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Supply Chain Metrics That Matter: A Focus on Contract Manufacturing

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  • Supply Chain Metrics That Matter:

    A Focus on Contract Manufacturing

    Using Financial Data from Corporate Annual Reports to

    Better Understand the Contract Manufacturing Supply Chain

    8/13/2013

    By Abby Mayer Research Associate

    Supply Chain Insights LLC

  • Copyright 2013 Supply Chain Insights LLC Page 1

    Contents Research ........................................................................................................................................................... 2

    Disclosure.......................................................................................................................................................... 2

    Research Methodology ...................................................................................................................................... 2

    Executive Overview ........................................................................................................................................... 4

    Contract Manufacturing: Is It the Right Business Model? ................................................................................... 5

    The Industry Lacks Resiliency ........................................................................................................................... 6

    Growth: Short-term Volatility .............................................................................................................................. 8

    Profitability: Squeezing the Margins ................................................................................................................... 9

    Cycle: Who Is Responsible? ............................................................................................................................ 11

    Complexity: Declining Productivity ................................................................................................................... 12

    Recommendations ........................................................................................................................................... 13

    Conclusion....................................................................................................................................................... 14

    Appendix ......................................................................................................................................................... 15

    Company Profiles ......................................................................................................................................... 15

    Other Reports in This Series: ....................................................................................................................... 16

    About Supply Chain Insights LLC .................................................................................................................... 17

    About Abby Mayer ........................................................................................................................................... 17

  • Copyright 2013 Supply Chain Insights LLC Page 2

    Research Supply Chain Metrics That Matter is a series of reports published throughout the year by Supply Chain Insights

    LLC. The focus of this research is to share insights for supply chain leaders on supply chain performance

    trends within specific industries. Each report offers a deep focus on a specific industry. This publication focuses

    on the contract manufacturing industry which supports brand owners in the discrete manufacturing markets of

    consumer electronics, automotive, medical devices and other industries.

    These reports are based on data collected from financial balance sheets and income statements over the

    period of 2000-2012. In these reports, we analyze how companies made trade-offs over the course of the last

    decade in balancing growth, profitability, cycles and complexity.

    In the practice of Supply Chain Management (SCM), each industry is unique. We believe that it is dangerous to

    list all industries in a spreadsheet and declare a supply chain leader. Instead, we believe that industry trends

    need to be tracked and studied over time by peer group. In this series of reports, we analyze the potential of

    each supply chain peer group, share insights from industry leaders from each industry, and give

    recommendations based on general market trends.

    Disclosure Your trust is important to us. As such, we are open and transparent about our financial relationships and our

    research process. This independent research is 100% funded by Supply Chain Insights.

    These reports are intended for you to read and share freely to improve your supply chain decisions. Please

    share this data freely within your company and across your industry. All we ask for in return is attribution when

    you use the materials in this report. We publish under the Creative Commons License Attribution-

    Noncommercial-Share Alike 3.0 United States and you will find our citation policy here.

    Research Methodology The basis of this report is publicly available information from corporate annual reports from the period of 2000-

    2012 for publicly-owned companies involved in contract manufacturing activities.

    In picking companies for the Supply Chain Metrics That Matter report series, our methodology traditionally

    focuses on companies recently listed in the Fortune Global 500. For this report, we identified two companies

    ranked on the Fortune Global 500 for 2013 and augmented them with four hand-selected companies that we

    believe provide a meaningful comparison to understand the contract manufacturing industry. We used the

    Morningstar Contract Manufacturers peer group to inform our decision.

    http://creativecommons.org/licenses/by-nc-sa/3.0/us/http://creativecommons.org/licenses/by-nc-sa/3.0/us/http://www.supplychaininsights.com/news/citation-policy/

  • Copyright 2013 Supply Chain Insights LLC Page 3

    In our analysis, we prefer to use financial ratios as opposed to absolute numbers. The use of ratios enables a

    better comparison of companies of different sizes and across different currencies. We use the financial ratios to

    gain insights on how the industry is performing on the Supply Chain Effective Frontier. This is a Supply Chain

    Insights framework for supply chain excellence that evaluates how well companies have balanced priorities of

    growth, profitability, cycle and complexity over the past decade. We believe that the supply chain is a complex

    system that must be managed holistically, and each industry has a different potential of performance.

    Figure 1. The Supply Chain Effective Frontier

    In this report, we use the financial data to help readers learn from past trends and to better understand current

    operating environments. In addition, we provide recommendations for the future. This financial analysis is

    augmented with information from our quantitative and qualitative research studies as well as our work with

    clients operating within the industry.

    http://www.supplychaininsights.com/research/conquering-the-supply-chain-effective-frontier

  • Copyright 2013 Supply Chain Insights LLC Page 4

    Executive Overview Growth is stalled. Margin pressure is high. Shorter life cycles, as well as increasing compliance and regulatory

    pressure, provide additional challenges to the contract manufacturing industry. Finally, excess capacity is a

    significant problem. Is this a recipe for opportunity or a disaster for the brand owner using outsourced

    manufacturing partners? We think the latter.

    Over the last decade, brand owners from consumer electronics to medical devices have grown more

    dependent on outsourced contract manufacturing. In fact, the contract manufacturing industry grew up out of a

    desire to mitigate risk and improve costs for brand owners. However, the market has shifted significantly in

    recent years and the contract manufacturing industry is struggling. As a result, they pose a risk to brand

    owners. In this report, we illustrate how the lack of resiliency affecting contract manufacturers represents a

    serious risk to brand owners and offer advice on what can be done to mitigate the problem.

    Over the last decade, many contract manufacturers have attempted to differentiate services and refine their

    business model to gain competitive advantage. However, in looking at the financial results, we find that most

    companies are struggling. As a result, it is time to redesign the business model and relationships of contract

    manufacturers and brand owners. While companies can outsource the role of manufacturing, they cannot

    outsource the responsibility of managing the extended supplier network. This is one of the many challenges

    the industry now faces.

  • Copyright 2013 Supply Chain Insights LLC Page 5

    Contract Manufacturing: Is It the Right Business Model? Contract manufacturing is now two decades old. Most contract manufacturers began in a different form and

    have morphed into their current business model. However, today they compete with similar business models in

    a very competitive landscape. Brand owners are squeezing the contract manufacturers on cost. In contrast,

    contract manufacturing companies have tried to differentiate based on capabilities, not costs, and the results

    have been disappointing.

    Each company of our peer group entered the industry with very different roots

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