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. 

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