Interview: Should You Choose Contract Manufacturing?

Here at Process Cat we usually talk about ways to improve your own manufacturing.  But, sometimes you’ll want to think about outsourcing, or contract manufacturing.  A contract manufacturer is just what it sounds like: a company that manufactures products on a contract basis.  There are all sorts of reasons you might want to choose contract manufacturing. For example, you might not want to or be able to buy a large piece of equipment that will be needed, or you might just want to have someone with experience handle the manufacturing so that you can focus on other things.  This week I interviewed Bharat Moorthy, an engineer with plenty of experience working with contract manufacturers, on what things small business owners should consider when making this decision.

MG: First off, tell me a little about yourself. Where do you live?  What’s your favorite thing to do on the weekends? 

B: I grew up in Madras (Chennai), India and spent a brief period in my formative years living in Bangkok, Thailand and Moscow, Russia. Home is in Falmouth, Maine where I live with my wonderful wife who I met while I was on assignment in Portland. On the weekends in the summer you will find me either sailing my 22’ Cape Dory on Casco Bay or hitting some poorly chosen shots on the golf course! (I should really stick to just watching it on TV!)

MG: Wow that’s a fascinating personal background!  What educational background do you have? What jobs have you held that relate to working with a contract manufacturer?

B: I have a bachelors in Mechanical Engineering and a masters in Industrial and Operations Engineering. As a manufacturing engineer with SPX Corporation I worked to transfer the manufacturing of a cool novel wireless cell phone antenna production from the US to one of the leading contract manufacturers in the world, to their production facility in southern India. In my role as Supply Chain Manager at Alere I managed the relationship and was ultimately responsible for all contract manufacturers in the US, Europe, India and China (CM or CMO is the industry term that we often use to refer to them lovingly!). My job was to ensure that CM’s met their Quality, Cost, Delivery, Safety and Sustainability targets. 

MG: Ok, now to the meat of the interview: what are some things people should consider when making the decision to contract out the manufacturing of an item versus training their own employees to do it?

B: Really good question! Most folks incorrectly assume that CMs are only based in low cost countries, and that cost is the only criteria to make the decision on selecting a CM. This is actually what got several US and European companies in trouble in the late 90s and 2000s. The industry started to realize very quickly that there were other factors than just cost that matter! Here are the top 3 things I consider when deciding to use a CM vs. manufacturing in-house:

1) Total Cost of Ownership (TCO): The cost per part that you’re quoted is only a portion of the total cost of that product. Poor quality results in increased costs. This is especially true if the defect is caught AFTER it is shipped to the customer. Both in terms of the cost of getting the defective product back and replacing it, and then also the customer goodwill cost.  That’s difficult to quantify, but basically it’s not a good look when a customer catches a defect that you missed. 

A former boss told me a rule of thumb – it costs $1 to fix a mistake if identified at the same operation, $10 to fix the mistake in-house and $100 to fix the mistake once it has shipped to the customer. 

Then there’s also the costs of shipping and tariffs to factor in. In summary, you should do your homework and try to predict what your Total Cost of Ownership will be, and factor that into your decision. 

2) Intellectual Property (IP): Different countries across the world may have different legal and enforcement standards when it comes to protecting IP. I have seen far too many examples of IP being stolen when the “know-how” to manufacture is transferred to a CM. If your IP is part of what distinguishes your product, you need to think about how you’re going to protect it if and when you transfer manufacturing to a CM.  

3) Strategic Competencies: If your project is going to involve creating or learning a new manufacturing or testing method, then you have to ask yourself, do I want to pay a CM to develop this new skill that they could then use on other customers or do I want to have my own employees develop the skill and keep that knowledge in-house? 

MG: Well this has all been very informative.  Now let’s end with the most important question: do you have any cats and if so can we see a picture of them?  

B: Haha! My favorite question! I think what makes me uniquely qualified to contribute to this blog is that I am the proud owner of 2 cats! (It might be the other way round, they own me!) My wife adopted (stole?!) Becky from the streets of Portland and Che joined us later as a companion to Becky. I do some of my best thinking while brushing their fur! I had so much fun doing this and hope we can collaborate much more going forward!

MG: Me too!  Thanks Bharat, great talking with you.

Bharat Moorthy is President and COO of Optimum Imaging Diagnostics, a startup in the medical diagnostics point of care market. Their goal is to change the paradigm of healthcare to a prevention-based system instead of a treatment-based one.

No challenge for this week.  But do let me know: would you like to see more posts like this?  Do you like the interview format? Do you have any follow-up questions for Bharat?  Comment below!