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What is Contract Manufacturing?

What is Contract Manufacturing?

Contract manufacturing is often called private label manufacturing and refers to an agreement where a firm hires a third-party contract manufacturer to produce products components or a final product.

The Purpose of Contract Manufacturing

Contract manufacturing is a form of outsourcing that allows firms to have their products produced by specialist manufacturers. Third-party contract manufacturers typically specialize in one of the following:

  • Product assembly
  • Product design
  • Product distribution
  • Product component manufacturing

Contract marketing is a business model that is implemented by many industries over the world, including the technology, medical, pharmaceutical, food, and cosmetics industry.

Benefits of Contract Manufacturing

There are several benefits to contract manufacturing including:

Lower Input Costs per Unit

Since the hiring firm doesn’t produce their products, they don’t need factories and the necessary production equipment. Labour costs are also typically lower, especially if the contract manufacturer operates in a low-cost country like China.

Contract manufacturers are also better suited to benefit from economies of scale, especially if they purchase large quantities of raw materials for several clients. As a rule, the cost per unit decreases as the number of units in once shipment increases.

Mutual Long-term Benefits

Contracts between hiring companies and contract manufacturers that last for years are beneficial to contract manufacturers in that they represent a steady flow of business.

Long-term benefits are also beneficial to the hiring company since the contract manufacturers eventually gain extensive knowledge about the hiring company’s product requirements.

Quality

Established contract manufacturers have extensive quality control policies in place to detect defects or poor quality at an early stage.

Skills and Expertise

The hiring company may not necessarily have the skills and equipment to produce high-quality products from raw materials in a cost-effective manner. One of the most prominent benefits of a relationship with a contract manufacturer is that it allows the hiring firm to take advantage of these skills.

Emphasis on Core Competencies

By leaving production to specialists, hiring firms free their resources to focus on their core competencies and strengths.

Risks of Contract Manufacturing

Lack of Control

By entering into a contract manufacturing agreement, the hiring company forgoes a high degree of control over the production process. High-end contract manufacturers will, however, work with the hiring company to meet their requirements.

Inherent Risks

Outsourcing production or assembly can be risky, especially if the contract manufacturer is in another country. Working with local contract manufacturers may mitigate risks such as long lead times, language barriers, and cultural differences.

Lacking Flexibility

If a hiring company outsources the production of their goods, responding to fluctuations in demand can be a challenge. Lacking flexibility can be particularly problematic if the hiring firm does not constitute a large portion of the contract manufacturer’s business.

In Conclusion

Contract manufacturing is a valuable model for role players in the food industry. If you’re in the food industry, and you want to build on the strengths of your business and need a partner to take care of the production end, head over to Dure Foods to learn more.

Dure-Foods-Contract-Manufacturing

Understanding Contract Manufacturing: Your Products, Your Brand, Your Reputation

With quality in mind, finding effective methods to cut costs and expand your production is a complex proposition.

To this end, one important factor of your business to analyze is supply chain management. Across the disparate parts of this dynamic, and deeply relative system— specific to your company—is the potential for massive growth.

Contract manufacturing is a form of supply chain management, that offers the strategic advantages of saving time and money on product line development. This is accomplished through a series of on-demand services, which essentially outsource production to a third-party company.

Will Contract Manufacturing Work for Me?

Like any business, contract manufacturing is customizable to the firms involved in the manufacturing agreement. In many cases, the contract manufacturer will be responsible for producing the goods, as well as sourcing all of the constituent, raw materials involved in production.

In other cases, specifically as is the case for many food production companies, contract manufacturing will take the form of copacking.

Similar to contract manufacturing for other industries, Copackers will handle either manufacturing and packaging, or simply provide primary and secondary packaging for products.

That being said, effective selection of a contract manufacturer or copacker, can greatly increase overall output of a company as well as increase the overall Value Added Margins (VAM). This is largely associated with labour and facility costs, as well as volume material costs.

How to Select a Contract Manufacturer

For a company that makes its living selling a physical product, selecting a contract manufacturer can be a serious decision. However, there are some important factors to consider at the onset which will likely result in a more successful transition to a supply chain vendor for a branded or private label product.

First and foremost, the lowest price quote does not necessarily mean the highest margins. Prices quoted by many contract manufacturing companies typically only account for about eighty percent of total supply chain costs, especially with smaller Contract Manufacturers which don’t have allocated resources intended to discern bottom line cost to the contractor.

In other words, there are often fees and charges which will adjust the margins by capturing and identifying any additional costs. Cost manufacturing is a low-margin business, and also highly competitive, so appropriate selection may entail active management of the manufacturing process.

Technical competence of a contract manufacturing partner is not the end all be all of the selection process.

Certainly, a company’s facilities and technical capacity is essential to producing the product you require. That being said, depending solely on the technical capabilities of a contractor will put the responsibility of this contracting agreement in the hands of your product development team.

This can be a huge mistake considering that a contract manufacturing agreement is a complex business agreement, that will integrate various commercial elements. Therefore, technical performance should only be one aspect of various other business requirements, essential to meeting your goals.

Conclusion

Contract manufacturing can save time and money while ensuring the highest quality output of your products. Many manufacturing firms have turned to this form of supply chain management because it offers a broad range of opportunities. Contracting an expert to manufacture your products will result in:

  • lower costs,
  • decreased capital requirements, and
  • a more efficient focus of time and energy

This will give you more time to focus on growing your business in other ways, rather than getting caught up in the minutia of manufacturing.


Should you be interested in developing your own exceptional products with an engaged and committed partner, please contact Dure Foods today.