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Malcolm Kerr
Director of Business Operations and Strategy  
Tuesday, March 19, 2024

How External Manufacturing Professionals Can Win With Robotics-As-A-Service

Contemporary Challenges to Building Trust Amidst Volatility

As costs increase for labor and raw materials, external manufacturers are battling on multiple fronts to stay on time and on budget. This “squeeze” can manifest itself into more transactional RFQ processes and/or doubling-down on finding savings within existing external manufacturing partners.

What is leading to this increase in pricing volatility? Market disturbances such as natural disasters, geopolitical disruptions, and other global crises are being more frequent and more pronounced.

At the same time, high price inflation exacerbates volatility and remains an ongoing concern for both buyers and suppliers, regardless of who owns sourcing.

External manufacturing departments have a tough balancing act. On one hand, they are responsible for delivering products on deadline with no quality issues. On the other hand, they’re typically asked for escalating savings targets year on year. These challenges are plenty to manage in an owned production environment, but can compound in complexity when producing via a network of external manufacturing partners.

Corporate wants savings without compromising on product quality or on-time delivery. They squeeze their external manufacturing departments, who in turn need to squeeze their external manufacturing partners. This is all happening in an environment where trust is the key ingredient to any successful partnership. 

As McKinsey & Co noted, establishing trust between buyer and supplier requires overcoming some obstructive tendencies. Buyers and suppliers, accustomed to tough negotiations, harbor concerns about revealing innovation capabilities, priorities, costs, and strategic direction. This mistrust can create barriers to cooperation. Doubts from either side about commitment and perceived value further complicate the relationship.

Finding the Savings

Many supplier agreements will have savings targets baked in - as high as 3-4% annually. So where will these savings come from?

  • Intermediary supplier inputs: savings can come in the form of reducing supplier expenses. This could be related to raw materials OR service-related fees. 
  • Adjusting production strategies: a company could migrate to “just in time” production and reduce inventory levels and costs to save. 
  • Supply chain management: by optimizing transportation routes, consolidating shipments, and reducing transit times, businesses can reduce their costs
  • New equipment investments: investing in new processing and/or packaging equipment can introduce savings, however, there is usually a payback period, and this can impact (or be negated by) the master service agreement between buyer and supplier.
  • Cutting into supplier margins: sometimes the onus lives with the supplier to either reduce costs on their side by reducing labor cost or eating into their margins. This can be hurtful to relationship stability and undercut precious “trust.” 
  • Switching suppliers: Extremely difficult, expensive, risky, and time-consuming, making this a rare maneuver. Typically when a company finds a good external manufacturer, they stick with that supplier. 

RaaS As A Rare “Win-Win” for both Buyers and Suppliers

Robotics-as-a-service presents a unique opportunity for both buyer and supplier to save money from day one. Unlike a traditional capital investment, the ROI payback period is immediate, and thus, RaaS can be introduced without the traditional complexities of big capital purchase/lease payments. 

RaaS for external manufacturers could be structured in two ways:

  1. Direct to the external manufacturer: a robotics-as-a-service provider could deliver a robotic system, and production savings, directly to the supplier. These savings would then trickle to the buyer. 
  2. Direct to the buyer: a robotics-as-a-service provider could sign an agreement directly with the buyer to deploy equipment within their external manufacturing partner facilities.

Another advantage to RaaS is the relatively low lift on behalf of either buyer or supplier. Since all scoping, design, engineering, deployment, and maintenance is handled by a third party, buyers and suppliers can continue to deploy their engineering and project management resources on higher order tasks. 

In a world of zero-sum games, where trust is paramount, RaaS represents a rare “win-win” for both suppliers and buyers. 

Sound interesting? Get in touch with Formic today to learn more. 

Robotics Finance