Contract manufacturing is when a small company hires another company to produce its products. It allows small-scale business owners to start selling their products without obtaining the large amount of capital needed to build and run factories.

Learn more details about contract manufacturing and its advantages and drawbacks for small-sized businesses.

What Is Contract Manufacturing?

The popularity of TV shows like Shark Tank and online marketplaces such as Amazon and eBay Entrepreneurs can come up with anything, have it manufactured quickly, and then begin selling to the masses because of contract manufacturers. These companies are contracted to create an amount of product according to the specifications provided to them by the company hiring them.

A contract manufacturer may be located in the U.S. or overseas. The company hiring should seek out the contract manufacturer that has expertise in the type of product the company wants to produce. The expertise might be more than just the manufacturing process; the firm could be able help with the engineering or chemical processes or packaging.

Here are some additional things to be looking for in a contract manufacturer:

  • Reputable in the market
  • Financially sound
  • Clean, well-managed and well-maintained facility
  • ISO-certified manufacturing quality standards for manufacturing
  • Dropshipping is a method of delivering the product directly to customers if that’s something the business needs
  • The capacity to keep up with production demand for the product

How Does Contract Manufacturing Work?

The hiring company usually provides a design or formula to the contract manufacturer to replicate or improve on. The hiring company typically focuses on selling and marketing of its products.

For instance, a small business may wish to market special cleaning products that use the formula that the owner has developed. The small businessperson could hire an contract manufacturer to make and package the cleaners according to their specifications. The company would be able to focus on finding buyers for its products, as well as managing sales from a central warehouse.

If the manufacturer is able to serve as a drop shipper – keeping stocks of its products on hand at the warehouse and distributing orders at the business’s direction–the business would basically be an advertiser for the products it has developed. In addition, the manufacturer might be able to deliver products only within a specified geographical region.

Advantages of Contract Manufacturing

Businesses opt for contract manufacturing for a few primary reasons, all of which makes it simpler and less costly to introduce new products on the market and to distribute the products widely.

The primary benefit to the use of contract manufacturing is from not having to build production facilities and staff it with employees and managers. In addition to that obvious advantage, companies may reduce costs by hiring a manufacturer that is located in a low-wage region. The site of the manufacturing facility could also result in savings on the cost of energy, overhead, and raw material costs , as in addition to tax savings.

Contract manufacturing frees up people at the hiring firm to focus in their core strengths of marketing and, possibly, sales. If the company’s owner has a background in those areas, they might be able to recruit smaller numbers of employees to support them.

The company could be able to easily introduce its products into the country in which they’re produced. It could also gain entry into the markets of neighbouring countries.

Disadvantages of Contract Manufacturing

Perhaps the biggest disadvantage for contract manufacturing is a lack of direct control over the quality of the final product. The hiring company can’t manage the day-to-day operations of the company day, and may not receive precisely what it needs in a regular basis.

A business that hires contract manufacturers contract manufacturer should keep in mind that it isn’t the only customer , and could not be as significant to the manufacturing company like the other, bigger clients.

The company that hires also faces the possibility of having its ideas stolen. Certain contract companies that are not ethical have been caught giving away products from one client to a different client who is a favorite or even to create a similar product with only a minor change or two. The business owner should seek out an attorney to draft a strong legal contract to guard against any such behavior.

In the event of dealing with an overseas manufacturer Business owners must be sure to know which legal system in the country the contract is governed by.

Cultural and language differences can also be a consideration if the business works working with a manufacturer in another country. In addition, potential economic and political risks must be weighed when choosing a manufacturer.

Key Takeaways

Contract manufacturing refers to the practice of hiring another business, maybe outside in the U.S., to produce the products of a company.

It allows small-scale business owners to sell their own goods without having to build and run factories.

The hiring company usually offers the formula or design for the contract manufacturer to replicate or modify.

The company that hires usually focuses on the marketing and selling of the products.

About Author: Steven Cheng, the founder of Topworks Plastic Mold, a China injection molding company with the most complete services, from design to production. Topworks provides customers with a one-stop service for Polycarbonate injection molding and ABS injection molding. The company’s professional team has excellent product knowledge of the plastics industry, which enables it to provide customers with quick responses and high-quality service.

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