Contract manufacturing is a type of outsourcing that companies use, which involves hiring a manufacturer to create products. A contract manufacturer may take part in various stages of production, including design, manufacturing and shipping, depending on the needs of their client.The company that hires the contract manufacturers can provide production details, which include the total amount of product they need, the production deadline and quality assurance standards to follow. Contract manufacturers have the International Organization for Standardization (ISO) certification, which is a certification that qualifies companies to follow standards for product manufacturing and quality assurance guidelines.
How does contract manufacturing work?
Typically, a company hires a contract manufacturer and provides their expectations and guidelines for their products. They may work with the manufacturer to design a product idea, or they can provide a prototype, sample or outline for the product. The manufacturer usually creates a test product to ensure it meets quality standards.Once the manufacturer finishes manufacturing the products, they send the items to the hiring company, so that they can ship them out to customers. Contract manufacturers sometimes use dropshipping, which involves sending the product directly to the customer, rather than sending the product to the company first.
When should you use contract manufacturing?
Here are several reasons you might use contract manufacturing:
- Smaller company: If the company you work for has fewer employees, a smaller budget or less manufacturing equipment, you may decide to use contract manufacturing.
- A large amount of product: When producing a large amount of product, you may find that it’s easier to use contract manufacturing since they likely have more experience producing a lot of products.
- Varying production needs: If your production need varies depending on the type of products or the number of sales, using a contract manufacturer may help the company maintain a consistent manufacturing schedule.
Benefits of contract manufacturing
Here are several advantages of using contract manufacturing:
Lowers production cost
Hiring a contract manufacturer can provide you with the ability to produce a high number of products at a lower cost, since you can choose a manufacturer that meets the company’s production budget. You can also save money on costs associated with manufacturing, like machinery, labor and facilities. Rather than purchasing the equipment, a company can pay a contract manufacturer that already has the manufacturing equipment needed.
Adds quality-control standards
While the company may have specific quality-control standards, it’s likely that contract manufacturers have added quality-control standards, which allow for higher-quality products. Having extra quality-control standards may help customers feel more compelled to purchase the products. It can also set the company apart from competitors who may have fewer quality-control standards.
Boosts production quantities
The amount of products that a company produces depends on its manufacturing capabilities. Contract manufacturers often have an easier time adapting to a larger production need since they have the proper manufacturing equipment and materials. A company that doesn’t have the proper equipment to produce large quantities of products may have a harder time meeting its production needs.
Allows expert advice
Companies may hire contract manufacturers who have more experience in product creation. Manufacturers can manage the production process and ensure that companies receive high-quality products.Companies may find it useful to use a contract manufacturer that has experience in their industry. For example, a toy company may hire a contract manufacturer that has several years of experience in toy production.
Offers more attention to other operations
When using contract manufacturing, members of a business can pay more attention to other business operations. This is because the contract manufacturers handle all manufacturing-related needs and issues. For example, if a company spends less time focused on manufacturing, it may be able to devote more time to marketing and sales.
Types of contract manufacturing
Here are several types of contract manufacturing:
Renting equipment
Companies sometimes have the option to rent a contract manufacturer’s facility, equipment or tools for production. A company may rent equipment if they have a temporary production line that they need to complete, and they don’t want to pay the full price of outsourcing their production. The manufacturer may bring the equipment to the company’s location, or the company may bring employees into the manufacturer’s facilities to produce its products.
Hiring outsourced labor
A company may hire outsourced labor to manufacturer its goods. If a company doesn’t have enough employees to produce the total amount of products they need, they may outsource their labor from a contract manufacturer.They can choose the number of employees they need and the amount of product they need help to produce. Typically, companies that outsource their labor also have to outsource their equipment.
Producing parts of a product
If a product has various parts, a company may manufacture part of the product, then it can hire a contract manufacturer to create other parts. This can help companies outsource products from manufacturers that have more experience creating specific products. For example, a car manufacturer may produce the engine and brakes, then it may hire a contract manufacturer that’s familiar with tire creation to manufacture the wheels.
Full-scale production
This is the most common type of contract manufacturing, and it’s when a business hires a contract manufacturer to produce all parts of a product. With this type of production, a company gives the manufacturer complete control over the production process. Full-scale production often involves a manufacturer that takes part in the design process and the manufacturing process.
