What Is Contract Manufacturing? How to Decide Whether or Not to Outsource

By: William Delong - Guest Contributor on November 7, 2022
On this page:

Imagine: your team just came up with an amazing new product that customers will love. But how will your business manifest this idea from sketches and digital models into a physical product? 

As a line lead, shift lead, plant manager, or manufacturing business owner, you want your company to stay competitive and reach your target audience. But you also need to be realistic about the goals, processes, and time it will take to get your new product to market. 

Perhaps your business needs the entire product built, or you might only need certain parts of the product manufactured. Whatever the case, you may need to consider a contracting manufacturer.

Let’s discuss what contract manufacturing is, the pros and cons it presents to your business, and the risks to consider (and mitigate) when choosing a contract manufacturer.

What is contract manufacturing?

Contract manufacturing is the production of goods by a third party (the contract manufacturer) for a company that cannot produce its own goods in-house. Ultimately, contract manufacturing is a form of outsourcing that helps businesses manufacture their products and goods.

What are the pros and cons of contract manufacturing?

There’s a reason an increasing number of companies across a variety of industries are turning to contract manufacturers to help them get the job done. Contract manufacturing is great for startups and small businesses with little buying power for raw materials that require high-quality results.[1] It's also a fantastic solution when demand suddenly exceeds your supply.[2]

3 pros and cons for hiring a contract manufacturer

Contract manufacturing's benefits include:

  • Reduced costs

  • Access to people with specific skill sets

  • More sets of eyes on your product to catch mistakes

  • Easier-to-scale production

  • Ability to focus on your company’s core competencies

By outsourcing to contract manufacturers, businesses can save money and time by not having to manufacture products or product elements themselves.

But this can come at a cost. Any time you take a piece of your business and outsource it, you relinquish some control. 

The cons of contract manufacturing include:

  • Not having full control over product quality

  • Being dependent on the contract manufacturer’s schedule

  • The possibility of your product being poached or sold to competitors

  • Communication barriers 

  • Damaging your business’ reputation if product quality diminishes or if the contract manufacturer mistreats its employees

The product you hire the contract manufacturer to produce will ultimately reflect your company, not the company you hired to make it.

This is why it’s important to choose your contract manufacturer carefully and ensure they adhere to your industry’s and company’s quality standards.

How can I mitigate some of the risks involved in hiring a contract manufacturer?

Before outsourcing, you should always do your homework and define your expectations and business needs around outsourcing. 

What process do you plan to outsource? In what ways will this impact your business overall? 

The processes you choose to outsource should not be core to your business. Generally speaking, essential processes should be kept within your direct control.

When you decide to hire a contract manufacturer, make sure to:

  • Communicate your expectations regarding quality, supply chain, and security from the outset and work these elements into your contract. If a contract manufacturer's quality standards don’t align with yours, they’re not the right fit.

  • Perform on-site audits to check the contract manufacturer’s quality system maturity level at every stage in the manufacturing process.

  • Formalize your working partnership with the contract manufacturer through a well-defined contract manufacturing agreement.

  • Only hire a manufacturer you can trust, and be sure to back up this trust with research such as customer testimonials/reviews.

Although risks associated with outsourcing through a contract manufacturer can be managed and mitigated, they can never be fully eradicated. Any time you outsource a business process, while you might gain significant advantages—such as reduced costs and the ability to scale production—you are still giving up control.

Use software to improve your manufacturing processes

If you’re ready to outsource, consider how software can help with your manufacturing processes, including contract management and in-house workflows. From streamlining your manufacturing business to closing the manufacturing skills gap, there are tools that can help.

Explore manufacturing- and production-related software on Software Advice, where you can read reviews from real users and connect with an advisor for personalized help determining which system is a good fit for your needs.