Contract Manufacturing: A Comprehensive Guide

Unless your company is in the service industry, your business makes products. That puts you in the manufacturing industry. But not every company has the resources required for manufacturing operations. You may face a shortage of space or skilled labor. Investing in production equipment can be expensive, and not every business can wait for the return on that investment. Fortunately, manufacturing can be outsourced. 

Contract manufacturing is becoming a popular option for companies of all sizes. It's proven to be an efficient model for production, as it offers faster turnarounds and scalability to businesses looking to become manufacturing organizations. 

If you’re seeking to understand the ins and outs of contract manufacturing, look no further as this comprehensive guide will tell you everything you need to know if you’re considering this business model.

What is contract manufacturing?

Contract manufacturing is the process when one business outsources its manufacturing activities to another company. This business model is regularly used in industries such as electronics, automobiles, pharmaceuticals, food, consumer goods, and more. Typically, a client company will provide the contract manufacturer with detailed product designs and requirements, so that the resulting products match the client company’s specifications.

While businesses of all types and sizes utilize contract manufacturing, it’s an especially compelling option for small to midsize businesses (SMBs). Contract manufacturing offers cost savings to SMBs, since they don’t have to invest in production equipment and labor. This allows an SMB to focus on its core competencies, instead of learning the ins and outs of efficient manufacturing. Contract manufacturing also offers scalability, as SMBs can easily amp up production orders in response to increased customer demand.

What are the different types of contract manufacturing?

Some of the different forms contract manufacturing can take include:

• Full turnkey manufacturing: This is when the contractor provides complete contract manufacturing solutions, from sourcing raw materials to assembling the production environment, all the way through to packaging and shipping the final product.

• Partial turnkey manufacturing: In these scenarios, the contractor remains responsible for some parts of the manufacturing process, like product design, sourcing raw materials, or shipping.

• Joint venture manufacturing: In some cases, the contractor and contractee will form a joint venture in which each party is responsible for manufacturing a range of the contractor's product lines.

Some other common contractual manufacturing scenarios include prototype manufacturing, which is when the contractor designs potential new products for the contractor, and subassembly manufacturing, where the contractor manufactures specific components instead of a complete product.

What are the benefits of contract manufacturing?

Perhaps the most critical advantage of contract manufacturing is cost savings. The costs of production facilities and equipment, along with labor and maintenance expenses can quickly add up. Contractual manufacturing is frequently more cost-effective because the contractor has already invested in the required resources.

Streamlined operations

Beyond cost savings, contract manufacturing can also streamline the contractor's business operations. With predictable costs and product turnaround times, contract manufacturing allows an organization to better allocate its labor, finances, and time. In full turnkey manufacturing scenarios, the contractor is freed from the burdens of working with vendors and sourcing materials. Many forms of contract manufacturing offer packaging and distribution services, reducing costs and time spent.

Access to the latest technology

Contract manufacturing also gives the contractor access to the newest production equipment and technology. A contract manufacturer will likely have computer numerical cutting (CNC) machines, chemical manufacturing equipment, scientific instruments, and state-of-the-art production facilities powered by the latest manufacturing software. Taking advantage of these offerings often results in better products, giving the contractee a competitive edge they otherwise would not have.

Scalability

Scalability is another benefit of working with contract manufacturers. Contract manufacturers typically have multiple contractors with large manufacturing facilities to match. Scaling up production for a contractor is simply a matter of increasing their order. Doing the same in-house requires significant capital investment in new production equipment and facilities.

Slowing down production without penalty

Conversely, ramping down production during the slow times is more feasible with contract manufacturing. A contractor can reduce their order or perhaps even put production on pause until demand for their products increases again. With in-house manufacturing equipment and staff, slowing or stopping production is a less attractive option since it means paying salaries and maintaining equipment until demand returns.

What are some examples of contract manufacturing?

The true value of contract manufacturing is evident from how common it is. Organizations of all types and sizes utilize contract manufacturers. Here are some of the industries where a majority of products and components are produced under contract manufacturing agreements:

• Electronics:Computers, cell phones, tablets, TVs, and other consumer electronics are often produced via contract manufacturing agreements.

• Food: From fast food companies to major supermarket brands, many companies in the food industry outsource their products’ manufacturing.

• Automobiles: Many of the components of automobiles originate from contract manufacturers hired by the major automotive companies, including axle assemblies produced by Warn Industries and door hinges from the Canadian company Flex-N-Gate.

How to choose the right contract manufacturer

Selecting a contract manufacturer for your company requires planning and diligence to ensure you contract with the right partner for your products. Choosing the right contract manufacturer is a process that follows these steps:

• State your goals: Take the time to define your desired outcomes from a contract manufacturing relationship. Decide which type of contract manufacturing agreement is most suited to your company’s needs. 

• Research the costs: Perform some market research to understand the typical costs for contract manufacturing in your industry. Your shortlist of contractors should quote prices within this range or explain why their costs are higher or lower. Taking your time with this step will ensure you partner with a reliable contractor for your industry.

• Conduct interviews: Once you have come up with a list of contract manufacturers suited for your company, arrange to interview them. When you meet with each contractor, don't hesitate to ask specific questions about the manufacturing process, turnaround times, and costs.

• Verify references: After meeting with potential contractors, talk to the references that each provided. Speaking with these companies will help you understand the potential benefits and downfalls of working with each potential contractor.

• Perform a cost-benefit analysis: After narrowing down your list of contract manufacturers to a few top candidates, perform a cost-benefit analysis on each to help find the best fit for your company. A contract manufacturer with the most expensive quote might be worth the extra money if they provide sufficient value.

Once you've completed these steps, you will be in an excellent position to select the right contract manufacturer for your company. Before entering into an agreement, feel free to ask for a tour of the manufacturing facilities so that you better understand where your products will be made.

Expanding your manufacturing needs and research

If your company produces any sort of consumer goods, you should look into the benefits of contract manufacturing. Businesses of all sizes, including SMBs, save money and are more efficient, thanks to contract manufacturing agreements. It’s worth investigating if your company might reap the same benefits.