No One Wants to Buy Manufacturing Services, and Why it’s an Opportunity for Contract Manufacturers

Let’s face it, no one wants to buy manufacturing services, they want to buy the result of these services—a product. They want to buy a product they can resell for good margins and want a product so great it sells itself.
They purchase manufacturing services only because they have to. They see no other option. If they don’t hire someone to build their product or do it themselves, then how can they possibly make any money?
Well, recently, another option has emerged: Product Design and Build. Instead of designing a product and then finding a Contract Manufacturer to build the product, they hire one company to design AND build the product. The customer provides the requirements for the product, not the complete design, and then hires a company to design and build the product..
Why is this trend emerging? First, we argue it is just the next value chain of an Electronics Manufacturing Service doing a good job at managing the customer; see our white paper here.
Second, Design-Build is working. Our research has shown that Contract Manufacturer’s that provide true Design-Build services are growing at twice the rate of traditional Contract Manufacturers, and profits margins quadruple. We believe the reason for this performance is that Design-Build puts in place the right economic incentives that just do not exist in traditional Contract Manufacturers business models.
In a traditional intellectual property, the opportunity to improve product quality, performance, or unit cost is limited. Research has shown that 90% of product performance, quality, and unit cost is set early in the product design phase. (For more on this see our whitepaper here.) By the time the product reaches the manufacturing stage, an opportunity to make a great product has long passed.
Third, Electronics Manufacturing Service companies are starting to realize just how reliant they are on their customers’ successes. If the product sells well, the Contract Manufacturers making this product will do well too. However, this is only true to a point. Because the client owns all the Intellectual Property (IP), they can easily switch to a lower cost Contract Manufacturer. Indeed, a common reason for losing a customer is because their product is so successful that product quantities increased and became an attractive account to larger, more capable competitors.
How does Design-Build work? Typically, the client provides a detailed requirements document (see our free Requirements Templates here) and lets a long-term contract for so many units per month. The Contract Manufacturer provides the conceptual design, detail design, and design verification testing for the product. The Contract Manufacturer generally owns the Intellectual Property although there are usually provisions for a buyout under certain circumstances.
The advantages of Design Build to the Contract Manufacturers:
Contract Manufacturers owns the Intellectual Property and therefore has a very sticky customerPotentially much larger marginsAdditional margins from the engineering services providedMore control over sales if the Contract Manufacturer can provide a superior product
The advantages to the client of Design Build:
Better products at lower costSingle point of responsibilityBuying what they need: a product they can sellFocus on their core activities of selling to the marketLower fixed cost
How a Contract Manufacturer can prepare for Design-Build:
Build a relationship with a Product Development CompanyStart to discuss this option with clientsUnderstand clients’ businesses in more depthStart slowly with low risk opportunities before “betting the farm”
The Design-Build option is growing and will likely continue as more and more Electronics Manufacturing Service companies perfect this new service offering. As manufacturing services continue to become commoditized, Contract Manufacturers will be forced to provide differentiated service offerings to maintain leadership. Design-Build will be one of the more important levers Contract Manufacturers can utilize to provide this differentiation.
To explore this option further and build a relationship with one of the leading Product Development companies in the country, click here to contact us.
Regards,
Steve Owens – CTO Finish Line PDS A Better Way for Small Companies to Develop Products
Steve.Owens@FinishLinePDS.com
Ph: 603 880 8484
94 River Rd | Hudson, NH | 03051 Click for Product Development White Papers
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