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My latest report just published with the Supply Chain Insights monthly newsletter on Tuesday and takes a look at the contract manufacturing industry. The full report is available here, but in this post, I'd like to address just a few aspects of the full report.


I began the research process with an understanding that contract manufacturing is a relatively new industry. Many of the companies in the research were founded earlier in a different form and over the decades have morphed into a similar structure. A brief timeline is provided below to understand a little bit of the history of the industry.


Over the years, the industry has morphed into a highly competitive business environment. Many companies have worked to differentiate themselves on service offering, while brand owners who contract for manufacturing are mainly concerned about one thing: price. The result is a decade of rocky financial performance as seen in the year-over-year sales numbers in the table below.


It has been a difficult ride for contract manufacturers since 2000. The Great Recession was a huge challenge to the industry and several companies demonstrated negative growth values over the recent years. There are several reasons for this chaotic growth situation including the short-term nature of contracts in the industry as well as the high concentration of business devoted to very few key clients. Contract manufacturers operate with a very short-term time horizon and work on contracts that change from quarter to quarter. This instability in their business creates a difficult situation in which to establish stable and consistent growth levels. Additionally, most contract manufacturers have a few top customers who each account for upwards of 10% of the business. The following excerpt from Benchmark Electronics illustrates the severity of the situation.


•Sales to our ten largest customers represented 56%, 53% and 47% of our sales in 2012, 2011 and 2010, respectively. In 2012, sales to International Business Machines Corporation represented 21% of our sales. The loss of a major customer, if not replaced, would adversely affect us.” - Benchmark Electronics, Inc. 2012 annual report (10K), pg 7

Growth is, unfortunately, not the only problem area. Profitability of the business, as measured by operating margin is another metric that demonstrates severe problems within the industry.
Margin is tight in the industry. Brand owners have tried to minimize costs and the result is that contract manufacturers struggle to get contracts and operate with very small margins. The move to mobile away from traditional larger items such as desktop computers is also hurting margin and spells future struggles for the industry.

Contract manufacturers are in a tough spot. Brand owners should take a serious look at their use of contract manufacturing and work to strengthen the relationship with downstream suppliers. This starts with moving beyond a winner-take-all mentality and creating a value chain where all members can share the risk and reward more equally. It also seems time to reflect back on and try to answer the question posed above- is contract manufacturing a viable business model? I think the jury is still out, but the financial results above should give pause to anyone interested in the future of contract manufacturing.

Inditex (parent company of Zara) and lululemon are two very popular apparel companies who have been individually applauded for their advanced supply chain management practices. Overall, the apparel industry is largely stuck and struggling to improve supply chain performance (I address the issues in my latest Supply Chain Metrics That Matter report here), but these two companies are breaking the trend. We can look at the intersection of their performance on inventory turns versus operating margin to understand their progress in more detail.

Inventory Turns vs. Operating Margin


Inventory turns, representing a company's management of cycle times and operating margin, representing their management of margin and profitability are two critical metrics from supply chain professionals all the way up to the C-suite. In the comparison above, you can see the dramatic differences between Inditex and lululemon. Inditex demonstrates a relatively tight pattern, no significant movement, and only a slight improvement in margin over the decade. lululemon, on the other hand, demonstrates large swings in both measures, and significantly improved performance over the time period.


It's too simplistic to ask which company is better. The resiliency of Inditex is to be admired while the improvement of lululemon is also exemplary. Pattern analysis, like this, helps to identify the good from the struggling, but doesn't help to separate the great from the good. This sort of analysis also reinforces the idea that there is more than one way to run a great supply chain. Even in the same industry, these two companies have taken dramatically different paths in their financial performance of these two metrics over the past years, yet both have enjoyed large scale success with consumers.


The Supply Chain Index is the next evolution in our financial analysis and moves beyond pattern recognition to mathematical modeling to try to understand the effect supply chain performance can have on a company's market capitalization performance. To learn more about the ongoing work on the Index- check out our archived webinars here and consider attending the Supply Chain Insights Global Summit, September 11 and 12 in Scottsdale, AZ. You can also read our full research report on the Index here.


Finally, if you're interested in your own custom benchmarking against a peer group, I'd be happy to do that for you. Let me know ( and we can find the right peer group and metrics to consider to help understand your specific supply chain and the financial patterns you are displaying.