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How to Manage the Contract Manufacturing Process

Contract manufacturing is part of the procurement process for manufacturers in which businesses will purchase many items at a bulk price from a supplier and schedule delivery at regular intervals. Although a standard practice, many businesses have failed to optimize their sourcing, forecasting and operational contract manufacturing processes and are paying higher costs as a result.   

In this blog post, our team wanted to look at how each of the contract manufacturing stages plays a crucial role in adapting to the ever-changing supply chain landscape. We also wanted to highlight some tangible steps your team can take to optimize these processes within your own supply chain. Please note that any solution recommendations have been made as a direct response to our work in direct procurement.     

Sourcing  

The sourcing process for contract manufacturing requires businesses to find and qualify the right set of suppliers, weighing factors such as quality, price, lead times, and several other preselected criteria. By carefully considering and optimizing these, companies can convert their supply chains into a differentiated advantage against their competitors. However, businesses have internal obstacles, processes, and data incoherence that make it a challenge.  

Many point solutions exist to help conduct market research, manage contracts or run a price analysis. Looking at the end-to-end process, direct procurement involves steps including:  

  • Find quality sources of goods   

  • Negotiate contracts  

  • Establish payment terms   

  • Conduct market research  

  • Establish ongoing standards  

Although these steps are common, businesses do not always use solutions that allow them to easily surface the necessary information to make decisions and develop ongoing supplier relationships.  

Our recommended solution is most often a consolidated sourcing portal and dashboard. Although this may require a semi-tailored solution, businesses can seek out-of-the-box offerings that may include features such as: 

  • Consolidated view across all supplier bids integrated with information from planning systems such as Material Requirements Planning (MRP) or SAP Integrated Business Planning (IBP) 

  • Insight into a new bid, bids with changes required, and no-bid RFQ’s  

  • Cost & lead time comparisons  

  • A/B sourcing between market pricing and lowest target pricing (not a requirement but has proven effective in the manufacturing industry

  • Two-way communications between the manufacturer and the bidding suppliers 

Ultimately, if your business is looking at investing in a solution for the long term, it should cover the entire process from RFQ through to supplier award.  

Forecasting  

Following the sourcing process, businesses undergo forecasting. Forecasting is the process stage in which companies will make predictions of the component supply, demand, and pricing based on the predicted manufacturing needs, supplier data, and the analysis of historical demand. The suppliers will respond to the component forecast with a proposed forecast commitment detailing their ability to supply the necessary components at the price points, quality, and quantity that they can provide. Oftentimes, these supplier proposals come with large amounts of data within multiple attachments that corroborate their responses.   

Unfortunately, data analysis will require as much data as possible to identify trends, make accurate forecasts, and award appropriate constrained commits to bidding suppliers. Many businesses fall short due to incomplete information because data is stored across disconnected systems. The result is that forecasts will face credibility issues and will not provide a clear picture of where the business is headed. Credible data is key to an accurate prediction. Without it, companies may wind up with too much or too little inventory on hand and have no choice but to pay the added costs associated with the mismanagement of supplies.  

Considering data credibility, the inability to report on operational data is another key area that businesses must consider. Even if businesses can report on critical metrics, they may not be able to do so in time to support the performance metrics needed in timely decision-making. For example, the decision to issue a spot quote for the purchase of components to resolve a supply chain disruption that was caused by unexpected delivery obstacles. 

Both concerns can be mitigated by integrating all data sources into a single solution for both SAP and non-SAP data. The complicated part of the process is what one might describe as a smorgasbord of applications in their IT infrastructure, surfacing the relevant data, aligning the data to use the same system of measurement, and then joining and correlating the data to extract the nuggets of higher-level information.  

After consolidating data, businesses can take the next step and create the necessary dashboards (as determined on a business-by-business basis) to ensure optimal visibility. When forecasts need to be presented, tools like SAP Analytics Cloud (for SAP users) can help teams introduce standard templates for their reporting, so reports can be easily replicated and are consistent across all business functions. 

After awarding suppliers and forecasting future demand, the next step will be to schedule deliveries regularly by awarding constrained commitments to the suppliers. Accurate scheduling will ensure that enough products exist to meet demand and too many products aren’t being kept on hand, resulting in increased storage costs that will hurt the company’s bottom line.   

Contract Manufacturing   

Finally, all of the sourcing, forecasting, and scheduling are useless unless it is matched with an efficient operational execution direct procurement process and system. In this manner, the daily, weekly, and monthly governance and management of the procurement and supply chain tasks associated with the progressive ordering, delivering, billing, and payment of components need to be continuously monitored, executed, and accounted for. By gathering all of the relevant data into a single system of record or operational data store acting as the single source of truth, manufacturers will be able to have a single view across their operational procurement process. By adding automation and making the procurement process as touchless as possible, companies will be able to efficiently manage-by-exception and increase their productivity by directing their accounts payable team to focus only on high-value tasks.   

Accurately managing the contract manufacturing process will require the selection of reliable suppliers and the continued maintenance of these relationships. That said, unforeseen circumstances may still arise, so businesses should have carefully set contingency plans. 

To do this, businesses will need to continue providing company-wide visibility into resource capability, conduct scenario data-driven decision-making, and work toward synchronizing supply with demand to reduce inventories.  

Conclusion  

The bottom line is that conventional systems to integrate contract manufacturing will often leverage multiple spot solutions or paper information exchanges that can hinder your organization’s efforts to become more agile.   

Currently, SAP has a robust backend to support the collection of supplier data. To further support businesses, the ConvergentIS team has developed a series of applications that can be deployed on SAP S/4HANA or SAP ECC to help manage this data in a single source of truth. Suppliers can communicate with their buyers about the production of finished goods or set up triggered messages after completing production orders.  

For more information about implementing SAP and ConvergentIS solutions for contract manufacturing, check out our free guide to procurement for manufacturers.


 

Procurement Guide for Manufacturers