Business and business models have continued to evolve over history. One of the more traditional types of business models is the manufacturer’s business model. The manufacturing business model became popular during the Industrial Revolution when technology began to allow for mass production. Now manufacturing can be seen in just about every industry. In this article, we will explore what the manufacturer’s business model is and weigh the model’s strengths and weaknesses.
What is the Manufacturer’s Business Model?
Simply put, a manufacturer is a business that creates goods from raw materials. It’s a model that spans a wide array of industries, from automotive companies assembling vehicles to bakeries crafting pastries. They can be as small as someone producing handmade products in their garage or as big as a giant corporation that creates millions of food items a day. Essentially, it’s any business engaged in the creation of end products.
There are two variations of this model. Depending on who the manufacturer markets their products to, they can either follow a business-to-business or business-to-consumer model. If their products are intended to sell to other companies, this is a business-to-business or B2B model.
An example would be a clothing manufacturer selling to a retailer who then sells to customers. However, if that clothing manufacturer instead had a storefront where they sold their clothes directly to their consumers, this would be a business-to-consumer or B2C model. Companies can also opt to do a combination and sell to both companies and customers.
Key Elements of the Manufacturing Business Model
All business models have key elements that are important for their success. However, the manufacturing model has its own set of elements and dimensions that are necessary if the manufacturer wants to compete in the competitive landscape. The five primary dimensions of manufacturing include cost, quality, dependability, flexibility, and innovation. Each of these dimensions plays a critical role in determining the success and sustainability of a manufacturing entity. Here is a breakdown of each one of those dimensions.
Refers to the total expenditure required to produce a particular product. It encompasses materials, labor, overheads, and other associated costs. Cost efficiency makes it possible to compete in the market if costs are low enough. By producing products at a lower cost, manufacturers can either maximize their profit margins or provide more competitive pricing to consumers. However, manufacturers mustn’t compromise quality for the sake of lowering costs.
This, of course, relates to the standards, specifications, and overall performance and appearance of the finished product. This dimension is crucial for the manufacturer in so many ways. High-quality products should satisfy customer expectations. Also, producing at a high quality will likely reduce returns, complaints, and warranty claims.
Another key dimension of this model is the dependability of the product. Can the manufacturer deliver products on time and as promised? Dependability ensures that downstream processes, distributors, and end-customers receive products when expected. This on-time delivery helps in building trust and ensuring smooth operations throughout the supply chain. However, dependability is a challenge for many manufacturers. Manufacturing companies need to account for potential disruptions and unforeseen challenges. Buffer stocks, alternative suppliers, and contingency planning can aid in maintaining dependability.
Companies of all kinds need to be able to adapt in order to succeed. This is also true when it comes to the manufacturing models. Flexibility is the ability of a manufacturing process to adapt to changes. This could include changes in product design, production volume, or even the production of different products. Flexibility ensures that the manufacturing process can adapt swiftly to these changes. This allows the business to cater to evolving market needs and capitalize on new opportunities.
This refers to the introduction and application of new ideas, processes, products, or services. It’s about staying ahead of the curve and continuously refining or reinventing the manufacturing process. As market needs evolve and technologies advance, innovation makes sure that the manufacturing company doesn’t fall behind. It’s important to understand that not all innovations guarantee success.
Just like with other types of businesses, innovations can be risky. If a new technology or process is unsuccessful, it can cost the manufacturing company time, money, and reputation. Because of this, companies using the model need to research and run beta tests before applying new innovations to existing customer orders.
Now let’s take a look at some of the advantages and disadvantages of this model.
Advantages of Manufacturing Business Models
Ability to Diversify Revenue
One benefit of starting a manufacturing company is being able to have multiple revenue streams. Although manufacturers may start out producing 1-2 specific items, they have the opportunity to expand their production portfolio. By creating complementary products or goods within the same industry, manufacturers can reduce the risk of relying on a single product for sales.
As well, if a company does want to specialize in a specific product they can offer customized options. For example, Nike often releases limited-edition Air Jordan shoes. Offering customized products can not only help to meet the needs of customers but also expand to other customer audiences.
Control Over the Quality of Products
Manufacturers have direct control over the production process. From sourcing raw materials to assembly and packaging, they can ensure the end products meet specific quality standards. Manufacturers should set up quality control standards for consistent production.
This is important as customers are more likely to buy products from brands who produce consistently high-quality products. However quality control not only benefits customers. Manufacturers are also able to cut down on production costs by setting up an efficient production process.
For a manufacturing business, the concept of economies of scale can be a huge benefit. As they produce more products their overall cost to produce a single product drops. As long as they have efficient production processes and systems in place, this scalability allows them to meet the growing demand for products.
The flexibility to scale up, or even down during low-demand periods, gives the business a competitive edge. As they can pivot depending on the market. Of course, scaling any business takes careful planning as well as investment in technology to optimize processes.
Disadvantages Manufacturing Business Models
1. Requires High Initial Investment
To produce items, a manufacturing business must have all the necessary materials, tools, equipment, and labor. They typically need a big enough workplace to house all of the materials and equipment, as well as store the finished products until they are ready to be distributed.
Labor costs should also be included when calculating startup costs. Although some manufacturers are incorporating more and more AI and machines to produce items quickly and efficiently, workers are still necessary for the majority of companies. Adding this all up can mean a pretty high upfront cost to start a manufacturing business.
2. Supply Chain Risks
Manufacturers rely on a complex network of suppliers, transportation systems, and logistics to source raw materials and ingredients. A shortage of materials, delays in transportation, and geopolitical issues can all cause problems for manufacturers. These can impact the production of products and being able to deliver to businesses or customers.
Some manufacturers implement strategies such as diversifying who they source materials from, maintaining a stock of important materials, and staying informed about global events and market conditions. Technology and data analytics can provide additional help to improve supply chain visibility and allow manufacturers to minimize the impact of potential disruptions.
3. Susceptible to Market Changes
The success of the manufacturing business model depends highly on supply and demand. Changes in consumer preferences can affect the overall demand for certain products. For example, you can imagine how flip phone manufacturers fared whenever smartphones were on the rise. As well, economic downturns typically mean consumers don’t spend as much money. Companies often see a dip in sales during a recession.
It’s important to conduct thorough market research before deciding what types of products to manufacture. Having multiple products as well as customer bases can provide further security during market fluctuations, and make the business more resilient.
Manufacturing plays a vital role in the economy. Without the manufacturer’s business model, we essentially would not have many of the beloved amenities and items we have today. And with the diverse industries in which manufacturing is needed, this business model can be a great long-term investment.