Home Blog What Is Contract Manufacturing (All You Need To Know)

What Is Contract Manufacturing (All You Need To Know)

Looking for Contract Manufacturing?

What is Contract Manufacturing?

What’s important to know about it?

Keep reading as we have gathered exactly the information that you need!

Let me explain to you what Contract Manufacturing is and why it’s important!

Are you ready?

Let’s get started!

What Is Contract Manufacturing

Contract manufacturing is when a party enters into a contract with a manufacturer to produce specific components or products based on the client’s specifications.

In other words, contract manufacturing is a commercial agreement where the client requests that the manufacturer produce certain components, parts, or whole products according to the client’s specifications.

In some cases, the client will use the manufactured goods in its manufacturing process or it may sell to generate an income.

You can consider contract manufacturing as a form of outsourcing where a company engages a manufacturer to produce something rather than investing time and money to produce the goods in-house.

Keep reading as I will further break down the meaning of contract manufacturing and tell you about its main advantages and disadvantages.

Recommended article: What is a manufacturing business

How Does Contract Manufacturing Work

Contract manufacturing is when one company hires another company to produce a certain part, component, or finished product.

For example, a company may want to produce an engine.

However, it needs to have different components built to exact specifications to produce the engine.

If it does not have the ability to produce the engine parts internally, it may hire a manufacturing company to produce the components.

The client will give the engine component specifications and design to the manufacturer who will then produce them.

Once the components are produced and delivered, the client will then be able to produce the engine.

By hiring the manufacturing company, the engine producer can focus on building great engines rather than spending time, energy, and resources on building engine components.

As for the manufacturing company, since it has the proper equipment and skilled resources, it can produce different types of goods for different companies (remaining focused on its core manufacturing business).

Recommended article: What is cost-plus pricing

Contract Manufacturing Advantages

There are several advantages to contract manufacturing.

The most important advantage is that by hiring a manufacturing company, you do not have to invest time and money in producing the goods yourself, leading to significant cost savings.

If you need to purchase the proper equipment, tools, and machines, hire the right staff, and use up capital to produce something, costs can quickly go up.

However, when you hire a manufacturing company that has already invested in the proper machines and equipment, has skilled labor, and understands the manufacturing business, you may find that it can help you save money.

Another key advantage of hiring a manufacturing company is that you can produce the goods or components more quickly.

The manufacturing company needs to understand your specifications.

It can then immediately get to work.

Also, since the manufacturing company is specialized in “manufacturing”, you can expect that they can produce your parts, components, or goods more reliably and with higher quality.

Recommended article: JIT meaning 

Contract Manufacturing Disadvantages

Although contract manufacturing has its benefits, it also comes with key disadvantages.

One important disadvantage in hiring a manufacturing company is that you do not have a lot of control over the manufacturing process as a client.

Once you provide the manufacturer with your specifications and product design, you have little to no say about how the manufacturing company will produce the goods.

Another important disadvantage is that you do not end up getting quality products for several reasons.

In some cases, the manufacturer may not have the proper machines and equipment to produce your goods.

In other cases, due to miscommunication, the manufacturer may produce the wrong parts or based on incorrect specifications.

If a client gets the wrong parts or low-quality ones, it may suffer reputational and financial damages.

Recommended article: What is production concept

Choosing The Right Contract Manufacturer

Not all manufacturing companies are the same.

If you need to hire a manufacturer, it’s important that you choose the right company for the job.

The first characteristic of a good contract manufacturer is how much they invest in their facilities and use the latest technology in their manufacturing process.

Also, they should have experienced staff allowing them to operate the complex machines and tools needed for high-quality production.

Great contract manufacturers will also demonstrate their expertise by having and maintaining ISO certifications.

For instance, ISO 9001:2015 establishes the standard allowing companies to establish the criteria for a company’s quality management system.

Another feature of the right contract manufacturer is that they are aware of the latest market trends and make the necessary changes to remain competitive in the market.

Finally, contract manufacturing requires that there is a good level of communication between the manufacturer and the client so everything is clear and properly understood.

Recommended article: What is the nature of a business

What Is Contract Manufacturing FAQ

What are the benefits of contract manufacturing?

The main benefits of contract manufacturing are the following:

What are the drawbacks of contract manufacturing?

The main drawbacks of contract manufacturing are the following:

  • Lack of control
  • Quality issues
  • Intellectual property risk
  • Outsourcing risk
  • Capacity constraints
  • Pricing risk
  • Loss of production control
  • Low responsiveness 

What are the different types of contract manufacturing?

There are different types of contract manufacturing but most will fall into four categories:

  • Private label manufacturing
  • Individual component manufacturing
  • Labor or service subcontracting
  • End-to-end manufacturing 

What are some examples of contract manufacturing?

You can enter into a contract with a manufacturer to create pretty much anything.

Here are some examples of things that can be produced through contract manufacturing:

  • Adhesives
  • Ceramics
  • Glass
  • Casting
  • Forging 
  • Die cutting 
  • Industrial materials
  • Metal cutting
  • Metal forming
  • Metal processing
  • Plastic modeling
  • Rubber products

And more…

Recommended article: Types of business strategy

Business and law blog

Takeaways 

So there you have it folks!

What does contract manufacturing mean?

In a nutshell, contract manufacturing is when a company enters into a contract with another company to produce components, parts, or products, based on a specific requirement and in a specific timeline.

Contract manufacturing is essentially the process of outsourcing the manufacturing process to another company.

The client will typically provide the design and product specifications and the manufacturing company will produce the goods as requested.

The manufacturing company will produce the goods based on the complexity of the process, tooling, labor, and materials needed.

Contract manufacturing is beneficial for companies that do not have the equipment, expertise, or resources to produce goods.

However, working with a third-party manufacturer exposes the client to intellectual property risk, outsourcing risk, lack of control over the production process, and other challenges.

Now that you know what contract manufacturing means and how it works, good luck with your research!

Subcontractor meaning 
Original design manufacturer
Original equipment manufacturer 
Value added reseller 
What is fragmentation
Material requirement planning 
Supply chain evaluation 
Interactive contract manufacturing
Electronic contract manufacturing
Author

Amir K.
Hello Nation! I'm a lawyer by trade and an entrepreneur by spirit. I specialize in law, business, marketing, and technology (and I love it!). I'm also an expert SEO and content marketer. On this blog, I share my experience, knowledge, and provide you with golden nuggets of useful information. Enjoy! Feel free to connect with me on LinkedIn.

Most Popular

Financial Services Industry (Explained: All You Need To Know)

Financial Services Industry (Explained: All You Need To Know)

Transporation Industry (Explained: All You Need To Know)

Transportation Industry (Explained: All You Need To Know)

What Is A First Look Deal (Explained: All You Need To Know)

What Is A First Look Deal (Explained: All You Need To Know)

Tag Along Rights (Explained: All You Need To Know)

Tag Along Rights (Explained: All You Need To Know)

Drag Along Rights (Explained: All You Need To Know)

Drag Along Rights (Explained: All You Need To Know)

Editor's Picks

Acquirer Meaning (Complete Definition: All You Need To Know)

Acquirer Meaning (Complete Definition: All You Need To Know)

Iron Butterfly Options (Definition: All You Need To Know)

Iron Butterfly Options (Definition: All You Need To Know)

What Is An Authorized Representative (Explained: All You Need To Know)

What Is An Authorized Representative (Explained: All You Need To Know)

Georgia Business Search (Step-By-Step)

Georgia Business Search (Step-By-Step)

Managing Partner (Complete Overview: All You Need To Know)

Managing Partner (Complete Overview: All You Need To Know)