Contract manufacturing lets businesses, which may not have the resources or the funds to invest in heavy machinery, collaborate with other companies to fill orders.
Let’s take a closer look at the types of contract manufacturing and some examples of how it works!
What Is Contract Manufacturing?
Contract manufacturing is when one company enters into an agreement with another to produce components or products over a specific timeframe. This is outsourcing on a manufacturing level, and like outsourcing employees, it lets companies compete in areas that were previously unreachable.
It’s a business agreement where one company pays another to provide the necessary components to assemble finished goods, or even manufacture the product in its entirety. Contact manufacturers are third-party providers, and most only work as subcontractors or sell their products to other businesses.
Typically, a company in need of a contract manufacturer will reach out to one with a design and get a quote for the process, labor, tooling and materials. If the price of doing business is less than the costs of manufacturing, it’s good to go.
For this relationship to work, there needs to be transparency and collaboration between the two parties. ProjectManager is a cloud-based work and project management software that lets users track time and costs. You can create manufacturing schedules, share with contract manufacturers and track progress and costs in real time. Get started for free today.
Types of Contract Manufacturing
There are many different types of agreements between companies that enter into contract manufacturing. However, most fall under these four categories:
Private Label Manufacturing
This type of contract manufacturing is when the contractor delivers a finished product, as specified by the company that hired them. That product is delivered to an inventory warehouse or directly to the store. Sometimes, these items are the product of several components. In that case, the components will be assembled prior to shipment. This is an ideal relationship for businesses that have a clear product vision but want to outsource the entire production.
Individual Component Manufacturing
Here, contract manufacturing is only responsible for making one component that will become part of a larger, more complicated final product. They are only responsible for the manufacturing of this component, one of the many components that were designed during the product development process. Other contracted companies must assemble that component into the finished product. This is obviously a solution for companies that have some in-house manufacturing capabilities, but can’t produce all the components necessary for their final product.
Labor or Service Subcontracting
In this, the contract manufacturer is only involved with one part of the larger process and acts more as a subcontractor in relation to a general contractor. They are hired by a general contractor who needs their specialized services. This is used with the production of very complex products, and contract manufacturers can help by offering lower costs and faster production cycles.
As in private label manufacturing, the product or component is completely outsourced. However, in this case, the contract manufacturer is more involved in the product design and offers feedback to the product manager. Therefore, the company that contracts the manufacturer isn’t solely responsible for specifications, and the contract manufacturer takes on a lot of the product design work. It’s ideal for companies that want to quickly make something, fast and inexpensive but with quality.
Contract Manufacturing Examples
Starbucks doesn’t cultivate coffee, and has no plantations in which they grow, harvest and cure coffee beans. They outsource all that work to focus on serving their customers across the world. Here are some other examples of contract manufacturing in a few different industries:
Heating, air conditioning and ventilation (HVAC) contractors have to install forced air systems in homes and businesses. Circulating that cool air requires ventilation systems made of sheet metal. Depending on the size of the company and the installation, some businesses build these in-house, but often they seek outside sheet-metal fabrication businesses. HVAC contractors will provide the sheet-metal fabricator with the specifications they need, and once the ventilation components are completed, the HVAC contractors will secure them to the HVAC system in the home or business.
In the pharmaceutical industry, there are many options for contract manufacturers to work with drug makers. For example, drug development can be very costly and is often outsourced. Once a drug has been developed, companies will often contract the drug manufacturing itself and the commercial production. Because of the regulations inherent in the industry, the documentation of compliance with the FDA regulatory requirements might be outsourced. Providing formal stability, scale-up and registration batches can be sent to contractors.
When a marketing agency or department works on an ad campaign, they might have much of the work done in-house, such as copywriting, editing, design and so forth. But if they’re producing a commercial, website or billboard, it’s unlikely they have the resources or skills necessary to make one of these promotional assets. Contract manufacturers could be video producers, web designers or sign painters, all of whom can contract with the marketing team.
Benefits of Contract Manufacturing
Contract manufacturing can help companies who don’t have the staff, resources or experience to manufacture products the company plans to make, but it can also benefit those who have many or even all of these capabilities. For example, outsourcing the work can lead to high-quality products, as the contract manufacturer is usually devoted solely to the work you require and have the tools and experience to deliver better and faster than you.
This can also lead to reduced costs. Rather than invest in the equipment, training and more needed to manufacture the component or product, you can pay another company to do this for you at a cost that is likely less than it would be if you took on the full job. This helps you keep overhead costs low and improve your return on investment (ROI), not to mention the resource and labor savings.
Using a contract manufacturer can also lead to a faster time to market. This is due to contract manufacturers having the equipment, skills and people who know how to make your component or product fast. Not only that, but contract manufacturing helps with scalability. With contract manufacturers, you can negotiate prices on bulk raw materials and keep costs down even as production increases.
It’s also a winning combination for startups and small businesses that don’t have the deep pockets that others in the market might. This provides them with a strategy to get a foothold in the marketplace and compete with larger competitors without sinking all their resources into it. This is especially true for end-to-end services that handle everything from start to finish. Plus, contract manufacturers are more likely to give you accurate cost estimates and deadlines.
Disadvantages of Contract Manufacturing
That doesn’t mean there aren’t downsides to employing contract manufacturing. Having a high-quality contract manufacturer is great if you can find one. You need to research and make sure you’re outsourcing with a reliable company. Sometimes it’s hard to find a contract manufacturer who fits your capacity, capability and project requirements.
Along those lines, once you contract with an outside manufacturer, you lose control to a large extent. That might not necessarily be a bad thing, however, it means that the skills, equipment and experience required to create the component or finished product are critical knowledge you won’t have. Not only does this hinder any prospect of bringing the work in-house eventually, but if there’s an issue with production you won’t be able to know how to resolve it.
Not only that, but you risk your intellectual property. Your component or product and everything needed to make it is no longer in your hands but passes through dozens or more people not under your control. This can lead to a leak of your company secrets. But this depends on the reliability of your contract manufacturer, which underlines the importance of our first point, finding the right company to work with. It’s also important to produce solid project documentation to keep track of your budget, schedule and project plan.
Managers Use ProjectManager for Contract Manufacturing
ProjectManager is a cloud-based work and project management software that gives you transparency into the manufacturing process. We help you track progress and performance so if there is an issue you can spot it quickly to resolve it fast.
Create Plans on Gantt for Contract Manufacturers
In order for there to be no mistakes in terms of the production of your component or product, organize all your tasks, resources, costs and more on our interactive Gantt chart. You can link dependencies, set milestones and even filter for the critical path. Set a baseline and you can monitor progress in real time against your plan. It’s also easy to share so there’s one source of truth.
Monitor Progress and Performance on Real-Time Dashboard
The Gantt chart tracks progress but our real-time dashboard gives you six metrics in which to monitor the time, cost, workload and more. There’s no setup required as with inferior software. It’s ready whenever you are, automatically collecting and calculating real-time data and displaying the results in easy-to-read graphs and charts.
Get Deeper Into the Data With One-Click Reports
If you need more than a high-level view of the production, then generate reports instantly. You can view status reports and portfolio reports if you’re working on more than one manufacturing line. There are reports on workload, timesheets and more. All can be filtered to show only what you need to see and then shared to keep management updated.
ProjectManager is award-winning software that connects hybrid teams to help them work better together. Whether those teams are under one roof or distributed across the globe, you’re in constant contact with them and stay informed by real-time data to help you make insightful decisions. Get started with ProjectManager today for free.