Price not main benefit of manufacturing contracts

16 September 2010

16 September 2010 | Lindsay Clark

While half of buyers say lowering labour costs is the main reason to contract out manufacturing, only a quarter of suppliers believe this is the main benefit they provide, research from Gartner found.

The analyst firm interviewed more than 30 senior executives for the study. On the specific question of the benefits to be gained from outsourcing, it divided them into two groups – one made up of original equipment manufacturers (OEMs), the other from the supply side.

While more than half of OEMs (53 per cent) said cheaper labour costs was the primary driver, 43 per cent of contract manufacturing suppliers said producing high quality products was the main benefit.

Contract manufacturing has increased its profile in recent years. For example, Apple, maker of the iPhone, outsources some of its manufacturing to Taiwanese company Foxconn which operates factories in China.

Hussain Mooraj, managing vice-president at Gartner, said the decision to outsource, and the management of the relationships, must involve cross-functional leadership team within the buying organisation. However, he told Gartner’s Supply Chain Executive conference in London this week: “The vast majority of companies are not doing this well.”

He added that in the best performing organisations employing contract manufacturers, senior supply chain managers were part of the team that manages these arrangements. “The people element of this thing is a huge deal,” he said.

The most popular sector in contract manufacturing was the high-tech and semi conductor industry, which makes up 28 per cent of the firms using the business model, Gartner found.

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