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.