Reflections on Second-Sourcing Manufacturing

I’ve had the opportunity over the last 20 years to look at second-sourcing manufacturing from both the perspective of a large telecom company, and the perspective of a system-based company start-up.   I took some time recently to capture what I learned on reflection –

Reasons for Second-Sourcing Manufacturing by Vendor:

  • Flexibility in pricing negotiations (leverage)
  • Flexibility in production volumes
  • Flexibility in production run priorities/intervals and prototype runs
  • Manufacturer disaster mitigation due to site problems (e.g. fire, flood, natural disaster, labor problems, transportation delays)
  • Manufacturer disaster mitigation due to financial strength (e.g. market conditions, sensitivity to a small number of customers)
  • May be required by customers of the vendor (e.g. particularly in case of large telecom customers or government)
  • Poor support or responsiveness by the manufacturer
  • Poor quality or process control by the manufacturer
  • There maybe government restrictions requiring products bought locally be made locally

Challenges associated with Second-Sourcing Manufacturing for Vendor:

  • Increased support costs associated with RMA, troubleshooting field problems based on source of card manufacture
  • Increased design cost for system to track and manage vintages according to source of card manufacture
  • Extra costs and effort required to vet, engage and manage an additional supplier
  • Extra costs for dual sets of component supply and obsolete stock
  • Extra costs due to yield problems (two bone piles)
  • Extra costs due to training manufacturer and fitting manufacturer for test and repair functions
  • Export restriction laws on specific technology
  • If off-shore – other complexities – language, timezones, shipping,  etc

Practical Considerations:

  • Most system developments have more then one single-sourced component on it (often from a small specialized supplier) – which is usually a higher risk then manufacturing line to the vendor and more difficult for the vendor to manage around (e.g.  no footprint compatible alternative components)
  • Manufacture and debug capabilities for specialized components can limit selection of potential manufacturers
  • Interval between production runs can be problematic for some manufacturers since the biggest customer tends to get the most priority on the lines
  • Off-shoring usually makes sense with system components with specific high volumes, limited assembly and test needs, and work best for builds with proven high yields and low technology complexity

Things a Manufacturer Can Do to Avoid/Preempt Second-Sourcing:

  • Establish method to assure vendor of long-term financial stability and business model on an ongoing basis
  • Present a disaster recovery/mitigation plan (e.g. second-site, cross-manufacturer agreement to protect each other)
  • Present a partner proposal to offer pricing flexibility that is fair to both manufacturing and vendor
  • Up-sell the cost and efficiency benefits of single-source
  • Offer to let them purchase equity in manufacturer
  • Offer to setup a preferred vendor agreement, e.g. commitments of volume in return for commitments of second site implementation, commitments to annual cost reductions over the life of the product build, commitments of turn-around time/priority
  • Offer to use their existing supply chain to leverage cost reductions on commodity components for the vendor
  • Offer to implement a Vendor-Managed Inventory program, where single-sourced high value components are held in Vendor-owned inventory at the manufacturer’s site,  but they are only sold to the OEM just before they are added to the assembly, which reduces the manufacturer’s inventory holding costs and reduces lead-time uncertainty for these big $ items.

If anyone has any other insights, let me know!


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