Definition

Contract manufacturing is when a company outsources the production of its goods to a third-party manufacturer, often to reduce costs or leverage specialised expertise.

Description

Contract manufacturing occurs when one business agrees with another to create components or goods over a particular time period. This is manufacturing outsourcing, and like employee outsourcing, it allows businesses to compete in previously untapped markets.

It is a business deal in which one company pays another to provide the components required to assemble completed items or produce a product. Contact manufacturers are third-party providers who typically work as subcontractors or sell their products to other enterprises.

Typically, a corporation looking for a contract manufacturer may approach one with a design and request an estimate for the process, labour, tooling and materials. If the cost of doing business is less than the cost of manufacturing, it is a sound decision to proceed, demonstrating the cost-effectiveness of contract manufacturing.

Benefits of contract manufacturing agreement

Some of the contract manufacturing advantages include:

Cost Reduction

Contract manufacturing allows a corporation to lower its overall operating costs. It saves money on equipment purchases, maintenance, and repair, as well as hiring trained labour and providing salaries and benefits to entire teams. This is because contract manufacturers already have these resources in place and can make the essential goods for the agreed-upon price.

Reduced Manufacturing Time

Hiring contract manufacturers to build certain components might be an effective strategy to cut manufacturing time. Once production is complete, the corporation may focus on assembling the finished product and distributing it to clients. This enables products to reach customers on time, potentially increasing brand attractiveness and loyalty.

Convenient Market Entry

Contract manufacturing allows a corporation to create a design, have it manufactured, and sell it in a timely manner. Companies can quickly launch items by depending on the contract manufacturer's equipment and skills. Early market entry can provide a company an advantage over its competitors by giving it time to expand its market share.

Improved Employee Efficiency

Because contract manufacturers handle the majority of the production, staff may devote more time to design and marketing. This means that staff can focus their energies on other parts of the company's operations, thereby improving efficiency. This increases productivity, allowing the company to grow the scale of its activities.

 

Tips to select contract manufacturers

Follow these tips before selecting contract manufacturers:

1. Enquire about previous experience of the contact manufacturers:

Maintain communication with manufacturers to learn more about their manufacturing skills and experience. Request regular updates on the jobs they are working on in your industry. You might also talk about the obstacles they had throughout production and the unique solutions they devised to overcome them.

2. Evaluate manufacturers:

Maintain with you work records of various contact manufacturers. Those whose performance aligns with your goals, can be taken in for contract manufacturing. 

3. Inspect manufacturer’s site:

Determine whether the contract manufacturer owns or has access to the necessary equipment for the work. To achieve this effectively, you must first grasp your project's prerequisites for completion. Equipment that follows maintenance and calibration schedules is a good indication of a reliable contract manufacturer.

4. Evaluate the manufacturing capacity:

The contract manufacturer's capacity to complete orders on time is critical when determining who to work with on projects. Storage capacity, equipment, devoted staff, and power availability can all have an impact on the contract manufacturer's output. A contract manufacturer with adequate production capacity can help ensure on-time delivery of high-quality items.

Different types of contract manufacturing

These are the types of contract manufacturing:

1. Hiring Labour:

A company that lacks the employee capacity to create a product can hire outsourced labour to boost its workforce. In such circumstances, the company owns production equipment. The company may engage staff to handle a large number of repetitive jobs or specialists with specific knowledge.

2. Renting equipment

A company can rent an entire facility, equipment, or tools to aid its production process. This usually happens when it wants to produce more than its current capacity can handle. This may also happen if its production involves the use of very expensive machinery.

3. Part-time production

Depending on the components of a product, a corporation can make some of it while outsourcing the remainder to a contract manufacturer. This ensures that enterprises with the necessary experience and competencies produce such components. Part-time production can minimise total output time with proper management and communication.

Example

Micromax, for example, uses Chinese manufacturers to manufacture its smartphones, allowing them to focus on design and marketing while taking advantage of cost-effective production skills.
 

FAQ

What is contract manufacturing?

Contract manufacturing is when a company outsources the production of its goods to a third-party manufacturer.

What is a contract manufacturing agreement?

A contract manufacturing agreement is a legal document between a hiring firm and a manufacturer that specifies the parameters under which the manufacturer will make and provide products to the employing company. This agreement often addresses elements such as:

• Product specifications include information on the quality, materials, design, and packaging requirements.
• Pricing and payment terms specify how much and when the manufacturer will be paid.
• Intellectual property rights refer to the ownership of product designs and private information.
• Production timelines are schedules for manufacturing cycles and delivery deadlines.