What is Contract Manufacturing?

3.11.2022

What is Contract Manufacturing?

If you run a company researching the best way to manufacture a product, you have likely discovered the term contract manufacturing along the way. Contract manufacturing helps lower production costs and allows companies to dedicate their time and resources to other aspects of their business. But what is contract manufacturing, and how does it work?

Contract manufacturing is a process where a company hires a third party to manufacture their product. The hiring company will sign an agreement with the manufacturer to produce a certain number of their good over a specified amount of time. The manufactured product will retain the branding of the hiring company, and the original company will still handle the sales and marketing. They simply offload the production process to the third party.

How Does Contract Manufacturing Work

The customer will usually provide the formula or design to the manufacturer, who will then take care of the production of the good. Normally, the contract manufacturer will first prototype and test a product to ensure its feasibility and reliability. Once both sides agree on the final design, the manufacturer will begin the production process and provide a set amount of the product to the customer in a given window of time.

Contract manufacturing differs from toll manufacturing since the third-party handles acquiring the raw materials or ingredients needed to make the product. In toll manufacturing, the hiring company provides the raw materials to the manufacturer.

What are the Benefits of Contract Manufacturing

The benefit of contract manufacturing for the customer is generally lower cost. The company no longer needs to acquire the equipment, ingredients, materials, and manpower to create their product, as well as pay for excess inventory. The contract manufacturer will take care of the entire process for them, saving time, effort, and money.

Contract manufacturers also provide expertise to the production process as well. A properly trained manufacturer will have a staff with years of experience creating goods and will help avoid some pratfalls that companies can run into when trying to begin production for the first time. The customer does not need to worry about hiring well-trained workers who know the ins-and-outs of the manufacturing process because the contracted company will already employ those people.

There are many other benefits of contract manufacturing that your company should consider as well.

Cons of Contract Manufacturing

The biggest downside for contract manufacturing is your company does not retain complete control over the production process of your product. Instead of your own employees supervising from start to finish, you cede that power to a third party.

There are other cons to contract manufacturing you should consider as well, although many of them revolve around choosing an unreliable or inexperienced partner.

How to Choose a Contract Manufacturer

There are many factors to consider when choosing a contract manufacturer. First and foremost, you want a manufacturer with the experience and capability to make your product at the quality you’d like. You also want to hire a company with the capacity, in terms of equipment and store, to manufacture your product at the quantity you desire. You will also want to find a business that will ensure your product meets any compliance and safety standards needed where you plan to sell it. Another important factor may be whether a contract manufacturer is invested in research and design. That way they can help keep your product and company on the cutting edge of technology, so you don’t fall behind your competitors.

Therefore, it’s important to know the questions to ask a contract manufacturer before hiring them. If you don’t properly vet the third-party, you may end up with a less-than-desirable partner who can harm the quality of your product. This will then damage your reputation and hurt your bottom-line.

Is Contract Manufacturing Right for Your Business?

We’ve laid out the benefits and possible downsides of contract manufacturing, but how do you know if it’s right for your business? One way to know is with your access to resources. Acquiring the raw materials, ingredients, or components for your product can be costly and difficult. How do you know the right vendors to go to and if there are better prices available? Contract manufacturers will often have relationships and experience with these companies and can be better informed on getting the best deal possible, thus driving down your costs.

That type of experience is the benefit of a contract manufacturer. If you don’t employ the technical experts or own the equipment to manufacture your product, a contract manufacturer will. They can cover the technical gap your company lacks to get your product to the market as quickly and as profitably as possible. And if you need to expand your business in the future, they will likely have the capacity to do so already, once again saving you time and effort.

Essentially, contract manufacturing allows your business to save your resources to focus on other areas of your business instead of investing heavily into the manufacturing process. Only you can decide whether your money is better spent building your in-house production from scratch or relying on manufacturer that has everything ready for your business on Day One.

Conclusion

Contract manufacturing is a process for businesses to consider if they lack the time, resources, or energy to build their production line from scratch. There are many benefits to adopting this method, and it can help build your company quickly in both the near- and long-term. But it’s important to do your research and ensure the contract manufacturer you hire is reliable and can accomplish your goals. There are many options out there, and it’s up to you to decide if this method is the best for you.

Photo by Lalit Kumar on Unsplash

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