The global contract manufacturing market is increasing at a CAGR of 9.4% and will reach $188.07 billion by 2026. More and more businesses are turning toward contract manufacturing to reduce project costs and improve efficiency.
Contract manufacturing refers to an agreement between a manufacturer and another company to manufacture given products or components over a specified period. In other words, contract manufacturers are third-party manufacturing units that produce goods for another company in a B2B deal.
Unlike private labelling, contract manufacturers do not offer readymade products for brands to label as their own. Companies give directions on manufacturing a product and play a key role in overseeing the processes.
Let’s understand how contract manufacturing services reduce your project cost.
Taking Better Control of Labour Costs in Manufacturing
If not managed correctly, labour costs can make up the bulk of production costs. While automation has dramatically reduced labour costs in different areas, it’s not always the case for manufacturing. Especially with particular products that require different components, automating every part of manufacturing is not possible.
Manufacturing costs can come down despite complicated designs with contract manufacturing. This is particularly effective with overseas contract manufacturers. Since they can hire and mobilise cost-effective labour, the partner company can significantly cut labour costs.
In most cases, contract manufacturers specialise in specific categories. They also have an appropriate labour force, and access to a wider labour pool. You also get the advantage of not having to worry about labour when there’s a surge in demand.
Many entrepreneurs believe that they need complete control over every step of production. But sometimes, it is a more time and cost-effective option to hire third-party enterprises rather than overseeing everything yourself. It’s one of the fundamental arguments in favour of contract manufacturing.
Advantages of Economies of Scale
The dictionary definition of economies of scale is “a proportionate saving in costs gained by an increased level of production”. The basic rationale is this: higher volume means less cost per unit of production. Large companies like Tesla are already benefiting from the economy of scale concept by setting up centralised manufacturing hubs with tremendous capacity.
Contract manufacturing is the only way to realise the benefits of economies of scale for small and medium businesses. The cost per unit can go down by a large margin once the units are mass produced.
Moreover, you save transportation costs since the finished goods come from a single destination. The advantages of economies of scale make it logical to go for contract manufacturing.
Scalability and Flexibility
Both scalability and flexibility are key concerns for small to medium businesses. Unlike large businesses, a small-to-medium enterprise (SME) may experience rapid growth in a short period. Similarly, many businesses are seasonal and demand goes up only for a particular duration. Since arriving at exact projections is difficult, your manufacturing unit needs to be flexible.
Small-to-medium companies cannot get the same level of flexibility and scalability that contract manufacturing offers. It takes enormous amounts of capital to set up a sizable manufacturing unit that is both scalable and flexible. On top of that, flexibility depends on labour availability, which further depends on several factors.
Contract manufacturing is the most scalable and flexible manufacturing solution for SMEs.
Reduced Overhead Costs
Contract manufacturers adopt a range of methods to reduce overhead costs. Running a manufacturing plant involves many components, from fixed assets to depreciation costs. The operational costs alone can prevent many small-to-medium enterprises from manufacturing their products in-house.
Since contract manufacturers work with several companies simultaneously, they can effectively manage and reduce overhead costs. For example, contract manufacturers do not have to bear losses due to machine downtime. They can also amortise equipment costs over many products and clients.
Contract manufacturers also cut costs in transportation by ordering in bulk, enabling them to manage margins with suppliers better. Contract manufacturing is your best bet if you aim to ring down operational costs.
Better Final Product
All successful businesses have one thing in common: consumers love their product/service. The misconception that contract manufacturing leads to low-quality products is prevalent, but not right.
Unlike private labels, contract manufacturers do not work on their own designs and ideas. Contract manufacturers will be in close coordination with the partner company regarding the design, material, quality, durability, and a lot more. As a result, the final product is of better quality than what it would have been without a contract manufacturer.
For customers, price and quality are the two most important factors determining whether they’ll buy a particular product or not, and contract manufacturing checks both these boxes.
Having Access To Expert Knowledge
Depending on the contract manufacturer you choose, you can get a lot of allied services and expertise. Since contract manufacturers work with specialists, you will have access to expertise that would otherwise cost a fortune to hire. It’s a benefit that is often overlooked.
For instance, if you are working with an overseas contract manufacturer, they will have expertise in handling the local markets and labour forces. Similarly, they have more manufacturing experience that allows them to adopt the newest practices and innovations.
The world of manufacturing is both complex and ever-evolving. Contract manufacturers offer one of the easiest ways to access manufacturing expertise without hiring new employees. Any company seeking manufacturing expertise and specialisation will benefit significantly from contract manufacturing services.
With so many benefits and advantages, it’s high time for entrepreneurs to explore the possibilities of contract manufacturing. When done correctly and with the right partner, contract manufacturing can take your business to the next level of success and profitability.
For more resources on contract manufacturing, check out the Oakter blog.