My first exposure to the world of Contract Manufacturing Organizations dates back to the years 97 & 98 when i was operations director at Honeywell France, in the measurement & control division of the company:
The manufacture of the electronic card which represented the strategic heart of our products had just been outsourced, after extensive research and validation by R&D and Quality.
The Supply Chain was “of course” not involved in the choice of the CMO and was therefore not surprised to discover that all supply aspects had only been discussed superficially.
As soon as I arrived, I only heard about this new CMO that everyone would have dreamed of getting rid of. The motive: an awful On Time In Full performance!!!!!!
This was the same topic that I found again many years later in the pharmaceutical industry, which meanwhile in the meantime became my specialty.
In each of the cases that I have experienced up closely during the following years, my first reaction was modestly to go and visit this manufacturer to listen to him.
My objective was not only to hear about their potential difficulties in working with us, but also to verify their true willingness to cooperate with us to improve our JOINT performance; this last adjective being, in my opinion, the starting point of the development strategy that I intended to deploy between us in the future.
It wasn’t easy because in the minds of many people even today, the idea remains, as it was in the industry 40 years ago, that a supplier is there to serve us, without discussion, at the best possible price, in a dominant/dominated relationship.
At the risk of losing you as a friend, I am sorry to write that for ages, a supplier and a CMO in particular has to be treated with care, certainly with a very high level of requirements in terms of Quality, Costs and Service Level, but it is no longer treated as it was in the early days of the industry.
As soon as the CMO’s willingness to cooperate was verified, I set about implementing our development strategy with them.
My first step at the time was to address our management fairly directly by setting out a few basic principles:
1.“like it or leave it”
Stop the litany of laments!
The CMO you are complaining about was not imposed on you, you chose it yourself; if it is CURRENTLY that bad, you should look yourselves at your own weaknesses, you who were unable to detect any issue during the selection phase. The CMO is an Industrial company like you, with all the difficulties that it implies. Internally you would not be satisfied with lamentations only; or you would get rid of your dead branches, or you would just set up a plan of action to deal with your difficulties.
It should be the same with a CMO.
2.“if you like it make it a partner not a punching ball”
As soon as the laments are stopping, it´s becoming time to move on to your vision definition and then to action.
The electronics industry, with its concept of “Fabless Organization” in the 1975’s, was a pioneer in this field, STARTING to develop concepts and practices using the prefix “co.” such as COoperation, CO-collaboration, CO-development, CO-supply Chain, … in short, anything that leads to a real partnership.
3.Stop the dictatorship of the OTIF
The vision of the future must therefore be a real partnership with the CMOs and the development/deployment of an action plan with real performance indicators.
The Pavlovian reflex towards a CMO is often due to a lack of imagination to focus on his OTIF (on Time in full) which is still supposed to represent for many the Holy Grail in Supply Chain change management.
However, let’s not lose sight of the fact that the OTIF of one of your suppliers will only ever be a Process indicator, not a Results indicator.
In Supply Chain, your results indicators are above all your customer service rate and your costs (stocks, level of back orders in $…).
Having a good OTIF without a good service rate and with high inventories will only “impress the gallery” without bringing you much profit.
So, the first thing to do in your new partnership, is to clearly state your ambition with regards to your CMO: you aim for high service at low cost.
This will inevitably force it to be more flexible and to reduce its lead times.
The requirement for Flexibility could potentially please the subcontractor, as it would allow him to more efficiently arrange its production campaigns and avoid untimely format changes.
Placing orders several months in advance and then fighting with them with your OTIF only in perspective, just to ensure that they meet their promised dates is and old-fashioned way of managing the supply chain, especially as your customer requirements will probably have changed in the meantime.
It has been decades since the electronics and automotive industry understood what needed to be done working with CMO, encouraging a commitment to transparency between partners and in a win-win/win contract.
And don’t talk to me about doing your CMO’s own Master Production Scheduling (MPS) like I saw recently in the project plan of a Pharmaceutical company. It is exactly the opposite that needs to be done.
On the contrary, you should trust more your CMO, give him more access to your information (customer needs, subsidiary stocks, etc.) and let him make his own planning and his own supply plans for your customers, according to strict service level and stock reduction objectives.
The flexibility that this technique will offer to your CMO will allow him to better control his costs and to involve him more deeply in your Inventory reduction objectives which will inevitably go through a reduction of their lead times.
OTIF will finally become only a measure of the stability of their production plan (MPS), a plan made at the moment it has detected your needs (VMI,…), and placed an order in its manufacturing program and then started to commit their first material resources or capacities.
In short, OTIF will become the measure of the respect of its committed lead-times, lead-times whose reduction and stability in this variation will become one of the essential levers for reducing your stocks.
It is by fighting to increase your sales, reduce your back orders and your stocks that the Supply Chain will make the best contribution to the company’s results, not by discussing hours about the “sex of angels” to find out whether your subcontractor has met its deadlines within plus or minus 7 or 10 days.
This is the philosophy that I have always believed in, which I first applied in the 1990s in electronics assembly, and which today makes me so happy to start the new assignment I have with Cheplapharm in Greifswald, a young and fast growing company that is working with a lot of Contract Manufacturer.