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recent survey on the use of contract manufacturing for electronic and electrical work was carried out for Remploy Manufacturing Services one of the UK's largest specialists in this field.

Table

I.

Use of Subcontracting
Use (%)

Subcontracting to Improve Competitiveness

Electronically "biased" manufacturers embracing: Consumer electronics Electronic data processing Telecommunications Office equipment Electrically "biased" manufacturers embracing: Domestic appliances Lighting DIY Automotive

62

32

(Survey carried out by Cegos Makrotest. Total survey sample size: 85)

Introduction The survey, carried out for Remploy Manufacturing Services on the use of contract manufacturing, spanned eight industry sectors (see Table I) and revealed that, across the board, about half of the UK-based manufacturers who responded now incorporate the use of contract services. Interestingly, there was a major divide between electronically (62 per cent), as opposed to electrically (32 per cent), "biased" manufacturers. In this article Divisional Manager Norman Johnson draws on some of Remploy's findings to examine the reasons why companies should adopt this route as part of a planned operating strategy and the steps they can take to get the best from it. Remploy's Findings There is a growing trend among UK-based manufacturers towards the use of subcontracting for competitive advantage. The fact that contract manufacturers (CMs) providing labour, or parts and labour, are now called on regularly and consistently to handle certain aspects of the production process not just to do so when a firm is overloaded with work is a significant change in management's approach to the need for manufacturing flexibility.

Why Contract out? As a policy that is already much more developed in Japan and the USA it recognises that all the processes carried out by a manufacturer are not necessarily "core", that is activities critical to that manufacturer's competitive standing. Many factory activities such as the production of PCB subassemblies or assembly of metal and plastic parts may be considered simply as production of multi-element components. As such they may best be contracted out to an approved supplier for a number of reasons, key ones being: An original equipment manufacturer (OEM) wishes to concentrate management time and effort on those core business activities which makes best use of in-house skills and resources; A more cost-effective approach and better budget control can be gained by using outside resources; There may be special difficulties in obtaining suitably skilled labour to do the work in-house on a permanent or temporary basis; neither the time nor money may be available for training and retraining; In today's volatile markets any downturn in business results in the CM having to handle redundancies.

Who Contracts out? Though the practice is now beginning to filter downwards, it was mainly larger "blue chip" and multinational OEMs who first recognised the value of the strategic subcontracting approach. It also appears from our findings that it is the younger, electronics-dominated sectors which

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INDUSTRIAL MANAGEMENT & DATA SYSTEMS 90,7

appear to have the more go-ahead attitude to this technique. These companies tend to have a clearer policy on which facilities must be maintained in-house and which can usefully be placed out when aiming for a stronger competitive stance. Although smaller companies tend to be more reactive to market conditions they also tend to be less clear about what their core activities should be and still lean more towards doing everything themselves. There may be a need to overcome other complexities, of course, which can limit and affect the ability of an OEM to follow the subcontracting route. These include: Unions in some sectors union pressure may be such that union agreement is required before work can be contracted out. Local economic situation in areas of high unemployment OEMs can feel under political and social pressure to maintain their labour force, even though a subcontract route may actually be a more cost-effective way of achieving production and targets. Government or development agency financial assistance the creation of jobs in-house is often seen as the ultimate measure of success for this kind of funding, as such the bodies who make the funds available may not look favourably on companies who plan effectively to shed jobs (even though for an expanding company there may be no net loss of jobs).

Remploy's survey focused on light assembly of components and parts in the electronic and electrical fields across eight industry sectors and indicated that the main kinds of work being contracted out were: (1) PCB assembly; (2) (3) (4) (5) (6) Mechanical assembly of metal and plastic parts; Wiring/harnesses/other electronic assemblies; Repair/rework; Assembly of electrical appliances/equipment; Others including ATE test and repair, painting, packing.

Which Contract Manufacturer?

An analysis of the perceived strengths and weaknesses of subcontractors yields a profile of the main features considered desirable when a firm wishes to establish a strategically important professional partnership with a CM (Table II).

stability and a sound financial base were important

Prerequisites from the service provided by a CM were, not surprisingly: value for money, flexibility and gearing towards on-time delivery. Closely associated was adherence to quality in organisation and output and the ability to show that quality principles (increasingly those of BS 5750) are in place. A close geographic proximity

What Type of Work is Contracted out?

Those manufacturing activities which are not viewed as "core" by a company will obviously vary from manufacturer to manufacturer.

production technology and materials dictate easiest separation of core from peripheral activities
Major differences in production technology and materials probably dictate the easiest separation of core from peripheral activities. For instance, it is easy to understand why a specialist audio electronics manufacturer might consider the metalwork involved in producing the boxes to house its products as non-core activity. The more sophisticated the OEM is, however, the less obvious are the decisions that are needed to define processes considered as peripheral.

Table

II. Profile of a Strategically Suitable Contract

Manufacturer

Value for money Flexible Geared to on-time delivery Able to show that quality principles (increasingly those of BS 5750) are in place Previous experience of similar work or relevant skills with appropriate equipment Geographically as close to the customer as possible (around 70 per cent are usually within 50 miles) Controlled by a strong management team An integrated part of the customer's activities Financially soundly based

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to the customer was preferred around 70 per cent of those chosen usually fall within 50 miles. A number of other requirements figured prominently: previous experience of similar work or relevant skills with appropriate equipment scored highly; as did the need for the CM to be controlled by a strong management team. From the long-term strategic viewpoint, stability and a sound financial base were important. So, too, was the ability to become an integrated part of the customer's activities being able to adapt to fit administratively and procedurally in terms of documentation and timing of communication of financial and production information.

Table

III.

Subcontract Procurement Decision-making and Product Life Cycle

time Mature product

New product/project

Complex decision for subcontract work Several people involved several departments involved

Simpler decision Few people involved

A CM should be able to handle sudden peaks in demand

Beyond these "basics" there are further demands made on those CMs who are capable of producing more sophisticated "higher value-added inputs" to a manufacturer. These companies may be expected to: offer design and manufacturing expertise, which in certain specialised fields may be superior to that of their customers; test products and systems to standards that are customer or industry defined; purchase components (and, if necessary, specify them).

approach is a movement away from the traditional method of control where QA engineer, design engineer and others responsible for a production project were usually drawn from separate divisions of the company. Those considering the use of contract services should learn from established users who screen potential new suppliers by subjecting them to some uniform system of Vendor Appraisal. This may well involve the completion of comprehensive questionnaires covering aspects such as previous experience, QA and training capabilities; together with visits by members of the OEM's procurement team. Once the choice is made and work is underway most larger OEMs look to regular performance monitoring of their CMs; often using monthly performance meetings and reports as the quality and on-time delivery control mechanism. When new CMs are being involved with established production lines the OEMs' decision-making process is unlikely to involve a project team. As occurs in cases where overload requirements need to be met on a "regular" basis, subcontract arrangements may simply be the responsibility of a production buyer outside resources often being called up via the Purchasing Department. Conclusion The research has highlighted the importance of making the correct choice of CM a first priority. Changing suppliers, or bringing new ones on-stream, can be timeconsuming. Selection of subcontract services to bring longterm economies and efficiencies to manufacturing as part of this innovative, strategic approach, is therefore a matter for careful analysis and consideration.

Even manufacturing work placed out is, of course, subject to unpredictabilities. A CM should be able to demonstrate sufficient competence in the handling of sudden peaks in demand and other unexpected, though conceivable, occurrences. It is not unreasonable to expect a CM to participate in the devising of contingency plans for such circumstances. When Should the Contract Manufacturer be Involved? Where new projects and products are involved, it is best to select and involve a CM as soon as the go-ahead is given (Table III). The survey shows that when subcontract input is required it is increasingly common practice to create a "project procurement team" (PPT), which will probably have its own purchasing manager, QA engineer design engineer and, for the largest of OEMs, a manager responsible for financial assessment of suppliers. This PPT