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Sunday, April 14, 2024

Sub Contract Manufacturing

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Sourcing Services Company– is on an intensive path of development contract manufacturing. Initially, the development of subcontracting in our country developed with incredible difficulty contract manufacturing.

Large enterprises with a traditional structure, for the most part, significantly lose in the cooperative supply market not only to enterprises in China and Eastern Europe but also to newly created small and medium-sized enterprises. The subcontracting system is one of the forms of industrial cooperation between large enterprises and small producers. This efficient and modern method allows enterprises to achieve high production efficiency through the rational use of available resources contract manufacturing. 

The methodology of the sub contract system (contract manufacturing) is as follows:

 Two parties

  1. The contractor and the subcontractor- agree. The contractor entrusts one or more enterprises (subcontractors) with producing parts, components, or assemblies necessary for producing the final product. The subcontractor performs the work to the specifications provided by the contractor. The issue of using subcontracting is decided based on two main criteria 
  1. production capacity and technical specialization of the enterprise. The first option: subcontracting based on production capacity, when the contractor does not have enough of its production capacity to fulfill the order in total, and the creation of additional capacity is unprofitable and undesirable. Under this option, the contractor hires a subcontractor to handle the remainder of the orders received by the contractor. This form of subcontracting is used when the contract manufacturing volume of orders received by the contractor is unstable. The second option is subcontracting based on specialization. In this case, the contractor wishes to use certain subcontractors’ services with special equipment and apparatus for the performance of complex and high-precision work. Such subcontractors have exceptional technical skills (technologies) necessary for specific production processes (manufacturing products), and contractors prefer to use their services. According to a survey conducted by the Interregional Center for Industrial Subcontracting and Partnership, at the moment, the main sectors of the industry for the development of subcontract relations are mechanical engineering, metalworking, manufacturing of tooling, and non-standard metal structures. Now the service market is gradually developing – the development of technical documentation, industrial design, measurements, and testing contract manufacturing.

The advantages(Quality Management Solutions) of such relationships between small and large enterprises are apparent. The main advantage of subcontracting for the contractor is the relatively low cost of parts and services received from small and medium-sized enterprises since their overhead costs are lower. As a result, the cost of the final product is reduced. The contractor is guaranteed a supply of quality and in-spec products and can therefore reduce inventory to a minimum.

A guaranteed sales channel for their products appears for small enterprises- subcontractors. However, there are quite a few obstacles for small businesses that wish to be involved in subcontracting. For the most part, small businesses do not have trained personnel to organize the marketing of subcontract products or the necessary funds to pay for marketing activities, including the most effective ones, such as participation in exhibitions and fairs.

Sub Contract Manufacturing 1

The lack of contract manufacturing experience and marketing promotion funds significantly limits these enterprises’ markets. Lack of funds also prevents these enterprises from implementing and certifying quality management systems. Managers of small enterprises often strive to keep information about their enterprise as private as possible (for reasons of business security), which prevents them from receiving orders from large (mainly foreign) customers; provide false information (exaggeration of the company’s capabilities), which leads to a failure to complete the order contract manufacturing. 

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A significant problem hindering the formation of the economic integration of small and large businesses is also the “information vacuum”: large companies have practically no information about potential (production, marketing, innovation, etc.) opportunities and needs (for premises, equipment, etc.) small firms. In turn, the majority of small firms, having a weak “penetrating ability” and not having the “necessary” connections, cannot independently reach the level of the management of a large enterprise to discuss possible prospects for their joint work.

As a result, a paradox arises: even being interested in cooperation, small and large businesses continue to work in isolation from each other. Great assistance in solving this problem is provided by the regional subcontracting centers created based on the Interregional Center for Industrial Subcontracting and Partnership, the main directions of which, in the interests of the development of industry and small business in the region, are:

  • 1. optimization of cooperation relations between enterprises in the region, maintenance (filing and updating) of an open database on industrial enterprises in their region; 
  • 2. the organization of information exchange between enterprises; attracting cooperative orders (subcontracts) to the region; 
  • 3. development of interregional relations (using the possibilities of information exchange in the system of subcontracting centers);
  • 4. participation in the development of the industrial climate in the region. It includes participation in the development and implementation of regional programs contract manufacturing.

However, despite the significant support provided by the center, the problems facing industrial enterprises cannot be solved by the forces of one center, even if supported by the government. Systematic, comprehensive work is needed to optimize industrial cooperation on a market basis and, therefore, based on common sense principles, efficiency and voluntariness. The regional center of industrial contract manufacturing subcontracting is only one link in the emerging complex system. Industrial enterprises themselves must choose acceptable forms and organizational schemes of interaction. For example, the Kursk region demonstrates similar forms of interaction. To avoid being unfounded, we present facts that testify to this. According to the official website of the Chamber of Commerce and Industry (Kursk region), large industrial enterprises invite small and medium-sized businesses to cooperate on the principles of industrial cooperation contract manufacturing. 

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