Why is the outsourcing of manufacturing such a tough process to manage, even at the best of times? According to Dave Harrington, vice president of supply chain and corporate quality with Stratus Technologies, companies might have conflicting reasons for outsourcing in the first place, leading to misaligned priorities. The key, he says, is to search out common ground between contract manufacturer and customer, to ensure that the relationship will work over the long term.

Due diligence prior to entering into any outsourcing relationship is an essential first step, Harrington says. A company must understand why the contract manufacturing wants to do business with it. Then the two sides need to develop a collaborative set of metrics. "If you don't have them agreed to up front," he says, "you're going to have problems in the future."

In the early years of outsourcing, many original equipment manufacturers saw the practice as little more than a price play. That attitude is what drove many companies to China, where labor was cheap. Today, says Harrington, OEMs are much more aware of the need for ensuring quality in their outsourced products.

In evaluating the attractiveness of a contract manufacturer, an OEM needs to come up with a succinct set of key metrics. The parties need to agree on a basic business model spanning a number of years, but they should also build flexibility into the contract. "Forecasts change," notes Harrington, adding that the contract manufacturer should have the infrastructure to deal with unexpected peaks in demand.

In addition, he says, OEMs should have a deep understanding of which materials the contract manufacturer is going to buy, how it intends to build the product, and how it will fulfill orders. A collaborative set of metrics, agreed to at the outset, can address those critical issues and avoid problems down the line. A detailed service-level agreement "spells out key attributes for both companies," Harrington says.

To view video in its entirety, click here