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5 Rules to Finding the Right-Size Contract Manufacturer

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Here are 5 simple, real-world rules for finding the right-sized electronic contract manufacturer.

1. Be at least 10 percent of revenue

This is the most important rule. You should be at least 10 percent of the business to command the attention you deserve. Five percent is really the floor. This rule applies to the specific plant that will be building your product. It's OK to spend $30 million with a $10 billion contract manufacturer if the plant that will be building for you produces $300 million or less. You will be important to that plant manager, and that's critical. It's OK to spend less than 10 percent at first if you have potential to become 10 percent within about one year.

2. Be no more than 50 percent of revenue

If you are more than 50 percent of revenue, you are in a potentially unstable situation. If you experience a downturn the CM may be forced to reduce plant headcount and vital knowledge may be lost. If the contract manufacturer has had to reduce headcount, they will also be slow react to an upturn because they will need to hire and train all over again.

3. Meet the plant manager

It can be very tough to figure out what plant revenue is, and often the contract manufacturer is reluctant to disclose. A simple way to gauge your importance is if the plant manger will meet with you. If your potential spend is way below 10 percent, he won't take the time. This is also a good way to gauge where you're at with an existing supplier.

4 Ways CMs Should Help Cost Reduction Download

4.  SMT lines produce $1 million per month

This is a terrible rule, but it's still a useful reference. It's extremely difficult to know what high-volume lines are producing because that is completely dependent on the particular products they are building. High mix/low volume lines are likely targeting $1 million per month, per SMT line, per shift. So a typical plant with two lines running one shift is likely targeting $25 million in annual revenue.  If they have 50 percent utilization (CMs are usually very willing to give you this number) you can guess they are running at $12.5 million annually, and your spend should be about $1 million to really command attention.

5. Don't lie

Or mislead. Suggesting you have a $10 million spend when you really only intend to place $100,000 is a recipe for disaster. This is especially true if you intend to source a given product at two or more contract manufacturers. They will be much more understanding if they are the sole provider of a particular product and that product hasn't done as well as expected, although if the variance from expectations is really high, blaming it on a poor forecast is still going to be a problem.

As a final note, you're looking for the right-sized contract manufacturer so they will value your relationship.  If you value right sizing, make sure your potential partner also values right sizing. You can tell they value right sizing if they do business with 5–10 customers, and no more than 20. This implies they have a lineup of 10 percent to 50 percent customers they can focus on, and a few they are nourishing. If the contract manufacturer "boasts" more than 20 customers in a single plant, they are churning them. 

Further Reading:  Why You Need To Do Should Cost Analysis