Contract Manufacturing Pros and Cons Explained
Companies of all sizes and scales use contract manufacturing (CM), also called third-party manufacturing, to outsource manufacturing to third-party companies. The arrangement of CM allows brands to introduce products in the market at scale.
According to an industry group, Elcina, India’s electronic contract manufacturing sector is expected to grow by more than sixfold to $152 billion by 2025. The electronic manufacturing services (EMS) business was worth $832 billion globally in 2019 and is expected to reach $1,055 billion by 2025.
Several things back up this growth of third-party manufacturing. These manufacturers offer ridiculously fast turnaround times, great values, and make sure the quality of the product remains consistent. As a result, they enable brands to penetrate newer markets quickly.
Like all arrangements and systems, contract manufacturing is also prone to cons. Here, we discuss all the facets of third-party manufacturing in detail, starting with the value the arrangement brings to the table.
How Contract Manufacturing Brings Value to You?
The product manufacturing business is very demanding. It requires resources at all fronts, from design, manufacturing, product development, supply chain to marketing. As brands, it’s never easy to manage all these crucial segments of businesses in-house.
Hence, brands need trusted partners to sustain business in the longer run. Contract manufacturing allows them the legroom to explore opportunities within the company by offloading manufacturing to a third-party player.
So, that was about the promise contract manufacturing holds. Now, let’s “talk business”; how it delivers value.
Anatomy of a Contract Manufacturing Contract
Before we get straight into the benefits of contract manufacturing, let’s first understand how the arrangement works.
All the contracts signed between a third-party manufacturer and a brand would vary at different levels. Given, every company has varying needs, if you look at the categorisation of those contracts at the macro level, you get two results:
- Build to Print
- Build to Specs Contracts
Let’s extrapolate and gain an understanding of how these contracts work.
Build to Print Contract
In a Build to Print contract, the company outsourcing manufacturing holds a lot of control. It’s a very comprehensive arrangement; outsourcing companies try to eliminate the manufacturing burden off their shoulders.
You might think, how’s it possible to hold control when the company is outsourcing the majority of its manufacturing to a third-party manufacturer. It works perfectly, and almost all the major players of the industry benefit from it.
When two parties sign a Build to Print contract, the party outsourcing manufacturing has its engineering staff providing all the designs and product development documents to the CMs. Once the contract manufacturer gets what their client wants, they present a prototype to the outsourcing company. If the client is satisfied, they go ahead with the manufacturing process.
Build to Specs Contract
The arrangement in the Build to specs contract is quite different from the Build to Print contract. Under this agreement, the third-party manufacturers enjoy great liberty. However, here they have a dual responsibility. They are not only responsible for the end product but also the design.
Yes, when entering into the Build to Specs contract, the stakes are high. But, it’s highly safe. How? The process makes it safe. The contract manufacturers provide comprehensive, new, and innovative designs to the brands. And the brand gets to hold the intellectual property rights of the products. So, the process establishes a win-win trust-based relationship between both parties.
Six Unputdownable Benefits of Contract Manufacturing
We looked at the variables of what third-party manufacturing is and how it benefits you at the peripheral level. But are there any direct benefits? Yes. You can experience the change in your organisation the day one with a third-party manufacturer.
We highlight the elements of contract manufacturing that directly add value to your company:
#1. R&D And Technical Support
Contract manufacturing allows you to produce the best version of your product. The research and development wing of CMs give you the best technical insight into your product. In addition, they highlight the areas where you can improve your offering and enter into the market with a more competitive product.
#2. A Stable Arrangement to Cut Costs and Maximise Profits
Among the many benefits, cost-cutting is a crucial element of why many companies adopt contract manufacturing. It’s justified because your resources are limited, and you would want to deploy your talent where you can get the most value out of them.
CMs save you money by offering everything under their umbrella, and you don’t have to go around talking to multiple vendors, negotiating, and trying to find the best deal.
#3. A Position to Create More Opportunities Within the Company
It doesn’t make sense to do everything in-house when you can have an arrangement that allows you to get quality products delivered directly to your warehouse. Then, with extra cash and resources at your disposal, you can explore more opportunities within your organisation. You can innovate better and, of course, market better.
#4. Access to Advanced Skills
It is impossible sometimes for small to medium businesses, even the bigger ones, to harbour all the advanced skills needed to stay competitive in the market. Here, companies can benefit from the expertise they may lack, but which the contract manufacturer possesses. The contract manufacturer is likely to have established contacts with raw material suppliers or efficient production procedures.
#5. Economies of Scale
Since contract manufacturers work with a number of different clients, they serve several customers. Hence, these manufacturers are capable of offering lower raw material acquisition costs because of economies of scale. This translates to a lower price per unit as the number of units in a shipment increases.
#6. Laying Ground of Scalable Business in Future
The money you save from not manufacturing in-house brings you the liberty to hire a more skilled workforce. This way, you prepare the ground for a growth-oriented, scalable business.
Also, as you work more with your CMs, your relationship with them gets healthier. They start prioritising your work, as a result, your organisation receives the benefit. Thus, you ensure more stability for your business.
The Limitations of Contract Manufacturing
There can’t be any second thought about the fact that contract manufacturing is an excellent Idea. But sometimes, it may not suit your business.
We highlight some elements that limit the potential of third-party manufacturing:
1. Scarcity of quality CMs
It’s not easy to find quality CMs in the market. If you end up outsourcing your manufacturing to a CM that doesn’t have the technical might you think they have, it can prove to be counter-productive.
2. Undercooked Business
Your CM will only produce what you tell them to do. If you as an organisation cannot direct CMs the right way, you are still experimenting. Going with contract manufacturing at this stage might not be a good idea for you.
3. No oversight
When you do not supervise your production process directly, you always risk your contact manufacturer mishandling your intellectual properties.
However…
If you are into electronics manufacturing, you can start your contract manufacturing journey by trusting Oakter. With trusted suppliers, quickest developments, most profound industry insights and best prototyping competence, we help businesses nail the manufacturing game. Click here to learn more about how Oakter serves its partners.