When companies make the decision to outsource production to a contract manufacturer, the need for effective manufacturing cost management shouldn’t be outsourced along with the product. In fact, if cost management principles aren’t a cornerstone of the business relationship, both parties could find themselves missing out on value creation opportunities or, even worse, wondering where their profits went. In this presentation I will provide strategies and practical steps companies can take to ensure production cost management is tracked, managed, and shared across a contract manufacturing partnership to both mitigate costs and unlock value.
- The role of continuous improvement systems in cost mitigation
- The importance of manufacturing execution systems and management models in the mitigation of manufacturing costs
- Contract structures that ensure mutual transparency and accountability for cost management
Hello, I’m Steve Hinkle. I’m the Director of Ingredient Packaging Sourcing for Clif Bar and Company. I’ve been with Clif Bar and Company almost eight years. In addition to my current role within strategic sourcing, I have extensive experience in contract manufacturing and leading contract manufacturing teams, as well as Supply Chain management and manufacturing operations.
In today’s presentation titled “Not My Plan, But Still My Problems and My Opportunities”, I’m going to talk about Contract Manufacturing and Cost Management in particular within a Contract Manufacturing. When companies make the decision to outsource production to a contract manufacturer, the need for effective manufacturing cost management should not be outsourced along with the product. In fact, if cost management principles are not a cornerstone of that business relationship, both parties could find themselves missing out on value creation opportunities, or even worse, wondering where their profits were.
This presentation is intended for teams or organizations that might be considering contract manufacturing for the first time, or they might have existing contract manufacturing relationships that they’re seeking. When we look to ensure that cost management is a cornerstone of a contract manufacturing arrangement, and we are exploring potential contract manufacturers, I’m gonna propose three elements of consideration that I’m going to go through in detail in this presentation.
The first is the role of Continuous Improvement, or CI programs in cost management. The next one is the importance of Manufacturing Execution Systems or MES, and formal management models. The last topic I’m going to touch on is contract structures that ensure mutual transparency and cost accountability within a Contract Manufacturing environment.
Let’s start with continuous improvement. If you’re exploring a contract manufacturer, and you’re walking into their facility for the first time, one of the first things that you’re going to want to do is to evaluate the maturity of their continuous improvement program. Now, continuous improvement programs come in all shapes and sizes depending on the specific manufacturing process, the products being produced, or the specific needs of that facility.
When you’re evaluating the continuous improvement program, propose you focus in three specific areas. The first is look for a program that is formal as a continuous improvement program. Just because there’s evidence of continuous improvement activities taking place in a facility that does not necessarily reflect a mature formal program with formal program governance.
There’s a couple things you can look for determine the formality of the existing process or the existing CIO program. That is look for dedicated owners. There should be persons within the facility that have continuous improvement in that title. This could be a team of continuous improvement managers, but more often than not, you’ll see a Director of Continuous Improvement within the facility.
The other thing that you should look forward here is standard tools. Standard tools as well as standard language. Standard tools ensure that best practices are utilized within that CI program. As an example, there should be a standard template for conducting root cause corrective action investigations or even exercises as simple as five why or fishbone diagrams. Ultimately, the continuity of knowledge is the objective of standard tools. So, look for evidence standard tools utilize within the continuous improvement process.
In terms of standard language, what I am not referring to here are multilingual plant environments. In fact, at Clif Bar, we have multiple primary languages spoken within our facilities, and it has actually become both a strength and a hallmark of our operations culture. What I am referring to is a standard continuous improvement verbiage. This is essential for everything, from problem statement creation and project charters to properly discussing your loss on the production floor. Having and adhering to defined CI terms is necessary to prevent any confusion that might arise from nuances in CI terminology. So, look to see if the program has standard definitions and compliance to those definitions within their CI program as evidence of formality.
The second focus area that you should look for in evaluating the maturity of a potential contract manufacturer’s CI program is look for evidence of universal buy in. For a CI program to achieve its goals, everyone must be on board. A properly formed CI program should be observable and integrated into every level within the plant organization, starting from the plant manager and extending all the way to the newest entry level position within the facility. Of any of those levels within the organization don’t have buy in, the CI program is going to struggle.
Secondly, the program itself must be indiscernible from the operations culture and its entirety. What do I mean by that? CIO should not feel in a facility like an add on or something that’s just sort of perfunctory on the plant floor to please management. In fact, it should be one of the foundations of the facility culture, such that the culture itself can’t function holistically, apart from continuous improvement.
The third area that you should focus on—this one probably seems very obvious on the surface, but it can be quite nuanced—and that is, look for a record of success. Look for a record of success within two rounds, both in transformational improvements, as well as small, ongoing, incremental improvements. A solid CI program should be able to drive progress within both of these rounds.
I would argue that the small, ongoing, incremental improvements are actually the most difficult and the greatest evidence of the maturity of that CI program. Often it’s those small, sustained, incremental improvements that come from the persons in the facility that are actually closest to the manufacturing operation. So more often than not, it’s a line operator or line supervisor. Evidence of this kind of progress is really important because it also speaks to the culture itself. These types of changes only occur in environments where they’re high trust, where the employees trust management, the employees feel trust in themselves, and they feel heard. That’s really key to driving those small, incremental improvements.
When you go into a contract manufacturing facility, more often than not, the main entryway into the operations will have a CI wall. This is more or less a brochure for their continuous improvement program. Look through that, look for evidence of small incremental improvements, look forward to find owners, look forward to find targets and goals, and look to see how it trends over a period of time rather than isolated areas of CI conducted within the facility to really get a sense for the formality of it as a program, the level of buy in across the facility, and in terms of success, how are they really performing.
Now, let’s talk about the importance of Manufacturing Execution Systems or MES, complemented by specific or intentional management models within a potential contract manufacturing legion. Everyone has probably heard the old adage, “You can’t manage what you don’t measure.” The reason that we’ve all heard this is because it’s absolutely true. It also goes hand in hand with another adage, and that is, “You can’t audit what you don’t document.” You may have even heard a more direct version of this within your quality organization. That is, “If it wasn’t documented, it didn’t happen.” However you say it, it’s intended to capture a really important element of a high performance management system around the interplay between performance management and proper documentation.
More on the documentation piece in just a moment, let’s focus on managing what we are measuring. Now, performance management systems within a contract manufacturing environment can vary widely, depending on the complexity of the manufacturing process, the products being produced, or the needs of the consumer, whatever that might be, it could bury. At a minimum, a contract manufacturer should be tracking overall equipment effectiveness for OEE.
Now, you can dedicate an entire presentation or an entire course to the application of OEE. No doubt, it exists within the courts library somewhere. If you’re not familiar with OEE, as a concept, I suggest that you go and you look to the port’s library to learn more information on this topic. At a minimum, if you’re not familiar with it, OEE is a multiplayer calculation comprised of availability, performance, and quality. This standardizes performance within the manufacturing facility, and enables you to track it over time, and differentiate by product, type, or [inaudible], or whatever level of granularity that you need to measure your particular operations.
Performance management goes hand in hand with proper documentation. You can’t audit what you don’t document. When we talk about documentation, I want to talk about it in two rounds here. That is in terms of documented process compliance that goes hand in hand with documented modes of team member engagement. What do I mean by process compliance? We’ll provide an example.
Let’s say your SPC program—your Statistical Process Control program—is detecting a statistical trend on one of the products key attributes. Let’s say it’s a dimensional attribute and you’re detecting a statistical trend. One of the first things that an operator or a supervisor might do is validate that the equipment is properly calibrated. If it’s not calibrated to the proper set points, the operator or the supervisor will have to determine if it was initially calibrated and then went out of tolerance, or if it was ever properly calibrated in the first place. Without a record of initial calibration or an inspection signed off by a supervisor, that root cause exercise becomes extremely difficult.
Now, I will rant that paper means of ensuring process compliance or proper equipment setup depending on the complexity of the manufacturing environment could be very cumbersome, and time consuming. But luckily, there are a number of solution providers with effective, easy to manage digital process compliance modules that can complement a Manufacturing Execution System or quality system if those systems don’t already include that feature. We touched on it already in this example.
Let’s talk more about documentation and intentional modes of team member engagement. We continue with this example. If it was determined that the equipment was set up properly initially, but something else was occurring that caused it to go out of tolerance. How does that solution get documented, applied, or monitored, not only for the remainder of that shift, and then the next one, but perhaps even permanently incorporated into the equipment set of SOPs. Again, documentation is the key enabler here.
The observed out of tolerance and the associated SPC data ideally should be flagged within the MES system. There should be a capability to flag that incident within the MES system, along with all of the relevant root cause corrective corrective action information. This, ultimately, should be highlighted in the shift handoff documents, so that the following ship doesn’t encounter the same issue and have to recreate the wheel every time the occurs. If the recommended solution was, let’s say, an adjustment to torque spec on a bolt, let’s just say. Ideally, there would be a formal process within the CI program where that proposed solution can be elevated to engineering for permanent consideration to the setup procedures.
When you’re evaluating a potential contract manufacturer, and you’re walking through the facility, look for these types of examples playing out, where you have a transfer of information from the production floor to the supervisory staff and beyond. One of the ways that you can do this is to ask to observe a shift handoff meeting. This is going to give you a great sense for the level of detail that’s being passed from line operators to supervisors and from shift to shift. This is the type of knowledge transfer within a facility that is absolutely key to driving those small, incremental level of improvements day after day. It goes hand in hand with the Continuous Improvement program.
Contract structures that establish mutual transparency and cost accountability. Contract Manufacturing agreements take many forms depending on the customer needs, the product, or the process and intellectual property involved in the process. If within a written contract manufacturing agreement, there are contract objectives that rely on data recording, then I would propose three elements for consideration that should be written explicitly into the contract language. That is talk about the data requirements in terms of form, frequency, and purpose.
Form, this one is somewhat obvious, because the data needed in an Excel format, hard copy, PDF, or do you need a direct data upload into your system, but explicitly state the form of the data that’s required to such detail as the calculations within the data if it’s a yield reporting that’s needed. Talk about the specific calculations for how yield is calculated. If it’s an Excel file, go into the calculation within each of the cells.
Frequency is also somewhat obvious. You want it at the end of every day, at the end of every shift, at the end of every quarter, getting very explicit about when and how you want that data reported.
Now, let’s talk about purpose. For the sake of this presentation, this is where I’d like to go a little bit deeper. Explicitly stating the purpose of the data required within the contract creates an environment of trust in support of cost transparency. Now, there may be various particular purposes behind the data reporting or contract depending on the particular product or the manufacturing process, but I will propose three that you may want to consider.
The first purpose of data reporting and the corresponding contract language is to make savings or cost sharing agreements transactional. An example of this might be on product yield. If volume goes up, yield is expected to improve. Conversely, if volume goes down, the yield is expected to decline as well. If it was agreed in the scenario, that the cost of yield variances should be shared via, let’s say, a quarterly reconciliation, you don’t want to do is end up in a prolonged and ongoing negotiation because there’s confusion behind the data in terms of form, frequency, or the calculations. Keeping the savings or cost sharing transactional frees up resources to focus on value creation within the business agreement.
The second purpose of data reporting is to unlock value by identifying improvement opportunities. Now, if a contract manufacturer has a mature CI program—a formal CI program with universal buy in—they’re fully utilizing their manufacturing execution system and they have a high performance management model, they will be very quick to identify areas of costs such as low throughput or low yield within a portfolio. Areas that would benefit from potentially a product or process design changes. With a contract, these are often referred to as Joint Process Improvements or JPIs, where both parties invest time or resources into the improvement and sharing the benefits correspondingly.
Lastly, if you’ve created an arrangement where JPI is possible, this is where data efficacy is absolutely key, and ensuring that each party’s return on investment, especially when that JPI is capital intensive, that efficacy ensures that those results are achievable and not overly ambitious. Nothing is worse than making an investment into a process improvement, only to come up short because there was flaws in the original data, or even passing over opportunities that could exist because they’re not revealed in the data because it’s not collected properly. Data efficacy is absolutely key. It’s a purpose of having explicit language and detail around the data and what those expectations are written directly into the contract.
Just to conclude, the decision to outsource production to a contract manufacturer might be prompted by many considerations, especially in cases where you’re looking to optimize perhaps capital utilization within your own manufacturing network or you’re looking to drive out costs. Either way, it is important to incorporate these elements that we discussed to ensure that manufacturing cost management is a cornerstone of that business relationship.
I hope you found this presentation helpful. Please leave your comments in the comment section below. I’d love to hear your thoughts on the topic. Also, check out ClifBar.com, of course. If you’d like more information about today’s topics, please feel free to connect with me directly. Thank you.
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