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Take a balanced risk approach when contract manufacturing
23 November 2016
BizConnect

It is no surprise that South African manufacturing is generally thought of as uncompetitive. After all, we must put up with some pretty serious challenges and restrictions. But, perhaps it’s time to dust ourselves off and make our own luck.

Consumer and niche markets present very different risks and rewards. Ultra-competitive, fast-moving consumer markets offer high volume opportunities at lower margins, whereas slower-moving specialised niche and industrial markets are less cut-throat and offer lower volume opportunities, but can have higher margins.

The inherent risks in these markets should tell manufacturers whether they are more suited to one or the other. In that regard, there are two kinds of contract manufacturers – the risk averse and the risk-hungry.

Risk and reward

Are you risk-averse?

Many will balk at the risks of consumer markets, instead focusing on manufacturing one or two high-end products very well and serving a captive market in that way. Niche markets prize quality over anything else, which raises the barriers to entry and takes the pressure off the manufacturer to produce goods fast, and at high volumes, or to hold large amounts of stock at high risk of orders not coming through.

But, with margin comes the drawback of lower volumes. In these instances, in order to build a sustainable business, manufacturers must focus on increasing their value-add in the form of excellent customer service, trusted advice and a close business partnership.

Are you risk-hungry?

On the other end of the scale are manufacturers for the consumer market. Despite the promise of high volumes in this game, many bite the dust due to low margins, fierce competition, working capital pressure and the high risk of stock losses.

Whereas niche manufacturers have the luxury of producing goods to order, consumer manufacturers produce commodity items amid fierce competition, often winning or losing a deal on price or availability. This means footing the bill for stock in the hope that it will be sold, and players must be super-efficient (low-cost) and responsive to customer needs.

Can you do both?

So, what can a company do to overcome the respective drawbacks of each choice? The answer lies in a clever blend of the two approaches.

On the one hand, manufacturers should maintain a solid niche focus to anchor the business. Customers paying for high-end expertise and quality assurance will tolerate make-to-order, and this leg of the business will provide the dependable income the company needs to keep ticking over.

But, to reach the next level, manufacturers like you must increase their appetite for risk. The way to do so intelligently, is to scope out reasonable opportunities, prepare potential customers and jump on opportunities. This approach requires market intelligence, negotiating skills and hunger. Yes, it’s a balancing act, and you will need to pick your battles wisely.

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