Posted by Alimar Private Label on 5/16/2014 to
Education
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
- 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