When a company cannot fulfill the market demand for its product due to own production capacity constraints or does not see manufacturing as their core competence, it can outsource manufacturing to dedicated service providers. Until now, the only option was to use contract manufacturers. More and more visible in different industries, the service revolution is now reaching the manufacturing industries and Production as a Service emerged as a viable and beneficial alternative.
In this blog post, we at FlexFactory demystify the key differences between these two general alternatives from the perspective of the company looking to get its product build, which we will call “user” of shared manufacturing capacity going forward. General benefits of Production as a Service will be covered in future posts.
The conventional approach to outsource the manufacturing of a user’s products is to employ contract manufacturers as dedicated service providers. They offer:
The user must provide a project-specific upfront funding for the setup of its production as well as pay and/or provide the product-specific machinery, equipment and tools. Then, a user-specific production is set up. Additional to a unit price, the user must pay a penalty in case of not calling off enough products. In many cases a base fee is also applied.
All in all, the utilization risk as well as the upfront installation cost lies with the user of the contract manufacturing service while the contract manufacturer mainly provides his technology, plant, workforce, equipment and knowledge.
What is Production as a Service in a nutshell: A highly flexible factory, owned by external investors and shared by multiple users. The sharing of a flexible production setup without user dedication is the key enabler for higher utilization independent of the market success of a specific product. Additionally, the easy integration of additional products makes small series production quicker commercially feasible.
With Production as a Service, a third player in form of an investor comes to the table, owning the production assets. The flexibility of the production enables the capacity being sold to different users, preventing capacity to remain unused and reach a constantly high utilization. The user is paying per part, while potentially also having to pay and/or provide the product-specific tools and fixtures, depending on the concrete project.
From a user’s perspective, he must only provide all dedicated tooling necessary for his product and pay per part ordered, while the main utilization risk and the upfront investment can be covered by an investor.
The key difference of Production as a Service lies in the flexibility of the production, making the success of all stakeholders independent from a single product's market success and lifecycle. With multiple customers, a higher average utilization can be reached compared to a conventional setup with multiple lines.
The diversified risk through multiple customers makes Production as a Service an interesting investment case for third-party investors. The flexible production facility leads to higher utilization of assets, resulting in a lower per part price compared to contract manufacturing.
For the operation of the production, a setup serving all targeted user’s needs can be chosen. Either one user operates the production or an external operator performs this task.
From a user’s perspective, four key advantages are gained with a shift from contract manufacturing to Production as a Service: