Advantages and Disadvantages of Contract Manufacturing

Contract Manufacturing – an overview

Are you seeking some experience or skills on contract manufacturing services? Either you have a product, or an idea, and you’ve reached the point where you need to understand how to execute on an outsource manufacturing plan for some or all of the aspects of your product.

Contract manufacturing is the process of engaging a supplier to make your parts, components or full assembled products. This could be something as simple as a single plastic moulding to be supplied to you in bulk packaging, all the way up to a complex finished product, in packaging, with user manuals.

You may have unique product identifications, component audit trails, warranty registration and web connectivity – and all of this can be completed by your contract manufacturer, drop shipped to a warehouse so you don’t even handle the product.

That products could be virtually anything, consumer audio, a medical device, a scented candle, a piece of luggage – the process remains the same. For the purposes of this article it’s assumed that the ‘product’ is plastic, metal or composite components (with or without electronics) assembled into a thing and packaged.

Many companies use contract manufacturing services in the world. For example, Apple uses Foxconn and does not own factories, Nio contracts JAC to build their cars, Tesla does assembly in their own plants but they make no components, relying on CMs for everything.

You’re likely to need a range of contract manufacturers for even a quite simple product – and the flexibility that this gives you can be empowering. Or you can simplify by using a larger, more connected CM to coordinate this range of services for you

Advantages of contract manufacturing:

Lowering your overheads

Contract Manufacturing simplifies the process whereby a company makes its products, avoiding the overheads of factory ownership. By this means, production variations can be accommodated in a contracted factory, where an in-house company facility might have idle periods, wasting resources.

If you’ve finished your design and prototype validation, you need to find the right contract manufacturing partner to undertake the outsource support you require. This could be through the Nio model, where you receive the product ready for market, it could be the Tesla model where you contract manufacture all the components and assemble in-house.

Depending on the nature of the product, the setup costs for in-housing everything can be astronomical; do you need CNC machined parts? Plastic mouldings? SMT electronics? Glass/ceramics? Specialist processes represent huge investments in plant and people – and CMs bridge the gap between what you can afford and what you need completed.


contract manufacturers encompass sector expertise that would take years for you to develop in-house – expertise which isn’t generally likely to be busy in your factory, making it even more costly.

They can maintain larger teams, with a wide range of specialisms and support this diversity by diversified client base. You get the advantages of that big team, without bearing much of its cost.

It’s a fact that specialists get better results than generalists – and choosing the right contract manufacturers allows you to benefit from their greater experience, deeper knowledge, without bearing the costs of learning and maintaining skills.

This inevitably leads to higher efficiency, better quality outcomes, lower wastage and a reduced cost of component/product for you – despite looking like you’re spending money on another company’s profit.

Of course, you ARE – but you will save far more than they gain.


You’ve likely reached the point where you need an increase in scale, so you’ll want to locate supply chains, in a lower cost or more skilled/diversified environment that suits your needs.

contract manufacturers in China, South Asia and India, for example, can achieve cost savings, when the volume of manufacture is large.

But contract manufacturing is not only for the ‘big boys’ – in many manufacturing technologies there is a wide range of contract manufacturing suppliers in most industrialised domains – and it’s possible to find manufacturers to supply from prototype quantities up to ship loads!

Plastic moulding, SMT technology, die casting, CNC machining and a wide selection of related services can be sourced from surprisingly small, agile suppliers who are entirely comfortable with international relationships and flexible enough to deliver modest volumes while offering much of the contract manufacturing cost advantage.

Reduced manufacturing setup costs and a faster process make it easier for small companies and startups to get their products to market, avoiding very large up front costs. This enables small businesses to compete against larger players, while delivering high quality products.

Locating CMs that operate at the right scale for your needs is not hard and it can offer most of the advantages – even at relatively low volumes.


It can be tough, being an innovator. Your product is new and brilliant, it solves critical and high value problems for a hungry market – and you’re working hard to stay at the leading edge.

So now you’re transitioning into a larger scale market and you need a whole new class of innovation. Where do you get the manufacturing process and materials innovations that can boost your product?

This is an area where the right contract manufacturer can bring whole new skillsets within reach. Long-term partnership with your contract manufacturer can strengthen you in startling ways, by accessing layers of innovation that are otherwise very hard to reach.

Quality systems

contract manufacturers need to maintain quality certifications that you can benefit from. As your volume grows, you will be increasingly visible and the market will require conformance and proof of it.

The registration and audit processes are out of reach of small companies, in general – whereas a medium sized contract manufacturer has no option but to maintain this, because lack of quality standards or poor adherence to them is a really bad sign.


Intellectual Property Risks

In any field of human endeavour there is the potential for bad actors.

If your product is heavily dependent on branding, on trade secrets or materials advantages that others don’t possess, there is the potential for IP leakage. But you’re going to sell your product, so IP leakage – i.e. your competitors learning more about how you win, why you’re better – is a sign of success.

Guarding against your contract manufacturer stealing by furtively manufacturing, or by selling your designs/solutions or by any other means is a concern that can be managed – by building strong relationships with your CM, by auditing their facilities and by not oversharing with any one CM – dividing solutions between multiple, unconnected suppliers for instance.

In essence, your risk is greater in golf clubs and handbags – where a channel exists for copies to bypass your IP protection, it can happen – but ask yourself if YOUR product would sell in markets, transient web outlets and discount stores. If not, your risks are really low!

The very best way to ensure your product knowledge is secure is to visit your suppliers and audit them. Not seeing counterfeit product in their factory is reassuring.

Higher costs in the longer term

You may have THE product, the one that will sell millions of units and require the highest degree of cost control.

If you stick with the contract manufacturer approach long term, you may then bear greater manufacturing costs than if you had taken the cost risk by in-housing those processes. This is a call that only you can make.

This is a decision that Nio is likely to face in the near future – and it’s a measure of success that such hard calls have to be made.

The most successful manufacturing company in history operates almost exclusively through CMs – and it’s hard to fault Apple, in return on investment terms.

Stability, quality, schedule

It’s true that any contract manufacturer you choose will have divided loyalties. You will NOT be their only client and at times their priorities will not converge with yours.

This is an intrinsic risk in the contract manufacturing process – but it’s one that is successfully managed by countless companies. Building strong relationships with your contract manufacturer is key. When you’re their close partner, rather than their task master, you can work at maintaining the service in concert with them – getting early awareness of issues and receiving their support in moderating the issues.

If you get quality problems, the same rules apply – plus you are in the driving seat, if your own production engineering and QA staff are present for product builds – at least some of the time.


As your use of contract manufacturing grows, you can become closely linked in public profile. This is not always an advantage. Examples of reputational damage are not common – but when it happens it us serious.

Apple suffered badly by too close an association with Foxconn, when their factories were exposed as toxic workplaces. Similar issues are a risk in many sectors, as arms length suppliers may cut corners in employment conditions, environmental issues etc.

A close relationship, transparent processes and independent auditing are all powerful tools that allow you to guard against this type of issue. Nothing is more effective than regular visits and thoughtful auditing by reputable and independent parties.

It’s often useful to ask some simple questions, such as “what would your staff tell me about working here”. Evasive answers or irritation are not good signs!