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Contract Manufacturing: Definition, Types, Benefits

11 min read

While some businesses have the means and resources to conduct their own manufacturing operations, this is not always the case.

Moreover, some companies may attempt to handle their own manufacturing operations, just to find it is not the best option for the bottom line. This is where contract manufacturing may be an excellent option to keep business flowing.

Contract manufacturing allows businesses to collaborate with other manufacturing businesses to produce the parts or orders required. Check out below where we take an in-depth look at contract manufacturing as a whole.

What is a Contract Manufacturer?

A contract manufacturer is a manufacturing business that creates agreements with other businesses to produce products, components, or parts for a certain period.

This time could be indefinite, but it depends on the agreement. Consider it as outsourcing in the manufacturing world. Instead of a business creating products or parts themselves, they hire a manufacturer to do it for them.

The process begins with the business in need of the product or part contacting a manufacturer to get a quote for the labor, materials, and overall production. If the price is agreeable, then the contract can begin. Most contract manufacturers are simply third-party businesses, meaning they don’t make products to sell themselves, but rather only sell to other businesses.

The hiring company will provide the details on the type of product or part they need, the deadline for the project, and the standards they want to be followed. Many will have a finalized design that can be given to the contract manufacturer to work from.

However, some may also work with the contract manufacturer to create the design or prototype. They can also get a sample of a similar product first to then tell the manufacturer any changes they would like.

Once the products or components are completed, they will be delivered to the company that hired the manufacturer for them to sell. Depending on the type of business and the agreement, the manufacturer may send the product to a fulfillment center or drop ship it, which means sending products directly to the customer.

The Types of Contract Manufacturing

The specific contract agreements in these arrangements can vary, but there are a few common types. Here are just a few.

Component Manufacturing

Component manufacturing involves the manufacturer creating a single component that will be used within a larger project. The manufacturer will produce this component and send it to the hiring business, which they will then use to assemble the final product.

This is a great option for businesses that have some level of manufacturing or production capabilities, but lack the resources or equipment to produce a certain high-level part.

Private Label

Private label manufacturing is very commonplace, especially in the ecommerce world. This is when the hiring company specifies a product that they want to be created, and the contract manufacturer produces the entire product. The finished product will then be sent directly to the hiring business, a warehouse, or to an ecommerce fulfillment center.

Dropshipping may also be used here. Private label manufacturing is suitable for businesses that know what product they want created but don’t have any manufacturing capabilities.

End-to-End Manufacturing

End-to-end manufacturing is very similar to private label in that all labor and production are outsourced to contract manufacturing companies. The primary difference with end-to-end manufacturing is that the manufacturer is involved in the product design and helps to shape the final product.

This can be a good option for businesses that want something produced fast and less costly than designing and producing it themselves.

Service Subcontracting

Service subcontracting is when a contract manufacturer is hired to handle a single part of a larger job or purpose. In these cases, general contractors will hire contract manufacturing services to handle a single part of a complex product.

It is similar to component manufacturing, with the difference being the overall purpose and entity hiring the service.

Benefits of Contract Manufacturing

Contract manufacturing can be very beneficial to companies in multiple ways.

Resources at Hand

Firstly, it allows companies without the necessary resources, employees, or equipment to create the products or parts they require. Additionally, in some cases, a business may have the equipment to create a certain component but decide to hire a specialized contract manufacturer for a better result.

Reduced Costs

Contract manufacturing companies can offer lower costs for many businesses. Investing in equipment, materials, and staff for manufacturing is expensive. Moreover, even once these things are obtained, the overhead for operations becomes significantly higher.

So, while contract manufacturing services have their own costs, they can help keep overall manufacturing costs lower for the hiring company. Plus, they will still receive quality products.

Perfect for Small Businesses

Small businesses and startups often benefit the most from contract manufacturing, as it allows them to get their product off the ground with relatively low capital. This allows them to get their foot in the door without the deep pockets that large businesses have.

Even better, contract marketing can help get a product completed and into the market more quickly. This is because contract manufacturers are experts with ample experience and resources to get products or components done fast. Thus, allowing new or veteran sellers to get their products sold.

Product Speed

The speed of production is another major factor to consider. Some smaller businesses may have some level of manufacturing capabilities. However, if they need a large batch of products, it may be difficult to meet the demand. This is an instance where hiring a contract manufacturer may be able to fulfill the order at a much lower cost and in less time.

Expert Advice Available

Another excellent part about contract manufacturers is their ample product creation experience. This allows businesses to ask any questions they may have or get any needed advice on design.

Moreover, experience helps ensure that the products will be of a high quality. If the hiring business wants to take it a step further, they can even locate a manufacturer that has years of experience in their particular industry.

Advice for Finding a Contract Manufacturer

Now that we’ve covered the benefits and different types of contract manufacturing, let’s take a look at some tips for finding the right contract manufacturing companies.

Don’t Settle on the First Manufacturer You Find

There is nothing wrong with finding a few contract manufacturing options. In fact, this is recommended, as it helps the hiring business ensure that they find the ideal pricing, quality, and experience.

A good place to start is by making a list of all the qualities you desire in a manufacturer. This could include factors such as:

Years of experience
Equipment availability
Quality standards and inspection capabilities
Turnaround time.

Reach Out to Multiple Manufacturers

Once a few ideal manufacturers have been located, the hiring business should reach out to each of them. Ask as many questions as necessary to ensure that they will be the right fit for the job. This can include questions, such as:

How long have you manufactured [product category]?
What is your turnaround time like?
Are you consistent in meeting deadlines and delivery dates?
What inspections do you do to ensure product quality?

Try Negotiating

In many cases, manufacturing services can be negotiated. This isn’t to say that hiring businesses should try to “low-ball” their manufacturing costs. However, there is nothing wrong with having a conversation to see if both parties can agree on a price for the service.

Build a Relationship with the Manufacturer

One of the best pieces of advice when it comes to contract manufacturing is for the hiring business to build a relationship with the manufacturer. This helps to create harmony and a sense of business trust between both parties.

Moreover, not only can this lead to increased business in the future, but it can also lead to better-negotiated deals or price breaks.

The Wrap on Contract Manufacturing

Ultimately, contract manufacturing can offer a wide array of benefits, especially for smaller businesses looking to get off the ground. It saves time, money, costs, and overhead, which can lead to the building of a successful business.

We hope this information helped you understand contract manufacturing. Good luck in finding the right manufacturer for your products!

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Apr 15, 2024

About the author

Max has been working in the ecommerce industry for the last six years helping brands to establish and level-up content marketing and SEO. Despite that, he has experience with entrepreneurship. He is a fiction writer in his free time.