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The Ultimate Guide to Contract Manufacturing

So you’ve got a big idea for a new product. What’s the best way to get it made? Learn why contract manufacturing might be the answer.

So you’ve got a big idea for a new product. That’s great. What’s the best way to get it made?

Lots of organizations have run into this problem, from first-time start-ups to large manufacturing companies. Some amazing products have likely never seen the light of day since high-quality manufacturing can make you dig deep into your pockets. Between the cost of labor, raw materials, and a manufacturing facility, the whole production process can just about run any company dry.  

This doesn’t mean that all hope is lost, though. Companies do get their products made without purchasing huge facilities or hiring a bunch of people. Even many manufacturers don’t build every single piece they use to build their final products.

How can they do this?

Through contract manufacturing.

If those words feel unfamiliar to you, don’t worry. This guide exists to give you an overview of contract manufacturing, tell you what it can do for your company, and show you how you can start realizing its benefits as soon as possible.

Propel Software's secure solution is designed for cohesive collaboration with contract manufacturers so you can track changes, mitigate risk, and streamline regulatory compliance in record time. Get a demo.

What is Contract Manufacturing?

Contract manufacturing is a specific form of outsourcing where a company contracts a manufacturer to produce a set amount of products over a specific period of time.

Types of contract manufacturing

Certain contract manufacturers do different things depending on the needs of their clients. Some different types of contract manufacturing include:

  • Complex or complete assembly
  • Die casting
  • Computer Numerical Control (CNC) Machining
  • Machine control assembly
  • Sheet metal formation
  • Forging metal
  • Metal shaping through either broaching, grinding, or milling

What is a contract manufacturer and how does it work?

A “contract manufacturer” is the company an organization hires to handle all the manufacturing services. They’re typically the ones who oversee the production process and build the product.

Picking the right contract manufacturer should take some time and research. You may want to reference an outsourcing directory to get started and see which providers meet your needs. Taking the time to find the right one can help you establish a long-lasting working relationship with the right contract manufacturer.

Why is contracting manufacturing important?

Working with a contract manufacturer helps companies with limited resources still have the ability to create great products. Contracting gives the hiring company access to experts who can oversee the entire manufacturing process, handle quality control, and lead times.

Why contract manufacturing?

By letting a contract manufacturer handle the production process, the hiring company can reduce costs and simplify their supply chain management by not having to manage the whole manufacturing process and facility. They can then focus their attention on the things they do best like selling, marketing, and customer service.  

What is an example of contract manufacturing?

One of the most prominent examples of contract manufacturing is an original equipment manufacturer called Foxconn, a Taiwanese contract manufacturer that specializes in electronics. They have work with some of the largest companies in the United States like Apple, Xbox, and Amazon.

Forms of Contract Manufacturing

  • Using the Contract Manufacturer’s Equipment or Facility: Don’t want to buy a big facility but still want to control the production? Then this level of contract manufacturing might be good for you. Companies essentially just lease the space or equipment of a contract manufacturer.
  • Contracting a Labor Force: This one is sort of the opposite of the first. Many companies don’t have the human capital to run a full-scale production process efficiently, so they outsource the labor to other workers while still owning the manufacturing facility.
  • Producing Parts of a Larger Whole: Some companies contract other companies to produce specific parts of a larger production. For instance, car manufacturers don’t necessarily create every piece they use in-house. Many will contract with companies that produce specific parts like plastic tubing. The car company then takes these specific parts and uses them in their larger production.
  • Full-Scale Production: This is the most extensive form of contract manufacturing. Companies contract an “original equipment manufacturer” (OEM) to oversee every aspect of the manufacturing process, but the hiring company’s brand gets the credit. You might also hear this referred to as “private label manufacturing.”

How to Choose a Contract Manufacturer

Choosing the right contract manufacturing business is a big decision that companies should not take lightly.

Pick the right one and you’ve got a longterm relationship that makes your life way more simple. Pick the wrong one, though, and you’ll deal with more frustrations and expenses than if you just handled the whole thing in-house. Here are a few quick tips to help you get started as you go through the selection process.

  • Take your time choosing
  • Interview lots of options
  • Know the market value
  • Understand capabilities
  • Check experience level
  • Evaluate staff’s competencies
  • Evaluate responsiveness
  • Compare cost savings

What to look for in a contract manufacturer

As you go through the process of selecting a contract manufacturing company, you’ll want to look for certain elements that can tell you a lot about the way they do business.

The most important factor to consider is whether or not the company has an ISO certification. This third-party evaluation helps ensure that the manufacturing company follows all the appropriate statutory and regulatory requirements. If you don’t see an ISO, just say no!

While the ISO certification is a great starting point, you probably want to also check for some of the following:

  • A clean facility
  • Proper facility management
  • State of the art equipment and technology
  • Ability to meet demand
  • Internal quality standards

Benefits of Contract Manufacturing

Businesses experience a ton of benefits when they contract with the right manufacturing company. Perhaps the most significant benefit is the ability to center the company's efforts on its core competencies instead of adding a whole other layer to its business model.

This freedom to focus on what they’re good at allows them to excel in these areas and to handoff the manufacturing work that is outside of their scope.

Advantages of contract manufacturing

  • Cost Savings. Think of all the expenses associated with manufacturing: machinery, labor, facilities, technology, insurance, training, and more. Most businesses just don’t have the capital to invest in all of that and grow their company. Contract manufacturers have already invested in all those expenses, enabling the hiring company to pay less in the long run and focus their spending on factors that will improve their business.
  • Additional Quality Control. The top contract manufacturers take pride in what they do, and while your company likely has its own set of quality control processes, having another set of eyes on the manufacturing side of things never hurts.
  • Increased Production. This is usually why companies become interested in contract manufacturing in the first place. Who doesn’t want to scale their products? Contract manufacturers are pros at doing this because they are used to adapting to the needs of their hiring companies including changing batch sizes, adjusting lead times, and maintaining quality standards. In-house manufacturing teams often struggle to scale, but the best contract manufacturers have become highly skilled in this area.

Risks of Contract Manufacturing

While contract manufacturing comes with lots of benefits, it does have its risks as well. Like any partnership, there’s always the chance that the contract manufacturer you work with will end up causing more problems for you than expected.

On occasion, some less-than-ethical contract manufacturers have sold one client’s product ideas to another client they favor. Others have just straight-up stolen the idea because they saw an opportunity in their local market. This underscores how valuable it is to take your time with the selection process. Don’t go with any company that feels untrustworthy.

A more foolproof way of avoiding situations like these can come in the form of a clear legal contract protecting your product and any intellectual property that goes with it. Any expense or work in this process will be well worth it in the long run.

Downsides of contract manufacturing

Other downsides exist that are less risky but still challenging. Cultural differences like social norms or language barriers can cause a bunch of problems if not handled delicately.

Companies will also have to accept their lack of control in the manufacturing side of the process because they’re handing that over to the contract manufacturer. Some leaders find it very difficult to surrender that power.

Lastly, you’ll have to accept that your contract manufacturer works with other clients, too. This means that your needs may need to wait sometimes because they have to handle a different client’s problem.

When You Should Use Contract Manufacturing

Contract manufacturing is best used when companies fit any of the following categories:

  • Limited internal bandwidth. Sometimes companies just don’t have the people in place to kickstart, manage, and scale a manufacturing process. Doing so can become a distraction for their leaders and take their focus off of growing the company. Contract manufacturing allows the product to still get made while empowering the team to focus on their core competencies.
  • Limited resources. In that same vein, companies that would rather utilize the time and money required for in-house manufacturing on other aspects of the business can benefit from contract manufacturing because of the cost savings associated with it.
  • Overwhelming supply chain. Too many moving parts in your supply chain? The top contract manufacturing companies can simplify supply chain management and reduce the complexity of the whole process.
  • Fluctuating demand. Lots of companies have a hard time predicting the ups and downs of their sales, making it difficult to produce the right amount of their product at the right time. Contract manufacturers are highly skilled in this area and can help you reduce excessive spending.

Questions to Ask a Contract Manufacturer

Using contract manufacturing services is a big commitment with a contract manufacturer, so you want to make sure you ask them the right kind of questions so you know what to expect. You don’t want to leave anything to chance.

Questions will vary between industries and depend upon your company’s needs, but a few questions to get you started might include:

  • “How will our intellectual property be protected?”
  • “What kind of pricing transparency do you offer? Should I expect any hidden fees?”
  • “Who will act as our company’s dedicated point of contact?”
  • “What processes are in place to maximize efficiency and flow on-site?”
  • “Will my orders look consistent?”

Contract Manufacturing Agreement

Not all contract manufacturers are created equal, so you want to make sure you protect your company from any potential problems that may arise. You can do this with a clear agreement that sets up expectations on both ends, protects you from theft, and states any other specific concerns that may arise in your context.

Picking a solid contract manufacturer can bring significant benefits to your company, but the process shouldn’t be done lightly. Make sure you cover all your bases. When you do, you’ll be able to fully experience the advantages of contract manufacturing.

Use a cloud-native platform that can organize all of the moving parts of working with a contract manufacturer to truly reap the benefits of the partnership. Talk to our team today about connecting the people, systems, and processes you need to deliver products from concept to customer on a secure Supplier Community portal that unifies your entire value chain.

Get a demo now.

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Post by
Anna Troiano
Editor in Chief, Converged

Anna has spent her content marketing career honing in on the critical keys for successful consumer & industry-driven marketing. Before joining Propel, she developed and executed content strategy for TodayTix, Stella & Dot, Atlantic Theater Company, and Theatre Communications Group.

Fun Fact: Anna's birthday is Valentine's Day.

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Anna Troiano