What Is Contract Manufacturing? Benefits and Risks

contract manufacturing

Running a small business is an extremely challenging task. With limited resources, employees, and manufacturing capabilities, it can be difficult to find footing in the competitive market. You can have great product ideas and concepts, but limitations can render you helpless to manufacture them. So, as a small business owner, what do you do? This is where contract manufacturing comes into play. It is an agreement that allows small businesses to compete in bigger markets.

So what are the benefits and risks of contract manufacturing? What are some different types?

Here’s an in-depth guide on everything you need to know about contract management.

What is Contract Manufacturing?

Contract manufacturing is a form of outside sourcing that enables small businesses to produce above their resource limitations. For example, let’s say that a team from a small business has an idea for a great product for consumers. However, this small business does not have the resources or manufacturing capabilities to actually produce the product on its own. The small business could then contact a contract manufacturer and enter an agreement.

Essentially, this agreement is a contract in which the small business will pay the outside party to manufacture parts or products over a specified time frame. In general, the small business will reach out to a contract manufacturer with a designed product in mind. They will then provide an estimate of the cost, labor, and time required to manufacture this product.

What are the Benefits?

For small businesses, there are a number of valuable benefits that come with contract manufacturing. The most obvious benefit is the ability to produce above your means and limitations. Businesses with a small staff or limited resources are able to work together with a subcontractor to create a product that they lack the manufacturing resources to create on their own. This can lead to greatly reduced manufacturing costs as they don’t have to train staff or pay costly upfront expenses on manufacturing machinery.

Furthermore, contract manufacturing can also result in greater quality and efficiency. More often than not, contract manufacturers will have much better equipment and more qualified workers who can produce your products. Where a small business has many different aspects and departments to keep track of, the contract manufacturer is focused only on the manufacturing aspect. This leads to not only better quality of products, but also to the products being manufactured much quicker. By utilizing a contract manufacturer small businesses can bring a higher quality product to market in a greatly reduced timeframe.

What are Some Different Kinds of Contract Manufacturing?

  • Individual Component Manufacturing – Individual component marketing occurs when the manufacturer is contracted to produce one specific part of a product. This part will eventually be used to assemble the larger product that will go to market. Individual component manufacturing is usually done by businesses that have some level of in-house manufacturing but lack the capabilities to produce one component of the end product.
  • Private Label Manufacturing – Private label manufacturing refers to an agreement where the contract manufacturer delivers a finished product. The subcontractor will deliver the finished product to the small business as a complete product. Use private label manufacturing when a business needs to outsource the entire manufacturing process.
  • End-to-End Manufacturing – End-to-End manufacturing takes place when the contracted manufacturer assists in every aspect of the production process. They will offer feedback and help with the design of the product as well as the actual manufacturing process.

What are Some Risks?

As with any business agreement, there are risks and downsides to contract manufacturing. Perhaps the biggest risk is that you are ceding control of your intellectual property. When you enter a contract manufacturing agreement you are recognizing that you don’t have the knowledge or capabilities to manufacture a product. This means that you have to trust an outside party to execute your idea to its’ potential. A good strategy to mitigate some of this risk is to establish transparency and open communication with the manufacturing party. Keeping detailed records and an open line of communication can help ensure your product meets your criteria.

Another risk/con associated with contract manufacturing is that you are truly working on the manufacturer’s timeline. Just because you had a goal for when this product would be completed doesn’t mean the contractor has the same goal in mind. This is why it’s essential to do your research and communicate beforehand to ensure your goals line up with the contractor’s goals. By researching and communicating beforehand you can help to mitigate many of the risks associated with contract manufacturing.

Conclusion

Contract manufacturing is an agreement that allows small businesses to outperform their limitations. Small businesses can enter into agreements that enable them to have products or components manufactured that they could not produce in-house. There are different forms such as individual component manufacturing, private label manufacturing, end-to-end manufacturing, and more. There are risks with it as well, but they can be easily mitigated by doing research and communicating with the contractor before entering into the agreement. Making use of contract manufacturing potentially creates a huge boost for small businesses often limited by size and resources.

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