Wednesday, August 26, 2015

The Advantages of Contract Manufacturing

As a factory owner or manager, you would probably have thought about contract manufacturing in the past. You would have probably asked yourself questions like the following: Is it safe? Is it cost effective? How do I ensure quality? and so on. To help you make the right decisions, here are a few of the many benefits of contract manufacturing.

The business model

The process begins with the hiring company approaching the contract manufacturer (CM) with a formula or product/component design. The CM will quote a price including labor, material costs, tooling and processes. Once the price, quality and other parameters are agreed upon, and safeguards put in place, the CM acts like an adjunct to the hiring firm’s factory, producing and, if required, shipping the product on behalf of the hirer.

Who uses contract manufacturing?

The demand for the services of Contract Manufacturers is growing exponentially both in number and types of industries using them. Among the major users are automotive, aerospace, computer, energy, semiconductor, pharmaceutical and defense and personal care industries. 

What types of work does a CM do?

The type of work a CM does is wide ranging, and includes casting, forging, machining, grinding, complex assembly and much more. The key is to find a CM with the capabilities and equipments to carry out what is required.

Cost savings

In an increasingly competitive environment, the cost benefit of contract manufacturing is hugely positive. The hiring company does not have to invest capital in setting up a facility and buying raw material and equipments. There are also savings in terms of wages, employee benefit and training expenses all of which are built into the CM costing.

Advanced skills

A CM usually commands a set of advanced skills and specializations that a hirer may not have and which are expensive and time-consuming to obtain.

Material procurement

A CM has the advantage of well-established business relationships with the materials suppliers required for bulk manufacturing which results in reduced cost of the end product and shorter start-up times.


A reputed CM follows his own high standards and methods of quality control. These can quickly be modified to meet the demands of the hirer to ensure that the final quality control meets the required standards.

Freedom to focus on core competencies

By outsourcing non-core production to a CM, the hirer will be able to renew focus on his own core competencies. In addition, he can now direct his management resources towards new business opportunities and markets.

Economies of scale

Because CMs have multiple clients for whom they produce, and may use the same raw materials and components, they can offer economies of scale which would not be available to a hirer on his own.

Finding the right CM

The relationship between a hirer and a CM is one of mutual trust and benefit. The hirer expects to get cost and other benefits from outsourcing production. The CM expects to have a long-term client for whom it is worthwhile to devote production and management resources. The key issue for the hirer is to find a CM capable of meeting the demands, which will free the hirer to work on other aspects of his business. A CM with a wide client base, years of experience and a reputation of meeting client requirements is the foundation of a mutually profitable partnership.

Did you find these ideas useful? Leave a comment. Tell us what you would like to read further.

More in our next post.

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