Selecting a Contract Manufacturer Amidst the Global Component Shortage

Selecting a Contract Manufacturer Amidst the Global Component Shortage

Electronic manufacturers have unique supply and demand dynamics that have been worsened by the recent pandemic. As a result, regular price increases and order delays are a standard now for commodities like MCUs and fab-based electronic parts.

Less supply and increased demand are pushing semiconductor suppliers to record heights. Along with increased demand, long-standing difficulties such as limited capacity at semiconductor production plants lead industry professionals and experts to believe that semiconductors will continue to be the commodity with the greatest gaps. In a recent interview, Intel’s CEO Pat Gelsinger said that the supply shortages in the semiconductor industry will likely drift into 2024. 

While you may think that there isn’t much you can do but wait for the shortage to ease, a contract manufacturer can help you effectively endure this scarcity situation. As Jon Kabat-Zinn, the creator of the MBSR (mindfulness-based stress reduction), rightly says, “you can’t stop the waves, but you can learn to surf.” Following this philosophy, a partnership with a reliable contract manufacturer makes the most sense to navigate these trying times successfully.

From enabling you to stay cost-efficient and scale production to improve quality control, a capable electronics contract manufacturer will help you in better planning of your supply chain and bring your product to the market faster amidst the global component crunch.

However, what factors should you consider when selecting your contract manufacturer in this globally demanding situation? Here’s a checklist that can help with the selection.

Factors to Consider When Selecting a Contract Manufacturer

1. Strong supply chain team – local and offshore

Given the component crisis the world is facing today, it is critical to have a contract manufacturer with diversified supply chains that provide you access to both local and offshore suppliers. A contract manufacturer with dual sourcing capability will give you the best of both worlds. 

While you’ll have the option to source components faster through local suppliers, in a shortage situation, the offshore supply team will ensure that the inventory levels are at an optimum level by procuring parts from their wider network of suppliers. This, in turn, will help you achieve your production goals more efficiently.

2. Multiple production facilities across different regions

A reliable contract manufacturer will always have production facilities across different regions, whether local or offshore. The primary reason is the ability to meet the production demands more effectively. This capability allows contract manufacturers to switch between different production facilities in the event of a disaster or disruption. In addition, multiple units mean each production unit will have sufficient inventory levels. Consequently, even if there are movement restrictions or local regulations, you can assure continuous production.

3. Experienced executives in the business

When partnering with a contract manufacturer, it is also crucial to know about the leadership team you will be dealing with and their experience in the business. One of the primary reasons to have experienced executives is they can help you make strategic moves during this component crisis.

For instance, based on their experience and connections in the supplier network, these leaders can foresee supply chain disruption and alert you of a possible uncertainty well in advance. With this proactive approach, they will assist you in procuring critical electronic components ahead of time or suggest effective planning methods to keep the production running.

Always consider if the owners of the business are still active day-to-day in their operations. This can be the true difference in sustained manufacturing excellence.

4. Strong supplier relationship, spending power, and negotiation power

A contract manufacturer with a substantial presence in the supply chain market will bring numerous benefits, especially when the world is dealing with the component crunch. With solid financials and an extensive network of suppliers, a reputed contract manufacturer can procure parts from where others cannot.

Furthermore, the strong bargaining powers allow the contract manufacturer to pressure suppliers to provide better lead times as well as work closely and transparently with you for all the price negotiations with the suppliers. 

5. Strong cash position with no debt

Positive cash flow signifies that your contract manufacturer’s liquid assets are increasing. A strong cash position also means that the company can settle debts faster, reinvest the funds in its business, pay expenses timely, and keep a buffer to fight future financial challenges more effectively.

If your contract manufacturer is constantly on credit hold with their supply chain, this will no doubt create further delays in your production.

6. Diversified portfolio of clients

Building on the previous factor of having a solid cash position, it is equally important to know if your contract manufacturer has a diverse portfolio of clients rather than relying on revenues generated from a few customers.

Ideally, a company must not rely on one or two of its customers for more than 10 per cent of its total revenue. This thumb rule ensures that a company doesn’t have overexposure to a single client and prevents it from running into the risk of becoming financially unstable.

Besides, a diverse portfolio also means that the contract manufacturer has broad experience handling different production requirements.

7. Debtors’ insurance 

A reputed contract manufacturer will have “whole of book” debtors’ insurance, covering all of its clients to protect its own business and therefore the rest of its clients if things go financially wrong on a large scale. Consider what could happen if your contact manufacturer had a major client that could not pay their invoices and what the repercussions could be on your own business. It doesn’t hurt to ask for a certificate of currency from your contract manufacturer to demonstrate they have debtors insurance. 

8. Robust and transparent ERP system

A robust and transparent ERP system eliminates data silos and provides accurate data to every distributed stakeholder. For instance, at Entech, we established a control tower in Adelaide and invested in an advanced ERP system to consolidate all the data and bring more visibility into the supply chain. With this integration, all the stakeholders, including our design partners, can now make informed decisions faster.

9. Solid network of external design experts

You may have already completed the R&D and prototyping process for your product. However, a contract manufacturer with its internal resources and network of external design experts, can help you evaluate your design, get independent and accurate opinions, and assist in design changes considering Design for Manufacturing (DFM) and Design for Availability (DFA) approaches. Amidst the global component shortage, these experts can guide you in choosing alternative parts and quickly pushing your product idea to production.

Entech Electronics: Your Trusted Manufacturing Partner in Australia

With two production facilities, local and offshore, Entech specialises in the contract manufacturing of electronic products, complex sub-assemblies, complete turnkey assemblies, and DFM. Manufacturing in South Australia since 1986 with an experienced and well-trained team of 350+ personnel, Entech has enabled several start-ups and leading global brands to meet their production goals amidst the global shortage situation. If you wish to learn more about Entech’s capabilities, reach out to us today!

Find out more about Entech Electronics or Get In Touch 

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Entech Electronics

Entech Electronics

Australian owned contract manufacturing.
Manufacturing in South Australia since 1986, Entech Electronics specialises in the contract manufacturing of electronic products and complex sub-assemblies.

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