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Problems of outsource job or contract job in manufacturing industry
The so called SME and MSME in manufacturing industry segment is always happy in supplying a component to a bigger company or manufacturing unit which is selling the product in its name and building the brand and also the awareness.
Lets understand the problem which manufacturing industry faces when it is happy being a supplier of a component to a bigger player.For e.g a SME and MSME which is into manufacturing of seconds hand, hour hand and minute hand to a well know watch brand which has outsourced the work to this MSME or what is known as contract manufacturing.
The well know brand has its presence across India and has brand it has limited itself to selling with retail network or its own company outlets to reduce the cost it has outsourced the job to MSME unit which is small and has technical ability to manufacture as per the technical specifications of the watch brand.
The MSME is happy that it is supplying parts to a big watch brand and happy that payments are not issue and is happy by supplying or fulfilling the contract it has signed.
Lets understand this scenario with a disadvantage, so what happens to the MSME unit is that it will get into comfort zone as payments is not problem so the founder of the unit is happy telling his friends that his payments are not a problem but at same time does not diversify nor he improves his capacity nor any innovation happens.
The major reason being that MSME which die due to lace of capital both capital and operational is happy with well know watch brand providing the payment on time. The MSME is does not increase its capacity nor its financials nor it diversifies its product range nor does get new vendor as the contract manufacturing comes with rider that the MSME cannot take a contract from the same industry and same product.
The brand that was doing well has found competition so what it does next is not axe its own people first it looks at vendors for reducing cost, when vendors resist the brand would be happy to pull out of the MSME and give order to any other MSME who is ready to work on lesser margins.
What happens to existing contract manufacturers is that the only option is to shut down as they cannot diversify at short time nor they did any R&D nor they though of a time where in the contract manufacturing would come to halt.
This is a situation where in major of MSME shut down and no one blame except themselves.