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The Value of Vertical Integration in Contract Manufacturing

By Joe Rocco and members of Eastek International Corporation.

Vertical Integration (VI) in contract manufacturing is defined as the collection of many manufacturing disciplines, with their corresponding expertise, into one physical setting to allow complete product manufacturing within the boundaries of one company.

This paper considers the benefits of a VI approach versus sub-contracting each of the major manufacturing processes separately as shown in this illustration, where each arrow represents transportation, team segregation and other forms of lag or delay.

Vertical Integration (left) compared to sub-contracting (right). Each arrow represents additional expense, time and testing.

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The many benefits of VI include the following:

  • Intellectual Property Protection
  • Quality Enhancement
  • Delivery Reliability
  • Engineering Collaboration
  • Manufacturing Team Depth and Breadth
  • Supply Chain Simplicity
  • Global and Local Distribution
  • Comprehensive Innovation and Cost Reduction Focus
  • Use of Customer Resources
  • Speed of Change

Let’s consider each of these main reasons to look into a Vertical Integration approach.

Intellectual Property Protection

Protecting your intellectual property (IP) is a key benefit of working with a vertically integrated manufacturing partner. You’re better able avoid the danger of sharing key data, specifications or assets, such as injection mold tools, with sub-contractors who may not have the appropriate understanding of intellectual property. By controlling access to crucial components of intellectual property such as product design, specifications, printed circuit board layout and molded parts, you radically reduce the chance of losing control of your IP.

Enhanced Quality

With Vertical Integration, one team builds the entire product, allowing all value-add steps to be conducted with the oversight of one management group to best balance the inherent conflicts of cost, quality, delivery and functionality. You’re able to eliminate questions of responsibility for quality defects, as all responsibility falls to one company for resolution.

Additionally, VI provides fast resolution of intermediary process quality questions, given the close proximity and good working knowledge of each manufacturing process with the others.

Delivery Reliability

Vertical Integration reduces the risk of delays compared to using a chain of suppliers in series. That’s because VI places all coordination of material delivery, quality and cost in one team’s control. At Eastek’s manufacturing campus, the chain from tool maker to molder to stamper to PCB assembler to functional tester to full assembly are all done in-house.

Engineering Collaboration

Vertical Integration incorporates all manufacturing and engineering into a single team which has a track record of working together. When all disciplines needed to manufacture a full product are working closely together, you’ll achieve better decision making and a stronger product in terms of quality, durability, reliability and price.

Manufacturing Team Depth and Breadth

With quality, engineering, sourcing and production personnel for all manufacturing processes under one roof, the sheer number of personnel at your disposal is greater and the pool of support staff is greatest for those moments when additional resources are needed, or if team members change for any reason.

The wide range of skills and talents working on your project helps ensure a successful product launch, provides ongoing product support and enables a cross-functional approach to each product challenge.

Supply Chain Simplicity

By eliminating the intermediate buying steps and supplier profit streams, Vertical Integration usually offers the lowest total delivered cost of a product. It also decreases the workload on the customer in terms of quality, purchasing, accounting and project management. With VI in place, you have a strong foundation for an integrated approach to supply chain planning.

Global and Local Distribution

Vertical Integration can also incorporate product global distribution to your warehouse and sales locations. These services offer more cost-effective options to minimize your human resource needs for tracking shipments, coordinating logistics and related invoicing.

In Eastek’s case, we can provide all these services from just one purchase order:

  • Offer air freight to any global destination
  • Assume importer-of-record responsibility to the U.S. and the European Union
  • Offer sea freight for less than Container Load quantities at near Container Load pricing
  • Provide inventory planning and control to support the customer’s actual order rate
  • Distribute product in China directly from the Eastek campus

Comprehensive Innovation and Cost Reduction Focus

Vertical Integration facilitates the creation of one cross-functional team with a complete product view from the project launch date onward. This team has the capacity to create a road map for future cost reduction and enhancements to allow the continuing innovation for a product in its marketplace.

Best Use of Customer Resources

By selecting one company to provide a turnkey product manufacturing, you can make the most use of your limited and valuable human resources. You can reduce the headcount devoted to purchasing, distribution, administration and quality, and re-allocate these resources for investment into your R&D efforts. Additionally, you can depend on the contract manufacturer to provide the expertise needed in the various manufacturing processes to improve design for manufacturing (DFM) and impact potential cost reductions.

Speed of Change

When it comes to mold tooling and other product changes, VI helps makes everything go smoother and faster. VI enables cost savings and speed of response because one company is able to build the tool, test the tool, mold production parts, maintain the tool and make modifications as the product life cycle evolves. You’re better able to make quality improvements, evolve designs and add new functionality thanks to the coordinated involvement of all related disciplines, including tool design, tool manufacturing and injection molding.

The Simpler, Smarter Solution

In conclusion, Vertical Integration offers the most complete set of services to mimic the customer having all processes in-house, without having to hire the staff or make the long-term capital investments. For projects of adequate size, dedicated work cells can be built to further extend the benefits of VI.

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