Annual sales for petroleum and coal were higher than the combined 2011 GDP of Mexico and South Korea. And annual sales for computers and electronic products surpassed the total annual 2011 GDP of Switzerland.

And to top it all off, the president declared in the 2012 State of the Union address that “the American auto industry is back.” General Motors is back to being the world’s #1 automaker, Ford has invested billions in U.S. plants and factories, and the auto industry has added over 160,000 jobs.

Can American manufacturers finally breathe a sigh of relief?

Unfortunately, it may be soon to tell what this all means. In a recent NPR interview, David Wessel, economics editor of The Wall Street Journal, declared that U.S. factory output is still 10 percent lower than pre-recession figures. And although factories have added more than 300,000 jobs in the last two years, we would need two million more jobs to get manufacturing back to 2007 levels—which may be a challenge, as factories can produce more without hiring thanks to new technologies and increased efficiency.

The European Union’s recent economic turmoil could further complicate the manufacturing industry’s path to recovery. (Currently, U.S manufacturers generate about 22% of their total sales from European nations.) If the festering debt problems, high borrowing costs and debt deflation continue in Europe, American manufacturing industries may be impacted.

An argument for optimism

Despite reasons for concern, U.S. manufacturing’s strong finish in 2011 is giving some experts reason to be optimistic. Dr. Mark Perry, professor of economics and finance at the University of Michigan, goes as far as to say that U.S. manufacturing is “thriving, expanding and prospering”—an assertion he backed up with the figure below.

This chart shows revenue for the 10 largest U.S. manufacturing industries in 2011.

These numbers look strong, and hopefully reflect a brighter future for American manufacturing.

And with the rise onshoring, we may see even more good things to come. In the 2012 State of the Union address, the president shared that the CEO of Master Lock finally believes it makes business sense for him to bring jobs back home. And for the first time in 15 years, Master Lock’s unionized plant in Milwaukee is running at full capacity.

So what do you think? Have you noticed any signs of recovery in the industry? Are we right to be optimistic?

For more information:

Three outsourcing challenges you may be facing

Findings from the 2011 Arena Solutions manufacturing outsourcing survey

What’s next in manufacturing? Some predictions for 2012

At Arena, we have built a robust way to invite trusted suppliers into your decision making process, but there are still occasions in which you need a quick, easy way to send product data to one-time, transactional partners. That’s why I am so excited about Arena PDXViewer—it makes assembling and sending build packages, quote requests and BOMs easy.

If you’re already using a PDX viewer, I encourage you to try Arena PDXViewer—it’s web-based, easy to use and works on any computer. If you’re unfamiliar with PDX—read on to learn how this XML-based standard can revolutionize the way you connect with your suppliers.

Life before PDX

If you’re not using PDX files to share comprehensive product data (including AMLs, BOMs, change orders, etc.) you can probably relate to how difficult it is to make your BOM accessible to external teams.

Without PDX files, preparing a build package for delivery is a mixture of black magic, blood, sweat and data from a business system. In some companies, one person is hired or trained to access the system for the sole purpose of sending data to suppliers once or twice a year. At other companies, data is pulled manually out of the PLM system by the design engineers, who put the data into an Excel spreadsheet and send it to suppliers in binders or zip files.

There are several problems with the manual methods of data sharing. For one thing, it’s nearly impossible to maintain the original BOM indentation when you export to Excel or try to print, and you may end up making PDFs of screen shots to try and maintain the original format. If you need to get rid of confidential data before sending your data, the process takes even longer. You quickly end up using tools like Paint or Acrobat, or find yourself at the printer with scissors, Wite-Out and a glue stick.

It’s amazing how many time-consuming, error-prone methods there are for getting product data out of a PLM system, when all you really need is a simple, standardized format for sharing PLM data.

A case for PDX

If you’re sick of all the workarounds, you may be ready for PDX—an open IPC XML-based standard with a solid and devoted following.

PDX is a great way to maximize your PLM usage because it incorporates suppliers—and anyone else who can’t access your PLM system—into your process in a clean, secure way.

PDX acknowledges that not everyone will be a PLM power user, and takes the burden off of engineers and doc control to get data from business systems for colleagues and vendors.  For power PLM users who have to work with a wide variety of people, PDX means easy data consolidation and sharing. Suppliers can even use PDX to run exports with BOM attachments as needed, or take the information and upload it into a variety of systems.

The PDX standard is fast, but more importantly, it minimizes errors. Because PDX is a read-only snapshot, you don’t have to worry that your data will get tampered with or that errors will be introduced to your BOM. PDX really is a fool-proof way to get structured product data out of your business system, and get it to the people who need it.

PDXViewer—a PDX viewer from Arena

As we announced earlier this year, Arena offers a free PDX viewer that is more convenient, and easier to use than any other PDX viewer on the market. (Check it out at arenasolutions.com/pdxviewer.)

Based on customer feedback, we recently updated the Arena PDXViewer interface and added the ability to highlight BOM substitutes. We believe these updates really increase the value of PDXViewer, and extend its functionality even further.

We have already seen how useful PDX can be, and we are committed to improving the process for Arena customers and other users. If you have never used PDX, I would urge you to give Arena PDXViewer a try. It works with SAP, Agile, Arena, Teamcenter and WebSphere systems, go to arenasolutions.com/pdxviewer, and check it out.

For more information

Announcing Arena PDXViewer: A free web app for sharing product data

Building a HeathKit was no great feat of engineering—it came with a fixed list of parts and the schematic—but it helped you understand how electronics work by letting you assemble your own electronic products. And back in the day, a well-built HeathKit radio was every bit as good as the store-bought ones.

HeathKit fell by the wayside as the complexity for products increased and the quality difference between what you could buy commercially and what you could build yourself became too large, but thanks to the popularity of publications like Make Magazine, and an increase in the availability of specialty electronic parts and open-source software, a Maker renaissance has begun.

And when the Maker mentality pairs up with recent developments in hardware—like the success of Arduino, an open-source electronics prototyping platform—I have to wonder if conditions are right for a Maker-minded, open-design hardware community to stake a claim in the consumer manufacturing landscape.

Software has laid the philosophical foundation for open-source design

The success of Linux and other open-source tools have demonstrated that certain classes of software deliver greater functionality and value through a collaborative, open development process. Not only has it been proven that these open-source software platforms can add value, but there are even examples, like Red Hat, Linux and Springsource, of profitable businesses who only publish open-source software. These companies give the product away for free, and make money by providing support, services, integration and community for that software.

The growing acceptance of open-source software products presents an interesting question for hardware manufacturers—could a growing hardware Maker community create similar value in open-design hardware? Is there a class of products for which the open-design model is better than the proprietary development model?

Open-design hardware dominates in some unusual places

At first glance, it would appear that Arduino stands alone as a model for open-source hardware design, but there are other markets where mass-produced, open-design hardware has succeeded, and even dominated. For instance, the M1911 pistol—the classic “Colt 45”—has been produced world-wide using an open design for decades. Similarly, the AK-47 submachine gun was designed in Russia, but is now produced world-wide from readily available specifications.

The success of the open-design model in the gun market is informative. For better or worse, guns are in wide demand all over the world, and if you looked at other markets where there is global demand for a high-value product—like high-tech electronics—you might expect the gun market to be dominated by a few global suppliers of proprietary products who achieve tremendous economies of scale (think of Apple, or IBM, or Cisco in electronics). Two characteristics make the gun market special: an overriding need for standardization, and support for local manufacturers who are too small to develop proprietary designs. Standardization is required because guns have to be compatible with a standardized component—ammunition—and because armies want to minimize their training costs. And nation-states have a very strong interest in supporting a “local” gun industry because they generally don’t want to rely on others for their guns.

Other than guns, there are examples of successful open designs in the form of standards-based products in some commodity functions—like plumbing—where there is relatively little opportunity for innovation, and where the market demands a standardized device that just works in existing infrastructure. When a market relies on mechanical interchangeability of simple hardware in a very large installed base, the benefits of open-design outweigh the benefits of proprietary solutions.

Will open-design supplant proprietary design in new markets?

The fact that open-design hardware has dominated specific, niche markets, is proof that it can work commercially—it’s just a question of the market fit.

For example, the open-design approach may not ever be appropriate for brand name, mass-produced, electronic consumer products. In this case, the economies of scale and required level of design integration are probably not achievable by an open-design community with limited resources.

However, if we got to a point where high-quality open designs could be easily fabricated and produced by many manufacturers, this could be a successful model in markets where product utility is more important than style, and where economies of scale are not too great. For example, there have been successful open-design products in the developing world for products such as water pumps and systems for water purification. There is an opportunity to cultivate an entrepreneurial manufacturing community in the developing world through the production of these kinds of open-design products.

Another place where this model might work is being demonstrated by sites like Kickstarter, where some companies have successfully paid for product development and manufacturing through pre-committed orders. To place a pre-committed order, a customer has to believe that the delivered product will really work. The transparency of a community-backed open design could provide the “product credibility” needed to enable manufacturers to use the pre-committed revenue model more broadly.

For example, if you had a machine shop, you could publish a catalog of community-created open designs, and allow pre-paid demand to drive your production schedule. This would be a great way to get interesting, innovative products to the customer as needed.

Because really, who wouldn’t want one of these?

To read more musings from Eric Larkin

Minimum viable product

Do QR codes belong on the shop floor?

Internet explorer, standards and customer value

Where has all the red paint gone?

Why does supply chain diversification matter? Take Ford’s recent fiasco following the natural disaster in Japan. Because of the auto manufacturer’s reliance on a supplier affected by the tsunami, Ford was unable to source key pigments that went into the paint for certain models. That is why it’s much harder to buy “royal red,” “red candy, “red fire” or “tuxedo black” vehicles today, and why you should consider diversifying your supply chain.

Questions to ask before adding supply chain vendors

If you’re considering adding supply chain vendors to mitigate your overall supply chain risk, there are many aspects that must be considered before you take the leap. Ask yourself the following questions:

• Are you at a sufficiently stable point in your product life-cycle? (Can your current handle a disruption?)
• How will you manage your supplier relationships through the transition?
• Can you afford or somehow mitigate new supplier implementation costs?
• How will you cut the ties to suppliers you no longer care to work with?
• What is your internal/external process for change management? (Do you have one?)

A clear, smooth process for managing change is crucial

This last consideration is extremely important if you are diversifying your supply chain—what is your process for change management? This includes defining what changes matter, what requires an ECO, who signs off, etc., as well as implementing systems that allow you to effectively and quickly communicate changes with internal and external partners.

When adding more complexity to your supply chain, the ease of production is directly proportionate to the quality, depth and availability of your documentation, so make sure your processes for revision control and data-sharing are up to par. (And if you have questions, here is an article on revision control.)

Diversification should not mean overproduction

If you’re moving ahead and adding supply chain partners, it’s also important to recognize that a diversified portfolio has more moving parts than a simple linear supply chain—because of this, managing inventory levels can be difficult. As you work with your various suppliers, keep in mind that excess inventory is a waste of both time and money. Make sure to keep your supply pipeline full, but don’t fall into the trap of over production.

Having tunnel vision in your manufacturing process can mean disaster for your product and company, so it’s good to be on the lookout for opportunities to diversify. Just be aware that diversifying increases your complexity as well as your operating and management costs upfront—so run cost analysis before diving in, and proceed with caution. Although a diverse supply chain takes an initial investment and adds complexity, if you are in a position to do it, it can really pay off in the long run.

For more information

Managing supply chain risk—are organizations doing enough?

Tips for developing a supply chain risk management strategy

Tips for managing supply chain risk from Global Supply Chain Solutions

Can sustainability help mitigate supply chain risk?

Engineers are told to design something, manufacturers are told to make something.

Engineering opens the design funnel, manufacturing closes it.

Engineers wrestle multiple theoretical possibilities into a realistic design, manufacturers make that design a physical reality.

When you really think about it, manufacturing and engineering are asked to work in parallel while being completely at odds philosophically. Their differing educations, day-to-day tasks and departmental goals ultimately cause them to form very different beliefs about how things should get done. So is it any surprise that there are often disconnects between engineering and production—particularly when it comes to managing the bill of materials (BOM)?

During the design phase, the cost of change is low

When engineers begin to design a BOM in their CAD tool, the possibilities can seem endless. As they move through iterations to find the perfect solution, dealing with a restrictive change process can be extremely frustrating.

During this part of the design process the cost of change is very low, and so for engineers, the ability to iterate quickly and keep the creativity flowing is key. Changes to the design—however major—have nowhere near the impact they will have several hops later in the process when the entire supply chain is involved and real products are being molded and extruded.

For manufacturers, software changes have real consequences

On the other hand, once a BOM crosses over to the manufacturing side, actions taken in the software program actually map to actions in the physical world. When you change order quantities, or mess around with the components in the BOM, this can potentially cost your organization large sums of money. A plan to build 100k of Product A using xyz materials actually translates into those materials becoming a product—with connected inventory usage and labor costs. This focus on the present and the tangible is really what drives manufacturers to care so much about keeping things on track, and making sure changes are managed methodically and thoroughly.

Walking the line between engineering and manufacturing

With the differences in philosophy between engineering and manufacturing, there is a natural tension between these two groups—from the way each group manages product data, to the way each group prefers to handoff the BOM. But is this tension irreconcilable? While engineers often are frustrated by document control, manufacturers can be frustrated with an engineer’s desire to work and rework a product, pushing up dangerously close to production timelines.

Given  our application’s position in the engineering and manufacturing process, we see both sides of the story in every single customer who joins the Arena community. Because of our connection to both production and design, I am interested in hearing how each group has managed the engineering/manufacturing relationship.

I’d like to know—how have you come to consensus on how change revisions and the BOM itself should be managed?

If you have a particularly interesting story, send me an email—I would love to interview you for future articles.

For more information

Excel BOM Template—for organizations just getting started with BOM and change management

Engineering BOM—the ins and outs

Share clean snapshots of your BOM with PDXViewer

Turning great designs into great products: the changing world of mechanical design

Bottom line—we’re producing more goods as a nation, but we no longer need the same amount of manpower to make it happen.

And the trend shows no sign of slowing down. With Foxconn’s three-year plan to integrate over 1 million robots into its assembly lines, more workers will soon be phased out of jobs.  Foxconn founder and CEO Terry Gou says robots will help the company increase efficiency and cope with rising labor costs, but there’s no denying the fact that thousands of factory workers will be displaced.

Since U.S. factories began adopting robotics into their assembly lines, national production has risen over 30%—so it’s not surprising that automation is a natural move for manufacturers looking to stay competitive. But as U.S. organizations charge full-speed into the Robotic Age, how do we ensure manufacturing workers are prepared to follow?

Taking notes from automation leaders around the world

Countries across the globe are using robotics to solve today’s manufacturing challenges—from coping with rising labor costs to maintaining factory productivity in an increasingly competitive global market.

Japan was one of the first nations in the world to capitalize on the low overhead of factory robots. As negative population growth drove up wages, Japanese manufacturers turned to automation to cut costs. The nation has since invested $50 million in robotic development programs and currently controls 40% of the total factory robotic population around the world. By 2025, the Japanese government predicts 15 million manufacturing jobs will be replaced by robots.

Germany, on the other hand, is leveraging robotics to grow the nation’s manufacturing base and bring factories (read: jobs) back home. It’s no coincidence that the country with 43% of Europe’s factory robot population also enjoys an export ratio of 63%. Government incentive programs encourage German manufacturers to adapt automation and help to sustain the nation’s global competiveness.

With results like this worldwide, it’s not surprising that the United States is beginning to take an interest in automation. In the first half of 2011 alone, North America nearly doubled robotic orders due to heightened demand in U.S. automotive factories.

New technology can change an industry

Although some fear that we are in the midst of a robotic takeover, the impact of new technology in the workplace is nothing new. Rather, robots are just the latest in a string of technological developments that have changed the way work is done around the world.

Consider the job landscape at the turn of the century, when roughly 50% of Americans were farmers. As tractors gained popularity and increased productivity in the fields, fewer workers were needed to tend the same amount of land.  Displaced workers eventually found their way into the manufacturing and engineering sectors, fueling the Industrial Age in the United States. In other words, farmers were kicked up—not out—of the job ranks.

Similarly, when computers were introduced into the workplace in the 1970s-1980s, secretaries feared their jobs would be taken over by machines that could complete the same tasks quicker and for less money. But in reality, computers enabled administrative assistants to take on more complicated tasks and manage more responsibility than ever before—increasing their earning capacity and value in the workplace.

If history repeats itself (as it commonly does) the transition to a fully automated manufacturing floor is inevitable. According to John Dulchinos, President and CEO of Adept Technology, not only is the robotic takeover inevitable, but it is a natural part of a continually advancing society. “If you look out far enough, machines are going to win. The human body . . . was not designed to be a factory machine. It was designed to be a thinking machine.”

What the robotic takeover means for the factory floor

In the big picture, automation means progress. Robots are designed to perform the same dull and repetitive tasks currently performed by manual labor—but in a safer, faster and more consistent fashion. As robots become a core part of a competitive manufacturing business, the demand for higher skilled robot-savvy engineers, programmers and service technicians will grow. And the more high-wage job opportunities are created, the more Americans can enjoy a higher standard of living—improving our economic status in the world.

But in the immediate future, factory workers are right to be concerned. As automation becomes standard practice, what will happen to the line and assembly workers phased out of their jobs? If nothing is done to transition these workers into new roles alongside their robotic counterparts, they may not be far from the unemployment line.

Unfortunately, the companies who are currently pushing toward automation aren’t as interested in retraining the workers that get left behind to fill more specialized roles. And in the immediate future, this could be a real problem for the manufacturing industry. “The ability to make things in America is at risk,” said Jeannine Kunz, Director of Professional Development for the Society of Manufacturing Engineers. “If companies don’t address this shortage of qualified labor now, hundreds of thousands of jobs will go unfilled by 2021, jeopardizing our workers, our companies and our nation’s future.”

Looking to the future

The next 15 years will be pivotal for American manufacturing, and our success depends on our ability to navigate this transition.  Fortunately manufacturers are taking notice, and events like the Interactive Manufacturing Experience (imX) summit—September 12-14 in Las Vegas, NV—are being developed to address the impending challenges. The imX hopes to “provide a national forum to fully engage technology innovators and leading manufacturers in meaningful and comprehensive dialogue to propel the industry forward” and hopefully will set an example for other industry leaders to follow.

While summits are one opportunity for manufacturers to begin discussing solutions, the problem is large and widespread—and it will take a concentrated effort by corporations, government officials, manufacturers, technologists and the public at large to make the transition to an automated manufacturing floor casualty-free. For now, we can only hope that organizations like Foxconn will focus on the human side of automation and provide displaced manufacturers with a transitional path for workers to move up—not out—from the factory floor.

For more information

The Future of the Robotics Industry

Do Robots Take People’s Jobs?

Quick Tip: Implementing Automation into Your Business

Foxconn Planning to Hire One Million Robots

So I hope you’re as excited as I am for the Product Realization Group (PRG) Summer Symposium and BBQ—an event that’s got it all.

At the 2011 Summer Symposium, you will:

• Learn about transformative approaches to product development
• Get updates on the latest industry trends
• Hear about innovation in clean tech and entrepreneurship
• Network with your industry peers
• Meet members of the Product Realization Group (who are all industry veterans)
• Enjoy delicious food and great music

What’s on the menu?

Keynote: Innovation in Clean Technologies

• Rex Northern, Executive Director, CleanTech Open

Work Session: Innovation, Entrepreneurship, & Investing

• Chris Gill, CEO, Silicon Valley Association of Start-Up Entrepreneurs (SVASE)
• Lisa Sibley, Journalist from the San Jose Business Journal

Technical Session: Accelerating New Product Introduction

• Panel of 6 industry veterans spanning product life cycle
• Bring your toughest questions about developing high-technology products
• Get insightful answers from diverse industry experts

Register now.

Cost:

The early-bird price is $30—so register before August 26th, 2011.

Location:

Sheraton Sunnyvale Hotel
1100 North Mathilda Avenue
Sunnyvale, CA  94089

Date and time:

September 9^th 2011 from 9am-12pm

If you have any other questions, please visit the PRG website, or post a question in the comments if you think the answer will be helpful for the general group.

Thanks – and we hope to see you there!

Tuesday, I posted five tips from Manufacturing Outsourcing for Small and Mid-Size Companies: 10 Key Challenges and How to Address Them, a white paper produced by Arena Solutions and Symphony Consulting, created by Bijan Dastmalchi. Today I will be sharing the last five tips from this white paper, with the hopes that you can take the next step toward finding the right CM for your business, determining appropriate pricing and contract terms and establishing a collaborative OEM/CM relationship.

Keep your product data in a centralized location, and adopt tools that provide both your team and CM with real time visibility into product changes

In our recent Manufacturing Outsourcing Survey, almost half of all respondents said that at some point in the last year they had received the wrong product from their CM. If that is a mistake you would like to avoid, there are two very important questions you need to be able to answer. Where is your product record—a complete bill of materials (BOM) that includes sourcing information, part specifications and assembly instructions—kept, and who manages it? Once these two questions are answered, you can begin to develop an effective process for proposing, reviewing and implementing changes.

Small manufacturers’ product data is often kept in a variety of formats, and is managed by a variety of people, which makes effective collaboration difficult and leads to mistakes. If you want to operate more effectively with your CM partner, at the bare minimum you should build and manage your product data in an Excel BOM. And while Excel can help you keep track of a single, simple product, once you have multiple products with more complicated data and change processes to manage, you are better off deploying a product lifecycle management (PLM) software solution like Arena.

In your CM contract, negotiate an exit plan that includes the operational details of ending the relationship

Although you can find plenty of stories about OEM/CM relationships ending amicably, you can find equally numerous examples of abrupt terminations over excess and obsolete inventory, price increases, quality problems, catastrophic product failures or late deliveries. As a smaller manufacturer you are more likely to find yourself in search of a new relationship, as CMs prioritize their larger clients in the case of a capacity crunch. Protect yourself from being left out in the cold by outlining each party’s exit obligations upfront.

In your OEM/CM contracts, be explicit about what will happen when you part ways, Make sure your contract identifies how FGI (finished goods inventory), WIP (work-in-process) and component inventory will be handled, and negotiate to prevent the CM from giving you a short termination notice.

Generally, your CM does not have as much at stake as you do in case of a termination, so don’t be afraid to push for protections in your contract. Consider the alternative—if your CM decides to end the agreement on short notice, you could spend months identifying a replacement, transferring tooling and components and setting up the new CM—all while your business suffers.

Take steps during the CM sourcing process to ensure you get the right team supporting your business

Another common problem smaller OEMs face is a lack of CM attention.  In many cases, this frustration is compounded because the OEM met with a very high caliber team during the sourcing process, and got passed off to less experienced and busy personnel after signing the contract.

While your business may not justify the CM’s best team, you can still get the right team for your business by identifying your greatest needs, and establishing a strong first impression during the sourcing process.

To increase the odds of getting the right team in the first place, know your needs. If you have someone internally with a lot of product engineering and manufacturing experience, getting your CM’s best engineer is not a top priority. Before awarding business to a CM, ask to meet the team you will be working with and be sure to insert contractual language that gives you reasonable control of who will be assigned to you. Lastly, while you’re negotiating your contract with a potential CM, send people from your team that know the ins and outs of the outsourced manufacturing model to negotiate during the sourcing process. Understand that the process you follow, the documentation that you request and the quality of questions you ask during the selection process help the CM decide what caliber of employees to send to your project—so make a good first impression.

Before you decide to manufacture offshore, develop a model and assess hidden costs

Although building products in an Asian or Eastern European country can save you money in some areas, there are challenges and hidden costs that smaller companies in particular tend to underestimate.

While a lower labor cost is enticing, you need to make sure that labor savings isn’t mitigated by the higher transportation costs, higher than expected product price, quality problems, inventory exposure and communication issues that can come with offshore manufacturing. Depending on your industry, these costs can outweigh the savings of cheap labor. (Electronics manufacturers only spend about 10% of their budget on labor, so savings here doesn’t necessarily make a big impact.)

Before you decide to offshore, analyze your components and validate the availability of the supply chain. Additionally, factor in the cost of cash that you will have tied up in inventory when your product is ocean-freighted or the high cost of air transportation if you have short customer lead times. Assess the potential impact of currency fluctuations and intellectual property concerns so you can be ready to mitigate those risks before taking the leap.

Be ready for an audit by taking responsibility for compliance with environmental directives

If you’re blindly relying on your CM and component suppliers for certificates of compliance, you are setting yourself up for trouble down the road. Most environmental regulations, like the European Union’s Restriction of Hazardous Substances (RoHS) directive, place the full burden of responsibility on the brand owner (you)—so do your due diligence.

If your products need to comply with one or more global environmental directives, it’s up to you to work with your supply chain partners to clarify the roles and responsibilities in this objective. Update your supply agreements—especially when it comes to warranties and indemnities—and make sure someone is responsible for assessing the components in your BOM. While you should ask your CM to certify their manufacturing process as compliant, don’t give your CM responsibility at the component level or for the product design unless you are specifically paying them for it.

Regularly audit your suppliers who have questionable records when it comes to compliance, noting that blind acceptance of certificates of compliance from any supplier does not count as due diligence when it comes to the RoHS. Keep careful records of what has been done, and be prepared with all required documentation in case of an audit.

Make manufacturing outsourcing a competitive advantage

As a smaller OEM, you probably have many of the same needs as a larger company, but with fewer resources and less clout, it can be more challenging to achieve your outsourcing goals. While it may require extra effort, if you are knowledgeable and sophisticated in your approach, you will be able to get the performance, motivation, and mindshare that you need from your partners.

For more information

How small manufacturers can establish better outsourcing relationships pt. 1

Manufacturing outsourcing for small and midsize companies: 10 key challenges and how to address them

Share BOMs more effectively with the PDX file standard

Contract Manufacturing for Small- to Mid-Size Companies

Tips and resources for managing your outsourcing relationships

Manufacturing outsourcing: 7 common pitfalls to avoid

The Arena Solutions guide to outsourcing: removing barriers, maintaining boundaries

Small manufacturers face unique challenges when establishing successful outsourcing relationships, so to help I’d like to share some tips based on a white paper created by Bijan Dastmalchi at Symphony Consulting and Arena Solutions. I will post the first five tips today, and the rest on Thursday.

Vet potential contract manufacturers to see if they’re really interested in your business before engaging in a lengthy request-for-quotation (RFQ) process

As you vet contract manufacturers, remember that they are vetting you too—and their main concern is usually the amount of business you will bring to the table. Even if contract manufacturers don’t ask about your volume directly, they may ask for projections, specifications or a bill of materials (BOM) to get a sense of your potential.

Before sending out an RFQ to a CM, ask strategic questions to see if the CM is really interested in you, and to assess the CM’s motivations. For example, if you are expecting two million dollars in business and you are talking to a multi-billion dollar CM, what’s in it for the CM? Is the CM looking to break into your market? Are you just an easy (and temporary) client during tough economic times?

A good rule of thumb: if your annual purchases represent at least 5% of your CM’s plant-level revenue, it will be easier to keep your CM’s attention.

Establish credibility with your CM by becoming an exceptional forecaster

Although forecasting is difficult, it’s a MUST—especially if you are a startup or small manufacturer looking to convince a potential CM that your company is legitimate.

When you’re just starting out, your reputation largely depends on your ability to meet or exceed expectations—so your forecast should be something you can realistically meet. (A good goal to shoot for is less than 10% variation from your predictions at the aggregate level.) Once you establish a baseline for your forecasts, be sure to make regular modifications based on prior levels of accuracy, changing supply conditions, CM capacity and inventory levels at your distributors or resellers.

Focus on inventory exposure throughout your supply chain to regularly assess and mitigate liability risk

Inventory liability causes a lot of contention between original equipment manufacturers (OEMs) and CMs, yet it’s often overlooked until unexpected fees for excess or obsolete inventory occur.

OEMs can mitigate and manage the risks associated with inventory liability by understanding and reducing inventory exposure, and by clarifying the specific conditions of inventory liability agreements upfront. Start by assessing the relative importance of your components, and weighing the risks and benefits of different solutions so you can evaluate potential process and policy changes that could reduce your risk. Determine what parts or products are considered “unique” and could become a liability for you—making sure non-unique parts are excluded—and outline acceptable lot sizes, reels and minimum order quantities.

For small organizations with leaner staffing levels and broader functional responsibilities, committing resources to developing a liability profile is tough, but taking steps to remove ambiguity early will drastically reduce OEM/CM conflict when issues occur.

When it comes to sourcing, focus on price structure and pricing details—not just the bottom line

It’s no surprise that unexpected costs are another major cause of conflict for OEMs and CMs. Unexpected price increases can lead to margin erosion, impact your ability to price your products competitively in the market and ruin the best OEM/CM relationships.

Fortunately, there is an easy fix for this problem—do your due diligence. Ask questions about your CM’s assumptions on the approved vendor list (AVL); make sure you understand the cost breakdown when it comes to raw materials, labor, test, overhead and profit; and don’t get distracted by multiple best case scenarios set up by potential CMs that feature aggressively low set-up, labor and test times. Always validate the assumptions used to build a quote, and make cost-structure transparency a condition of doing business with your company.

Spot quality issues early by monitoring quality before and after shipment

If you are a small manufacturer, mistakes are deadly—because of this, quality management is key. Many small manufacturers are reactive rather than proactive when it comes to quality control, so if you can master quality you will have a clear competitive advantage.

Discuss expected product yields, parts-per-million (PPM) failure rates and control limits for each critical stage in the manufacturing process with your CM, and incorporate quality checks into your product designs. Once you’ve established your projections and talked about the best ways to ensure a high level of quality, you can begin to utilize tools that enable you to achieve real-time visibility into what is happening on the production line so you can monitor trends and identify potential problems.

Remember—how you manage quality will set an example for your CM, so demonstrate its priority in your company.

Make manufacturing outsourcing a competitive advantage

For more information

Manufacturing Outsourcing for Small and Mid-Size Companies: 10 Key Challenges and How to Address Them

Share clean snapshots of your BOM with PDXViewer

Tips and resources for managing your outsourcing relationships

The Arena Solutions Guide to Outsourcing: Removing Barriers, Maintaining Boundaries

As I mentioned in a previous post, it seems that some manufacturers are making calculated decisions not to invest in risk mitigation, believing that cleanup is a more manageable cost than prevention. Other organizations want to invest in risk management, but lack the time, resources and know-how to do so.

For those that are looking to adopt risk management strategies in 2011, here are some considerations from JDA Software that I found particularly useful for both manufacturers and retailers, as well as links to a few other articles I found particularly relevant.

And if you have a favorite article or go-to-resource for supply chain risk management, please share it in the comments.

When creating a plan for minimizing supply chain risk . . .

1. Make sure your supply chain risk management strategy allows for frequent plan updates—you never know when political conditions, tariffs, labor costs and other factors may change.
2. Create contingency plans by mapping out “what-if” scenarios and running business simulations to assess the potential impact of a disaster.
3. Make sure your backup production and distribution plans include 2-3 different options for sourcing materials, components and vendors.
4. Clearly communicate your risk management strategy to operational and tactical employees. Running “what-if” scenarios in advance at the tactical level can help reduce the business impact of a supply shortage.
5. Monitor and understand daily operating conditions so you can anticipate regular spikes in demand, seasonal weather patterns such as droughts, hurricanes, tornadoes and floods, and short-term performance threats as much as possible.
6. In times of crisis, monitor supply chain activity and make sure your promotional teams are prepared to adapt campaigns as product availability changes.

Additional resources for managing supply chain risk

Supply chain risk mitigation moves to the C-level suite

When Disaster Strikes: Avoiding A Hit To Your Supply Chain

Managing supply chain risk—are organizations doing enough?

Tips for managing supply chain risk from Global Supply Chain Solutions

Risk Mitigation Strategies for Supply Chains from 200 to 10,000 Miles