How do contract manufacturers turn unprofitable orders into profits? Discover the real cost structure behind CDMO/OEM/ODM strategic underpricing and learn how operational cost management leads to profitability—even with underpriced deals.
In the CDMO/OEM/ODM industry, there’s a saying you may have heard:
Strategic underpricing with back-end profitability.
At first glance, this concept seems completely irrational. Why would a manufacturer intentionally take on orders that lose money? But here’s the truth: it actually makes sense — if you understand how factory cost structures and operations work.
Let’s break it down. Every factory has fixed operational costs—expenses that exist whether or not production is happening. These include:
These costs don’t disappear when the machines stop. Even with zero output, you still pay for these expenses. So here’s the strategy:
I first heard this strategy from Terry Cheng, former VP at Foxconn. I kept thinking “How can a factory still profits even from unprofitable orders?” Back then, I worked with colleagues to develop a quotation model based on cost analysis. When we listed cost items, I realized that some expenses always appeared—and most of them belongs to operational, not production-specific.
A light bulb went on in my head:
If a factory can ensure its total revenue covers all operational costs, profitability follows.
This is why some companies can afford to undercut prices, especially when capacity is underutilized. It’s not just about winning deals—it’s about keeping the factory running and turning a profit over time.
In manufacturing, not every deal needs to be profitable on its own. As long as the total revenue offsets the baseline operational costs, the company stays in the black. This is a strategic long-game, often misunderstood by those only focusing on per-unit margins.
However, I’m not advocating a race to the bottom. Cost control is important, but value creation—through product quality, innovation, and service—should always be the goal!
In a world full of price competition, understanding your real cost structure is your best advantage!
Whether you’re in BD, supply chain, or operations, understanding cost structure helps you make smarter decisions. If this topic resonates with you, please feel free to comment, message me by Email or LinkedIn and share your experience!
Feel free to sign up for our newsletter!
