How Robust are your Global Manufacturing and Sourcing Strategies?

Global manufacturing choices are almost endless, but with innovation and progress, what works today may not work in the future.

Gone are the days where the only choice for manufacturing a product was the local factory next door, or the factory in Shenzhen that your friend worked with for their product. We can now manufacture a product in more places than ever before. This does not prevent areas of regional expertise to exist of course (caused by a long history or by recent decisions made by a group of visionary leaders), but this is only relevant for a minority of products. In general, the options are numerous and one might argue that the differences between the options are getting smaller and smaller. This is due in part to increased global access to technologies and raw materials, low transportation costs, and because salary discrepancies tend to shrink rapidly. One of the challenges of our time (when choosing where to manufacture a connected hardware/IoT product) is the increase in pace and in magnitude of changes. Carefully crafting your sourcing strategy is an important step, but you should be aware that these advantages will most likely diminish over time, and possibly in ways you could not have foreseen. 

Three aspects of scaling-up the manufacturing of a connected object (IoT) to large quantities have been particularly affected: 

 

  1. Availability of contract manufacturers 
  2. The number of factors to consider when selecting a manufacturing partner
  3. Increased need for diversification to weather the increasingly turbulent conditions we work in

Increased availability of contract manufacturers 

Pulled by demand from customers, and pushed by rapid changes in the traditional manufacturing areas, new production ecosystems are being created. As a result, the possibility to manufacture globally has expanded (especially in the EU, APAC and the Americas). Every ecosystem offers different advantages related to their geographic location of course, but also because of differences in import and export laws, in workforce education level, in political regime stability, currency volatility, etc. 

Once you have chosen an ecosystem, you then have to decide which size partner you want to work with. This will determine the type of services you can expect from them, but also the level of attention you will receive. You want to swim in a pond that is the right size for you. This is sometimes counterintuitive as it goes against the well known McKinsey recommendations on "Strategy to beat the odds."  When choosing a Contract Manufacturer (CM), "it is better to be a great customer for an average CM than an average customer for a great CM." The latter customer will have to fight for attention, while the former retains control and can mitigate risk through a well crafted supply chain

Production tools nowadays are readily available in many parts of the world and have a lot of integrated controls, making production less human dependent. This lowering of the barrier to entry to propose manufacturing services resulted in more small companies being created too. Hence, the increased number of manufacturing partnership options we have witnessed in the EU, APAC, and the Americas.

Increased number of factors to consider when selecting a manufacturing partner

A number of external factors are to be taken into account when creating a Global Manufacturing strategy. These are related to the well known top five: 

 

  1. Logistics (location and infrastructure)
  2. Politics (regime type and stability)
  3. Economics (currency stability or volatility)
  4. Education (technical and linguistic)
  5. Foreign trade policies (import and export laws) 

 

This is not new. The factors related to the Contract Manufacturer’s size, experience, services, payment terms, etc. have also been known and taken into consideration for a while. Recently, two new categories have been added to the list: Geopolitics and Corporate Responsibility (both Social and Environmental). 

In less than two years, we have seen a referendum in Great Britain, complicating companies and manufacturers based in the UK. The US trade war with China affects the majority of electronics imports in an unpredictable manner. And finally, the recent COVID-19 pandemic affected the supply chains worldwide and paralyzed manufacturing, first in China and later throughout the world. 

 

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When defining their manufacturing strategy, teams need to be aware of and react to global geopolitical events, as unpredictable as they may be. And while the need and desire to conduct business ethically is not new, there is an increased awareness of the need to conduct business in a socially responsible and environmentally sustainable manner. The pressure might come from your consumer base or from regulations, but no matter the source, teams would be well advised to have looked into these aspects ahead of time and be ready to defend their choices from these perspectives too. 

Certainly not all options are acceptable (i.e. not aligned with your ethics, ambitions, or shareholders directives), restricting the number of actual choices. And teaming up with experienced partners can reduce the amount of time it takes to assess a list of qualified CMs on all of these parameters. However, making a decision taking into account a dozen categories remains challenging, especially given the rate of changes.

Increased need for diversification of the supply chain

Not only are the choices for a manufacturing partner involving more and more parameters, but the properties of a given region or CM tend to change at a faster and faster rate. In order to anticipate such ecosystem changes, running a Global RFQ Exercise (i.e. involving CMs in EU, APAC, and Americas) is becoming the new norm. Gathering data upfront is necessary, but because of global changes in economics, politics and technology advancements, these datasets require continual updates. By exploring domestic options as well as international options to match their current and future trajectory of mass manufacturing, companies can increase their chances of manufacturing in a region of the world not affected by a fast developing new disruption.

Often teams do not have the resources to find and negotiate with a second group of manufacturing partners when they launch production. It is becoming more and more important however to build in your contingency plan the need to diversify your supply chain.

The requirement to diversify the supply chain has traditionally been affecting teams a few years into production. But because of the different global challenges, companies must now think of alternate plans up front, in order to be more proactive than reactive. You must stay up to date on current policies, global economics and world events as part of the new contingency plan that you must build (preferably) before beginning manufacturing.

A faster rate of technological changes, increased chatter in politics and economics, combined with the globalization of disease, all make the standard manufacturing strategies more risky. The new standard includes not only running a search for manufacturing partners on a global scale, but also the inclusion of the social and environmental behaviors of contract manufacturers. This, combined with early diversification of the supply chain, will enable the creation of the most robust supply chain our fleeting times allow.

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