What is Contract Manufacturing?
In a contract manufacturing business model, you approach a contract manufacturer with a design or formula. The contract manufacturer will quote the job based on processes, labor, tooling, and material costs. For the agreed-upon price, the Contract Manufacturer acts as the hiring firm's factory, producing and shipping units of the design on behalf of the hiring firm. 

Benefits of Contract Manufacturing: 
  • Cost Savings 
    • Better pricing on raw materials 
    • Manufacturers have the required facilities and equipment 
    • Labor costs such as wages, training and benefits are reduced 
  • Mutual Benefit 
    • Outsourced production and labor for you 
    • Guaranteed stream of business for the manufacturer 
  • Advanced Skills 
    • You can take advantage of skills you may not possess that the manufacturer does possess 
  • Quality 
    • Manufacturers are likely to have their own methods of quality control in place already 
  • Focus 
    • Companies can focus on what they are best at, such as sales and marketing 
  • Economies of Scale 
    • Because they are servicing multiple customers, they can offer reduced costs in acquiring raw materials 
Risks of Contract Manufacturing: 
  • Lack of Control 
    • When you sign a contract allowing another company to produce your product, you lose some control over that product 
  • Relationships 
    • Keep in mind that the manufacturer has other customers 
    • You cannot force the manufacturer to produce your product before a competitor’s 
  • Quality Concerns 
    • You rely on the manufacturer to perform appropriate testing 
    • You rely on manufacturer to ensure that suppliers meet your standards 
  • Intellectual Property Loss 
    • You must divulge your formulas or technologies 
  • Outsourcing Risks 
    • Manufacturers who outsource to foreign countries put you in a position to have to work around language barriers, cultural differences and long lead times 
  • Capacity Constraints 
    • If your project does not make up the majority of the manufacturers business, your project may not be prioritized during high-production times 
  • Loss of Flexibility and Responsiveness 
    • Without direct control over the manufacturing facility, you lose some ability to respond to disruptions in the supply chain

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