Outsourcing provides growth opportunities
By Staff -- Industrial Distribution, 11/1/1998
Integrated supply is one way that distributors are increasing revenues and profits. Contract manufacturing -- or the growing trend in outsourcing -- is another. A recent study says U.S. contract manufacturing is expected to triple, topping $35 billion by 2001, according to a research report produced by Frost & Sullivan.The report says the U.S. market for contract manufacturing will balloon from $11.1 billion in 1994 to $36.4 billion by the year 2001, growing annually at 19 percent. Although the largest percentage of contract manufacturing business will continue to come from the computer industry, which accounted for 40 percent of total revenues in 1994 -- a figure that will rise to 41 percent in 2001 -- the OEM sector is increasingly outsourcing al-most every aspect of product manufacturing from design to final assembly.
That trend looks to continue as more large manufacturers continue to cut back on staff, partly in response to the uncertain economic conditions overseas. As this issue went to press, both Gillette and Pratt & Whitney announced staff reductions.
According to the Frost & Sullivan report, contract manufacturers, and distributors performing contract manufacturing work, have become full-fledged partners in product design and development, and essentially extensions of the OEMs they service. Contract manufacturing will continue to grow in many cases faster than the industries it serves, benefiting contract manufacturers of all sizes.
Although most opportunities lie within the computer industry, outsourcing is growing within the telecommunications industry, increasing from 19 percent to a predicted 21 percent of the market in 2001. The medical/other category should total 16 percent, up from 12 percent in 1994. Contract manufacturing occurring within the industrial and instrumentation markets will fall from 14 percent to 12 percent. The consumer and automotive products segment will check in at seven percent, while the military and aerospace industries are expected to decrease from six percent to three percent.
Bruce Siegal, president of Air Draulics Engineering Co., a fluid power distributor based in Memphis, Tenn., says contract manufacturing is booming for his firm, rising significantly over the last two years mostly due to an increase in the need for engineering work. The firm has a thriving business assembling hydraulic power units for one major customer. Services like that are clearly seen as value added by the customer.
"What we find is our customers are relying on us to do more of their engineering work for them and that usually leads us into a custom application," says Siegal. "A lot of customers are reducing their engineering staffs and they end up relying on us a lot more for technical expertise, which is a good thing. Obviously, it makes us more important."
And, usually, more profitable.
"Usually we can make a higher profit margin on these custom product applications," Siegal acknowledges.
Contract manufacturing expanded in the recession of the early 1990s with downsizing by many OEMs. With economic recovery, OEMs increased their reliance on contract manufacturers rather than investing in more capital equipment. Contract manufacturers, meanwhile, increased their production capabilities, investing in the latest technologies and expanding the services they could offer.
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