to specific customers. Others, like UFE, employ market-oriented teams.

PHOTO : Nypro's Clinton Mass., plant molds millions of parts, but it's not readily apparent in this section of the plant where subassemblies are built. Contract manufacturers make considerable investments in assembly technology to separate themselves from molding-only shops and thus meet the requirements of a changing market.
COPYRIGHT 1990 Gardner Publications, Inc.
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Copyright 1990, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:custom plastics molding
Author:Fallon, Michael
Publication:Plastics Technology
Article Type:Cover Story
Date:Sep 1, 1990
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