The niche branch of contract manufacturing is a situation in which a third party makes products that are packaged under another company’s label. Unlike traditional supply chains, there is a lack of direct enterprise control over material procurement and sourcing quality of raw goods. Instead, responsibility falls directly within the scope of the client of the contract manufacturer. How, then, can a contract manufacturer best pursue profitable operations?
I recently was afforded the opportunity to join a leading consumer packaged goods company that was experiencing rapid sales growth. My responsibilities included a review of its current operations and developing a strategy to improve efficiencies and profitability while maintaining first-class service. What I discovered is that, when customers are always right, the best way to reach these goals is with customer responsibility management. Here is how it’s done.
The prospective customer interview
In contract manufacturing, it is common for a potential client to contact the manufacturer with which they hope to do business. Although it is a best practice to only pursue profitable sales, a contract manufacturer may choose to accept marginally lucrative work for the purposes of market penetration, gaining market share or goodwill. Whatever the motivation, strong business relationships begin with a prospective customer interview. Its objective is a win-win-win relationship among the enterprise, client and consumer.
This interview should include, but is not limited to, the following:
- Market scope, goals and objectives: What is the history of the potential client? How many products are currently offered? What is its current market share? What are the client’s ultimate goals? What is its five-year plan? What are its consumers’ needs and wants?
- New-product development: What is the target market? Does the company need help with brand introduction, packaging, artistic development or preferred material sourcing recommendations?
- Communication review: Establishing a shared vocabulary with the potential client is essential to avoid misunderstandings. From my experience, it may necessary to provide a basic education in supply chain terminology.
Master customer agreement
The master customer agreement (MCA) and accompanying statement of work are aimed to clearly and contractually delineate the duties and responsibilities of both the enterprise and the customer in future transactions. The MCA is generally drafted with the aid of legal representation and includes mandates on specific quality criteria, payment terms, deviation protocols, dispute resolution guidelines and warranties. Because of the limited control over certain aspects of the manufacturing process, the MCA is critically important to ensuring a positive business relationship and timely order fulfillment.
In addition to the MCA, I recommend creating a quick-review guide for the customer. Topics include
- agreed-upon credit and payment terms
- preferred contact channels
- a confidentiality agreement
- a statement of business ethics.
ABC customer classification
Similar to ABC analysis, this tool can help measure the enterprise-client relationship. The rating can be based on the accounts receivable schedule, as well as other discrete, weighted criteria set forth in a customer scorecard, such as profitability; direct costs; and indirect costs, including excessive customer service hours, frequent requests for changes in service or highly stressful business interactions.
Here is an example of some potential classifications:
- Anchor customer: This describes one or two high-value clients that can form strategic relationships or collaborate on special projects.
- A-level customer: Most clients should fall within this category and become primary, sustainable revenue drivers.
- B-level customer: This category is reserved for clients experiencing payment or quality issues, frequently demanding refunds, or having MCA-deviation issues. Rather than being punitive, I recommend considering this a transitional stage and using it to monitor customer performance — in the hope of seeing improvement.
- C-level customer: Ideally, there will be zero customers in this group, as they are continually unprofitable, regularly violating at least one or more components of the MCA, or are extremely difficult to work with. In all cases, thorough written documentation must be generated and retained. If continued communication and feedback fails to produce results, form an exit strategy that is as beneficial as possible to both parties.
Customers may always be right, but sometimes it’s best to let them become someone else’s customer. Of course, terminating any relationship is unpleasant, which is why the aim should be identifying the right customers in the first place.
Dave England, CSCP, CPIM, is a supply chain specialist currently working with Motovotano. He may be contacted at firstname.lastname@example.org.