Outsourcing on-demand manufacturing using conversion cost model

June 26, 2014 6:01 am

This model is likely to fundamentally change the structure of outsourced manufacturing in the capital equipment sector
The needWhen it comes to low-volume, high-quality, on-demand manufacturing in sectors such as mechanical, material handling, electrical, control systems, panels etc., OEMs and EPCs find it very difficult to find good quality players to whom they can outsource. Outsourced manufacturing in these sectors is fragmented with many small and unorganised players who struggle to maintain the difficult balance between quality, consistency and cost. They lack scale. They also do not have enough volumes or margins to invest in training, skill development and competencies over the long run. So they lead a hand-to-mouth existence.
What is the root cause of this? ChallengeIf a product or sub-system is standardised with a predictable demand volume, clear specification, BOM and process, it is very easy to outsource this on annual contract basis. However, most OEMs and EPC customers in this space have changing and diverse requirements. The technical and commercial terms will vary widely between each requirement. Floating RFPs and finalising terms for each and every requirement is very time consuming.
New model and its impactOutsourcing on-demand manufacturing using conversion cost model is a disruptive new approach pioneered by Autosys.  Like the way high volume contract manufacturing changed the structure of the industry in many sectors such as electronics, computers and automobiles, this model is likely to fundamentally change the structure of outsourced manufacturing in the capital equipment sector. More consolidation and an emergence of big players are expected, who can deliver substantially high levels of quality and consistency at a much lower cost.
Conversion cost modelThe core principle behind this model, is that the OEM or EPC company and the ODM partner (such as Autosys), pre-agree in principle on a conversion cost percentage for each category like electrical, MCC, control panels, conveyors, screw feeders, silos, batch weigher, and piping module. 
Similarly they also agree upon the overall size or value of the business for the year, even though quantities could vary from one requirement to another.
The manufacturing is always done on-demand as per the custom specification or BOM of each requirement. But the customer gets a price advantage, as if they are outsourcing a standard high volume product on annual rate contract.
How it works?For each requirement, the input costs are mutually and transparently shared and agreed.  If there is a budget limitation for a specific requirement, the target costs are also mutually discussed and the input specifications, makes, models are collaboratively frozen.
BenefitsThe ODM partner gets better prices and just-in-time deliveries  from downstream vendors because of the sizeable business volume that is consolidated in this model.  The quality, productivity and process control efficiencies are also substantially better. As a result the final landed price to the OEM or EPC customer for the same requirement (mutually agreed input cost plus pre-agreed conversion cost) will be lower, without compromising on quality and consistency. The overall cycle time from requirement to delivery is also shortened.
About the author:Ramkumar R SThe author is Director Marketing at Autosys Engineering, which provides outsourced on demand manufacturing services to OEMs and large EPC companies in areas such as mechanical, material handling, electrical, control and instrumentation.