The customer landscape has changed. Competition, pricing pressures and frankly, good business sense have forced OEMs to outsource their manufacturing operations to contract manufacturers. Suppliers that have been used to dealing directly with OEMs now have to work through a CM, and this layer of separation presents its own unique expectations, requirements & challenges.
Contract manufacturers are high maintenance customers that cannot be managed the same way as an OEM customer. Pricing models, performance expectations and customer service all have to be adjusted to be successful with a CM. Navigating design issues, technical questions and engineering changes through the CM as the liaison to the OEM requires finesse and patience; a lot of patience.
Chances are you have asked yourself “How can I get this commodity manager to answer my call?”, or “Should I differentiate ‘bid-for-bid’ pricing from ‘bid-for-buy’?” Whether you are having trouble getting a foot in the door, or are seeing stalled business level growth, understanding how the CM thinks and what is important to them is critical for success. 15 years in global strategic sourcing with one of the most successful contract manufacturers in the business has given me this insight.
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Privately held sheet metal fabricator with North American facilities supporting 35 active customers across the industrial, commercial and medical market sectors. The company has annual sales of $35 million, employing 120 skilled fabrication craftsmen with the average tenure of 21 years. Years in business: 35.
The company became an Approved Supplier with a major global contract manufacturer (CM) four years earlier and had some early success winning new program awards. However, business levels have remained minimal due to a few fundamental issues. A number of large wins were lost due to an ineffective contract review process that resulted in a disconnect between customer expectations & product quality. Poorly integrating the many different OEM specific requirements that fall under the single CM customer created customer dissatisfaction with both the CM and OEM. The company’s standard pricing strategy did not match up with the contract manufacturing sourcing model, resulting in the double whammy of an overwhelming quote workload & a low single-digit hit rate. Used to dealing directly with OEM customers, the company struggled with navigating design issues, technical questions and engineering changes through the CM as the liaison to the OEM. Finally, the company’s sales team was not structured to support the high maintenance challenges that the CM customer presents with dozens of contact points across multiple locations.
Strategically, the first priority was educating the company’s sales, engineering, quality & manufacturing management on the different approach needed to be successful generically with a contract manufacturer, and specifically with their CM customer’s model. Contract manufacturers present a unique set of challenges and cannot be managed like an OEM customer. Tactically, the following plan was created and implemented, including development of new processes and workforce training.
- Developed a duel-strategy CM pricing model for both the “bid-for-bid” and “bid-for-buy” quotes
- Created a robust Contract Review process for new order onboarding through sales and engineering
- Implemented new product design cross-functional reviews with a hyper-focus on identifying & addressing all unique CM & OEM requirements
- Improved the Customer Complaint process to increase overall responsiveness & permanently address all complaints
- Introduced a Voice of the Customer program to drive deeper understanding of customer needs, expectations & perceptions
- Aligned internal processes to integrate CM / OEM Requirements into their travelers & work instructions
- Improved the Corrective Action program by adding Preventive Action and laser focusing on true root cause & the CM’s Scorecard metrics
Aligning the company’s core competency to the CM sourcing model resulted in a magnitude reduction in the quote workload, and the dual-pricing model adjustment substantially increased the new-win hit rate. Due to the nature of the extended CM sourcing cycle, revenue impact was not as immediate but began to hit top line sales after roughly eight months. One year later, the company’s CM customer was the company’s fastest-growing, expanding market share with multiple customer locations & broader OEM touches. Contributing to this success was the reduction of customer returns and improvement in customer satisfaction attributed to the changes in the quality system and understanding of the unique requirements of the CM.
“Steve’s insight into the inner workings of the CM, and specifically our customer, was instrumental in changing the way our company does business with the contract manufacturing customer. His guidance on pricing and the importance of a responsive quality team were direct contributors to increasing our business levels with all of our CM customers. His lessons on How to Speak CM were priceless!” — VP of Business Development (Name and company withheld by request)