In this article, we will be exploring the concept of Contract Manufacturing. After the idea is defined, you will learn about the many advantages of contract manufacturing, as well as a number of challenges one may face when deciding to venture into the exciting world of contract manufacturing.
You may be deciding whether or not to hire a contract manufacturer or whether or not to become one yourself (or you may just be curious!), but in either scenario, we encourage you to continue reading and learn something new today.
What is Contract Manufacturing?
Contract manufacturing, by definition, is when a company hires a manufacturer on a contract. The word “manufacturer” refers to a business that can produce goods to market, including molding plastic parts, forming sheet metal or simply a single ball bearing. Every component of every consumer product around you, including the very screen you are reading this from, was produced by a manufacturer. Lastly, the word “contract” in this context refers to a legal agreement between parties. The contract is generally used to define the scope of the relationship between businesses. For example, a small machine shop may receive a contract to produce two piston heads for a vehicle engine in a week or a factory might receive a contract to produce six million pencils in five years.
Some businesses that receive work contracts decide to hire a different company on contract. This is called sub-contracting and is very common in certain industries where components are better sourced from manufacturers who specialize in said component.
Why would a Manufacturer choose to hire a different Manufacturer?
The next reasonable question one may ask is why a business would hire another business to produce a component when they are capable of producing the component themselves? Why add so much more paperwork, lines of communication, supply chain difficulties, etc.? The answer was touched on in the last paragraph in the last section. Simply enough, sometimes it’s better to have someone else do it.
For example, if a manufacturer was tasked to build a thousand ball bearing drawer slides, they may first take inventory of the capabilities they have in their shop. If this business has plenty of experience cutting and forming sheet metal, they have no problem creating the framing for the drawer slide, but the question arises: how do we make the ball bearings? They may choose to buy pre-made ball bearings, but what if the “off the shelf” bearings are not to spec or not the correct size needed? They may invest in the proper equipment to make their own ball bearings, but that decision will require a very sizeable investment of time and money. The smart choice is to find a company specializing in ball bearings, one that has been producing them for many, many years and has the experience desired to produce the exact bearing needed for a reasonable price point. They will be able to handle the workload and relieve the stress and pressure that may possibly befall an inexperienced manufacturer.
How is Contract Manufacturing different from “regular” Manufacturing?
A contract manufacturer has slightly different responsibilities from a typical manufacturer. Typically, a “regular” manufacturer has a specific and known product they are producing. For instance, a passenger car manufacturer produces completed vehicles in certain time frames for its business. However, this manufacturer may need to hire a different business to produce a desired specific fit and finish of the tires, not having the capabilities of doing it themselves. This business relationship may be a one-time deal if the car manufacturer is not satisfied with the results. On the other hand, the contract manufacturer may also be producing tires for a bicycle company, or rubber products for a toy company, or possibly even the vehicle tires for the car manufacturer’s competition! A contract manufacturer has to be versatile, dynamic, and must always be ready for the next challenge that may walk through the door.
Is Contract Manufacturing the right choice for my Business?
A business or manufacturer may be considering entering in to the contract manufacturing business, or may be thinking about hiring a subcontractor to help with their work load. The aim of the next few sections is to guide the reader into making an informed decision on whether or not he or she may either a) start a contract manufacturing business; or, b) hire a contract manufacturer.
Advantages and Disadvantages of a Contract Manufacturing Business
Like all business ventures, there are advantages and disadvantages, or “pros and cons” of hiring a contract manufacturer. One must be honest and realistic about his or her needs and desires to make a proper and informed decision on whether or not to hire a contract manufacturer. The list below of the pros and cons was designed to inform the reader on the possible benefits and challenges one may face while walking the path:
Cost is most likely the single most important factor to consider when deciding whether or not to pursue a contract manufacturer. Since the contractor will most likely have the machinery capable of making the component desired, the business will not need to purchase the expensive equipment needed to make the product.
It’s also important to understand the opportunity cost of investing in expensive machinery to produce a single component of a larger assembly. The money not invested into equipment can be channeled into other ventures or even research and development of your business to bring new and exciting features or products to the market.
However, it’s important to note that over time, the cost of hiring a manufacturer on contract has diminishing returns on a long enough timeline. Simply put, at some point, it would be cheaper to just make the component yourself!
The next, and second most important factor to consider when deciding whether or not to hire a contract manufacturer is in reference to their specialization. A company producing rubber gaskets for a hundred years would certainly have more experience than a company who is making them for the first time. This means that all of the little problems and bumps in the road that would normally plague a manufacturer making rubber gaskets for the very first time would be ironed out and essentially nonexistent.
Experience is an invaluable factor when it comes to manufacturing. A contract manufacturer specializing in a component will be able to make any shape, size, material, finish, etc. of a desired product with little problems. Much like the opportunity cost of a financial investment, the opportunity cost of a time sink provides limitless potential for company improvements. The time invested into fixing tiny issues and solving minute problems could be spent into providing more value to the customer or researching new ways to stand out.
With expertise comes speed. The next advantage to hiring out a manufacturer on contract is the rapidity in which they can produce the goods. If a business chooses to produce a part themselves, consider the time stack required before the component starts coming off the assembly line. The business must research the machinery needed, compare models, decide on which to pick, speak with a sales representative, order the part, wait for it to be produced and ship (lead time), set it up, learn how to run and operate it, etc. All of this time could be spent elsewhere. A company with plenty of experience producing a part can most likely be up and running by the time you choose which machine to buy!
Lastly, it’s important to note the overall ease with which handing over the production of a component creates. The benefits of avoiding the stress of learning an entirely new design and manufacturing process is hard to overstate. It allows the primary manufacturer to divert his or her attention to more pressing matters while trusting that the production of an essential component is in the hands of an experienced professional.
Initializing a business relationship with another company opens the doors to many benefits, but one of the primary challenges is beginning a chain of command, line of communication and overall trust and rapport. At this stage, one would have to rely on methods of communication such as email and phone calls. Ideally, a supervisor or manager would be able to talk to his or her employees in person by simply walking over to their respective desks or workspaces.
For example, if a product was received fresh off the assembly line with an obvious defect, a quality engineer would ideally be able to walk over to a manufacturing manager with the defective part and discuss the problems in person, visibly showing the manager the errors on the component. In the case of a contract manufacturer, if that same quality engineer were to receive a defective part, due to lead times, it could have potentially been received weeks after it was finished. Then, once the defect was noticed, the engineer would have to call the manager at the contract manufacturer’s place of business and send pictures of the defect. Most likely, the part would have to be shipped back, further lengthening the quality inspection process. Finally, in the time during the shipment of the part, the contractor was most likely continuing to produce defective parts.
If communication is a valued and important factor when it comes to your mode of business practice, it is highly recommended to weigh the risks carefully.
Continuing off the example above, one can easily understand how quality is an equally important factor to consider when deciding whether or not to begin business with a contract manufacturer. Depending on the reputation of the contract manufacturing business, the quality of the part may fluctuate greatly. They may also not hold themselves to the standards that your business is seeking.
The benefits of choosing to subcontract a manufacturer may be outweighed by the challenge of adding an entirely new locale to your supply chain. In essence, the further your component travels over the course of its assembly, the more complicated the entire process is. Complexity leads to potential problems which, in turn, leads to a loss of time and money. If a company decides to manufacture all of its components in-house, the part is made and assembled all in one place. If that same company decides to outsource its manufacturing to a different locale, even if it’s just across town, it is opening itself up to a whole host of potential issues and obstacles.
For example, something as simple as inclement weather or as random as a freak accident on the highway can potentially increase lead times by days, if not weeks. In this increasing global world, shipping logistics have been improved greatly, but it is not without its concerns. Shipping on large freighters or barges overseas can open a company up to potential environmental hazards. Often, consumers look to a company’s environmental reputation when deciding whether or not to engage in business transactions with them. It’s an unfortunate reality that shipping product halfway across the world can sometimes be cheaper than having it manufactured across town.
Another potential challenge with contract manufacturing is the fact that if a company chooses to outsource manufacturing, it may mean potential layoffs among workers for various reasons. This sometimes does not sit well with the public and could possibly disrupt future business relationships. However, this is an option that many contemporary businesses have decided to choose and it has not affected their bottom line, at least not as of yet. Look to large domestic corporations who have chosen to outsource their manufacturing to other countries while simultaneously putting a number of their employees on furlough. Compare your business strategies, industry type and company ethics, principles and goals with examples in the past to determine whether or not choosing to outsource and contract manufacture is the right option for you.
Lastly, a single word to sum up the above disadvantages, is the word “control”. Passing the buck and washing your hands of the responsibilities of manufacture can be very tempting to many, but one must understand the scale of control will therefore tip into the balance of the manufacturer. Once the keys of the proverbial kingdom are handed over to the contractor, he or she may feel more qualified to make business decisions without the consent or knowledge of the primary business.
For example, if a part’s mechanical drawing calls out a certain tolerance that the contract manufacturer believes to be too tight or otherwise unnecessary, he or she may make the executive decision to change it. This can potentially open up the possibility of quality engineering issues down the road. If control is an important part of your business model, I would recommend seeking other avenues of manufacturing.
The above advantages and disadvantage must be keenly considered and weighed before making a decision as to whether or not contract manufacturing is right for you.
To summarize the advantages of contract manufacturing, benefits include lower cost, increased speed, increased specialization, and increased ease. In short, if working with a contract manufacturer, expect to receive proficient components easily and quickly, for a lower overall short-term cost.
To summarize the disadvantages of contract manufacturing, challenges include harder communication, harder quality standards, longer supply chain and less control. In short, if working with a contract manufacturer, expect to factor in shipping times back and forth as well as a possible difficulty in communication and control.
There is a reason why the majority of business choose to contract out their manufacturing. The cost reduction in production is almost always worth any challenge when it comes to lead time, communication and domestic situations. We highly recommend considering contract manufacturing, simply for the ease of transitioning to a new procedure of manufacturing, allowing companies to be dynamic and streamlined.
How to find a contract manufacturer
Hopefully you have made your decision as to whether or not to pursue a contract manufacturer for your business’ needs. And hopefully this article has helped you. If you decided that working with a contract manufacturer is the best option for your business, continue reading this section below to learn how to contract one and begin a business relationship with them.
The vast majority of information these days is found by an online search. We recommend you begin your search by a simple internet query in a web-based search engine of your choice. In this scenario, the very first page of results will most likely not contain your ideal business partner. There are many factors to consider when looking for a proper contract manufacturer. Keep looking until you find the one that’s best for you and your business needs.
For example, a coworker of mine wanted to manufacture a product overseas but had some special requirements for this product. He began his search online, inspecting dozens of websites for products similar in nature to his. Eventually, deep into the pages of an internet search, he found a small company that had prior experience making a very similar part to his. Months later, he received the first batch of items and was very pleased with the result. Keep looking and don’t give up!
Secondly, the next most useful method of locating a proper business partner is by word of mouth. Knowing somebody is always the best way to get a “foot in the door”, so to speak. It is always a safer bet to start a business relationship with somebody that a trusted friend, colleague, family member or peer has a relationship with, too. This is because the contract manufacturer has proven itself to a person you trust. There is very little risk when listening to a glowing reference of an honest peer.
However, this does not mean that there won’t be any obstacles or potential challenges that one may face when working with a contract manufacturer. Always be prepared for the worst, but hope for the best. Any failure on behalf of the manufacturer should not reflect on the person who referred you to them.
The last, but not least, method of finding a contract manufacturer as a business partner is by using traditional methods of discovery. That includes local bulletin boards, phone books, local advertising (billboards, TV commercials, radio advertisements, newspapers, magazines, etc.), pamphlets, flyers, brochures, etc. Many contract manufacturers may be right across the street, all you have to do is start looking!
Factors to consider when looking for a contract manufacturer
So, you have found some contract manufacturers, whether online or by word of mouth or by a local ad, and need to decide if they are a right fit for your company. Continue reading the section below so a list of considerations to ponder whether or not any given business is a good choice.
Most company websites or pamphlets will have a portfolio of products that they have manufactured in the past. This is the best way to see what the company is capable of and should be a major factor in considering whether or not to pursue a business relationship with them. If one is not available, you may always contact the company and ask for one – they will be happy to oblige.
A business may have third party reviews available to view on the website. Some companies do not, or have reviews that may not be entirely legitimate. If the company is rated by a third-party business, it is certainly more trustworthy than reviews seemingly written by the company itself. Keep a keen eye out for this possibility and use your judgement to determine whether or not a company is a good choice to work with.
Under the same umbrella as reviews, a legitimate business will have registered with the government and/or have received a business license to practice in their country. Any manufacturer would be proud to show you these credentials if asked. Do not be shy or bashful about asking for these documents. If anything, the contract manufacturer will see you as legitimate, responsible and respectable.
The location of the contract manufacturer influences more factors that one may first imagine. Obviously, it influences the shipping times of product from the manufacturer to your front step. Consider the cost and time of shipping material back to the manufacturer as well. Next, different regions have a reputation for producing a certain quality of goods. Typically, the higher the quality, the higher the cost. Determine how important the quality of your product is to your business model and allow this to influence your choice on location of manufacturer.
Just as location of the contract manufacturer influences the cost of business, so too does it influence the communication between your business and theirs. Depending on the region and specific company chosen, you may find difficulties in communication. This does not only include a language barrier, which is an important factor to consider, but also the time difference.
For example, if an American company is in a business relationship with a company in China, there is a whole 12 hours of time difference between the two. This means that 8:00 AM in America is 8:00 PM in China. So, the workers in China will have to be active far past business hours and the American workers will have to be active at the very beginning of – or in some cases, before – business hours.
Lastly, it’s important to consider the type of communication agreed upon. Phone calls are most likely out of the question – international charges are expensive. This moves most lines of communication online. Email is a very traditional method for communication, but does not typically include voice or video calling. Many companies use third party messenger apps, but different cultures may have differing views on the professionalism of using such apps. Always have a reliable, agreed-upon method of communication when working with a business. Communication is key.
Hopefully this article has enlightened you, the reader, on every aspect of contract manufacturing. Together, we have explored the definition, purposes and goals, differences and pros and cons of contract manufacturing. Finally, we looked at ways of contacting a contract manufacturer and how to make a decision on which to pick. I hope this article has opened your eyes to the many benefits of working with a contract manufacturer and that it will help you on your manufacturing journey!