The Ultimate Manufacturing Guide: SME Manufacturing Explained

In this manufacturing guide:

The so-called secondary sector of the economy, manufacturing sees raw materials transformed into finished goods which are sold to wholesalers, distributors and consumers, or else on to other manufacturers within the supply chain.

It’s a sector that remains open to innovation, with many new SME manufacturers able to develop products and find their own niche, despite competition from more established global companies.

It’s SME manufacturers of this kind that will benefit most from this guide. Here we’ll take a practical look at the manufacturing process, with an emphasis on how modern small-to-medium manufacturers can improve their performance and build a competitive edge.

Let’s start with some of the basics.

What is manufacturing?

Manufacturing is the processing of raw materials and components into finished goods. The manufacturing process may involve simple assembly by human labour or by robot, as well as mechanical, chemical or biological processing to create a product.

The products created by manufactures can in turn be used as components by other manufacturers in the supply chain, or else sold to end users.

From simple to complex

Manufacturing can be as simple as creating bookshelves using wood, screws, glue and varnish. It can involve more nuanced biological processes such as brewing and bottling beer using yeast, grain, water and specialised vats and equipment. Or manufacturing can be as sophisticated as assembling a modern mobile phone using components sourced from hundreds of high-tech suppliers, each with its own complex global supply chain.

Manufacturing – an inventory management perspective

Regardless of the complexity or simplicity of a manufacturing process, or the techniques used, it can be understood in the simplest way through an inventory management lens.

From the inventory perspective, manufacturing is simply assembling a group of existing products under a new SKU code. In theory this process should create more value than the sum of its parts. It may also generate waste, which can also be assigned a cost that can be tracked.

Types of manufacturer

Lifting the performance of a manufacturing business requires a different approach for the different types of manufacturer.

The simplest distinction that can be made between different types of manufacturer comes down to what triggers their production process. Regardless of the huge variety of activities that can be classed as manufacturing – plus the many different industry types and production methods – any manufacturer can be classed as either Make to Order (MTO), Make to Stock (MTS) or Make to Assemble (MTA).

Make to Order manufacturing

MTO manufacturers begin a production run when they receive a Purchase Order, creating just enough product to fulfil that request. For that reason it’s sometimes called ‘pull production’, with products being ‘pulled’ through the production process by the customer’s order.

Make to Order manufacturers often sell higher value goods, as well as products that are customised, rather than standardised.

An aircraft manufacturer, for example, would only ever operate as a Make to Order business. Similarly, a dressmaker might use an MTO approach, ordering in fabric after a customer chose the particular specifications that they want.

MTO benefits

The benefit of an MTO operation is it avoids overproduction. Because MTO manufacturers rarely hold unused finished stock they aren’t exposed to the risk of finished products expiring, or forced to sell excess stock at a discount.

MTO downsides

A downside of this type of manufacturing is longer lead times, with parts and materials often being ordered-in immediately prior to assembly. A purchaser will typically have to wait longer for their goods to arrive if buying from an MTO manufacturer rather than from a company that holds finished items in stock.

How MTO manufacturers scale and improve

MTO manufacturers benefit from:

  • Sales and Customer Relationship Management (CRM) technology that gives visibility over lead times (which benefits potential customers) and the sales pipeline (which aids production planning and reduces downtime)
  • Sales order management that connects to the core production system used, and on to purchasing, for efficient ordering of materials
  • Visibility over supplier lead times
  • Fast product innovation cycles

Case Study: Australia’s Made-to-Order High Performance Window Business

Make to Stock manufacturers

MTS manufacturers create products in response to demand forecasting – anticipating future sales and storing finished goods so that orders can be fulfilled in the shortest possible time. MTS manufacturing is sometimes called ‘push production’, with the forecasted demand responsible for ‘pushing’ products through the production process and out into the marketplace.

Today a vast array of products are created via MTS production, with so-called High Street Fashion a good example of the approach: volumes, colours, and styles are all planned ahead of each season, with stock warehoused until it can be sold.

MTS benefits

MTS manufacturers are often able to create very efficient production processes. The method is suited to high volume products with little or no variation between batches. This allows for fast, highly automated production, bulk buying of materials, and all the other efficiencies that come from operating at scale. Customers also benefit from MTS manufacturing, with products available quickly and at lower prices. This in turn can give manufacturers a competitive edge, boosting bottom lines.

MTS downsides

Overproduction is an ever-present risk for MTS manufacturers. Creating more product than the market demands is a waste of time and capital. Beyond this initial waste of over-production, holding excess stock also hurts a company through warehousing costs. Even disposing of goods into the waste stream incurs a fee, while companies that move excess stock via clearance sales and discounts can create a precedent that undermines their value in the marketplace. The reverse situation – producing too little – is also a risk for MTS companies. Where customers expect items to be quickly available, a stockout can erode goodwill and see sales go to competitors instead. Another limitation of the MTS approach is that, due to the costs involved in mass-production, it tends to favour cookie-cutter products, with less scope for variation or customisation.

How MTS manufacturers scale and improve

MTS manufacturers benefit from:
  • Accurate forecasting
  • Precise inventory management that keeps stock levels lean while avoiding stock outs
  • Employing Just-in-Time production principles that closely align raw materials purchasing with production schedules, reducing WIP inventory costs and waste
  • An accurate view of the true landed cost of materials, and the cost of labor
  • Visibility over product margins by sales channel and location
  • Streamlined logistics
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Make to Assemble manufacturers

The MTA approach is a hybrid of the MTS and MTO systems. In MTA all the required components are either created or purchased ahead of time, with the final product built quickly as an order is received. Some tailors for example will quickly create a bespoke suit for a client using panels of fabric that have been pre-cut and stitched, with only minor adjustments needed to assemble the final piece. Similarly, some computer manufacturers allow clients to request custom built machines to match their needs, adding RAM, and swapping out graphics cards as needed. An MTA approach works well where a business needs the flexibility of customisation but wants to fulfil orders quickly. Finished goods that perish quickly are also well suited to being assembled to order. For example wedding cakes aren’t made in bulk ahead of time, but rather are baked to order from stored goods, then delivered fresh.

Methods of production

Beyond the Make to Stock, Make to Order and Make to Assemble distinctions, manufacturers are further distinguished by the method of production they use. Improving a manufacturing firm takes a different approach depending on the method of production used.

Job production, aka one-off manufacturing

Job production is where a single end product is completed before the next item is begun. The job production method naturally aligns with MTO manufacturing, and is suited to creating high-value and unique items. Custom jewellers, ship builders and aircraft manufacturers all use the job production method.

How job production can be improved

Good workplace design is key to effective one-off manufacturing, with many businesses using a fixed-production layout. This is where the product stays in place while it is assembled, with workers and material brought in to its location. In a shipyard for example an efficient workplace design – and good production planning – will allow multiple teams access to a vessel under construction simultaneously. So while electrical systems and cabinetry are being installed inside a yacht, workers can access the exterior, securing fittings and final surfaces. Regardless of the factory floorplan used, one-off manufacturers also benefit when they can attract and retain the highly skilled staff they need. They also become more efficient by maintaining a full sales pipeline that minimizes downtime between projects.

Batch production

Batch production is where groups of identical products are created in production runs. For example when a clothing range includes several different styles of jacket, each style will be produced at once, before the production line is reset to accommodate the needs of the next product – with sewing machines swapped out and pattern-cutters reprogrammed as needed.

Similarly beer is produced in batches, with each batch needing different temperatures, time-scales and ingredients, despite being produced with largely the same equipment.

Advantages of batch production

The key advantage of batch production is it brings the efficiencies of mass production, while allowing for customisation and responsiveness. It’s used by both MTS and MTO companies.

Another advantage of batch production is quality control. If a product is compromised, contaminated or assembled with faulty components the loss can be limited to a single batch.

In a similar vein, products that expire – such as food and medicine – are often created in batches. This allows for efficient management of expiry dates via batch tracking, which is also known as lot tracking.

Flow production

Flow production is where identical, standardised items are produced continuously and en masse in the name of optimal efficiency. Often using conveyor belts to move products sequentially through the assembly process, flow production lines are often capital intensive, but with lower labour costs.

Flow production is suited to creating high volumes at a low price per unit, with limited and often lower-skilled labour required.

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Types of manufacturing industries

There is no one definitive list of manufacturing industry types – different categories are used depending on the needs of a given index, government or group. However, some commonly recognised categories include:

  • Food & beverage
  • Fast Moving Consumer Goods (FMCG)
  • Medical equipment
  • Building & construction
  • Clothing and textiles
  • Petroleum, chemicals and plastics
  • Wood, leather and paper
  • Metal manufacturing
  • Electrical equipment
  • Computers and electronics
  • Transportation
  • Furniture
  • Additive manufacturing
  • Pharmaceuticals
  • Aerospace & defence
  • Non-metallic mineral products (glass, cement, lime etc)

Contract manufacturing

Contract manufacturing is when one company designs a product and outsources the manufacturing of this product to another company.

Businesses use contract manufacturing when they do not have the assets—such as the facilities, equipment or skilled staff—to produce their goods in the quantity needed.

By using a contract manufacturer, businesses can avoid having to make a large capital investment to produce their goods, and production can be scaled easily as the business grows (or shrinks).

Ultimately, the decision on whether to use a contract manufacturer will rest on whether it is cost-effective for the business, and what capabilities the company already has.

From start-ups to tech giants: contract manufacturing and business size

Contract manufacturing is especially useful for start-ups that do not have the physical assets to produce their own goods. For example, a craft beer start-up might outsource its brewing until the business grows to the point that it needs its own equipment. At the other end of the scale some of the world’s biggest electronics businesses use contract manufacturing. As a result, contracting manufacturers like FoxConn, which manufactures products for clients including Apple and Google, have become some of the biggest employers in the world.

The contract manufacturing agreement

In a contract manufacturing relationship the client will provide the contractor with design specifications for the goods they wish to produce. The contract manufacturer will then provide a quote by calculating the cost of production and adding their profit margin – the ‘cost-plus’ model. Each party’s responsibilities should be clearly defined and set out in a legally binding agreement. This agreement will usually include:
  • Timeframes for the production and delivery of goods
  • Procedures to ensure quality standards
  • Measures to deal with disputes and the termination of the contract
  • A Non-Disclosure Agreement (NDA) to protect the client’s intellectual property

Contract manufacturing benefits

So what are the benefits of contract manufacturing? Typically these include:
  • Scalability: Contract manufacturers can produce goods efficiently as demand fluctuates.
  • Lower capital investment: The client does not have to build factories, buy equipment or hire and train new staff.
  • Technical expertise: Contract manufacturers bring valuable skills, knowledge and guidance to the manufacturing process.
  • Staff allocation: Existing staff are freed up for other jobs such as product development, marketing and sales.

Contract manufacturing downsides

There are also potential downsides to this model of manufacturing:
  • Exposure of Intellectual property: Businesses run the risk that the manufacturer may share the client’s ideas and designs.
  • Lack of direct control: The client does not have direct oversight of production, including quality control.
  • Long-term costs: In the long term, it may be cheaper to manufacture goods in-house, rather than using a contract manufacturer.
  • Communication difficulties: Communication may be slower and less clear, especially where the client and contractor are in different time zones and using different languages.
Read more: What is Contract Manufacturing? And is it right for you?

Toll manufacturing

Toll manufacturing—like contract manufacturing—involves an agreement between client and manufacturer, but is different in that the client provides the raw materials that the manufacturer then processes into goods to be sold. For example, a supermarket may use a toll manufacturer to produce goods that are then house-branded before hitting the shelves.

OEMs and ODMs

OEMs and ODMs are two common types of manufacturer:
  • Original Equipment Manufacturers (OEMs) produce items according to their clients’ design specifications
  • Original Design Manufacturers (ODMs), produce items according to their own design, which clients then buy and market

Original equipment manufacturers (OEMs)

OEMs manufacture products that a client has developed and designed. An OEM may also produce components that the client then uses in its own manufacturing process. While OEMs sometimes provide advice on design, usually the client retains their intellectual property rights.

OEM benefits and downsides

For clients, the potential benefits and downsides of using OEMs for manufacturing are substantially the same as for contract manufacturing. OEMs allow businesses to produce goods without a significant capital investment, such as acquiring new premises and staff. A key benefit of being an OEM is that the manufacturer is not responsible for the design and testing of the product, which reduces their costs. In addition, OEMs’ premises and equipment will often not need to be upgraded to manufacture their clients’ goods – but where this is required, some of this cost can be passed on to the client. On the other hand, a downside for OEMs is that the market is competitive, meaning you will have to differentiate yourself from other companies to grow your OEM business.

Original design manufacturers (ODMs)

ODMs are responsible for much more of the product design process than OEMs, and they retain their IP rights for their designs. A client will come up with a new idea for a product, and the ODM will undertake R&D, testing and design for the product. ODMs sometimes design and produce items to be sold as ‘white’ or ‘private label’ goods:
  • White label: ODMs design and manufacture goods with a blank label which retailers then re-sell under their own brand – the ODM effectively leases out its products to the client.
  • Private label: ODMs design and produce goods, and customise these for clients so they have an exclusive product to re-sell.

ODM benefits and downsides

For a client, using an ODM means that products are designed and manufactured without R&D and other up-front investment. The flipside of this is that competitors may buy the same white label product, meaning that consumers will be offered exactly the same product by different brands. As an ODM, benefits include the fact that manufacturing is cost-effective and efficient, since the ODM can choose the products it manufactures without needing to build its own brand. This may be further improved through automation and the use of manufacturing software. On the other hand, setting up as an ODM can include high costs – including market research, R&D and product design. Read more: OEM vs ODM explained – what’s best for manufacturers?

Good Manufacturing Practice (GMP)

Good manufacturing practice (GMP) gives a set of rules and best practices for safe manufacturing in industries like pharmaceuticals and food & beverages. GMP provides measures so that businesses maintain quality control, which ensures consumers are not harmed by faulty products. At the same time, GMP minimises the risk of manufacturers becoming liable for producing harmful products. Businesses around the world go through a rigorous auditing and inspection process to receive GMP certification. Many countries will not allow the importation of goods in certain industries without this certification.

Which industries use GMP?

GMP applies to several industries that produce goods for human consumption:

  • Food & beverages
  • Cosmetics
  • Pharmaceutical products
  • Dietary supplements
  • Medical devices

The Five Ps of GMP

The Five Ps of GMP summarise the principles behind GMP:

  1. People: Do your staff receive adequate and up-to-date training?
  2. Premises (and equipment): Are these maintained, calibrated and cleaned to prevent problems like cross-contamination?
  3. Products (and materials): Are all items in your facility—primary materials, components, products—handled correctly throughout the manufacturing process?
  4. Processes: Are your processes documented clearly and consistently?
  5. Procedures: Do these provide detailed, step-by-step instructions for each of your processes?

GMP authorities around the world

Different countries have their own regulatory agencies to certify compliance with GMP. In the US, for instance, the Food & Drug Administration (FDA) is responsible for GMP regulation, while in the UK the Medicines and Healthcare Products Regulatory Agency (MHRA) performs GMP inspections.

Read more: What is good manufacturing practice, and why is it important?