Risk Management Portfolio For A CMO
Contract manufacturers provide advantages over internal manufacturing thereby leading to lower costs, access to external expertise and reduced capital expenditures. It is obvious that in order to make the CMO engagement symbiotic and mutually beneficial, the contract manufactures need to live up the customer's quality standards.
The world of a contract manufacturer is also infested with many challenges. As contract manufacturing business development wins more deals, the risk of the contract manufacturer not being able to recover his investment decreases because similar outsource product manufacturing programs often have similar startup support requirements.
Typical support investments, for outsource manufacturing programs include NRE expenses (non-recurring engineering) and ENRE expenses (extended non-recurring engineering).
While I was researching on contract manufacturing engagements I came across a risk management discussion that I would like to share with you. The risk management equation below emphasizes components of the process when contract manufacturers assess risk mitigation and risk management, where:
- N = Number of deals the contract manufacturer wins from the retailers each year
- NRE = Non-recurring engineering expenses (NRE)
- ENRE = Extended NREs (ENRE) expenses
- P-Vol = Product life cycle sales volume
- TP = Transfer price for the value added services
- CRE = Cost of recurring expenditures (excludes CENRE)
Contract Manufacturer's portfolio Risk Management is represented by:
Summation ( NRE+ ENRE) / Summation P-Vol (TP-CRE)
There are a few factors that can jeopardize a contract manufacturer's profit and adversely impact the CMO engagement. These are:
- Late time-to-market: Speed to market is a key benefit for a typical CMO engagement
- Limited flexibility
- Poor quality of products
Once the contract manufacturers are able to strike the equation above, supply chain bubble settle and CMO engagement bears fruition.
Acknowledgement: Contract manufacturing risk mitigation and risk management by Mr. Mark Zetter
