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.
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.
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.
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.
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.