CONTRACT FOR MANUFACTURING
Contract manufacturing lets businesses, which may not have the resources or the funds to invest in heavy machinery, collaborate with other companies to fill orders.
Let’s take a closer look at the types of contract manufacturing and some examples of how it works!
What Is Contract Manufacturing?
Contract manufacturing is when one company enters into an agreement with another to produce components or products over a specific timeframe. This is outsourcing on a manufacturing level, and like outsourcing employees, it lets companies compete in areas that were previously unreachable.
It’s a business agreement where one company pays another to provide the necessary components to assemble finished goods, or even manufacture the product in its entirety. Contact manufacturers are third-party providers, and most only work as subcontractors or sell their products to other businesses.
Typically, a company in need of a contract manufacturer will reach out to one with a design and get a quote for the process, labor, tooling and materials. If the price of doing business is less than the costs of manufacturing, it’s good to go.
For this relationship to work, there needs to be transparency and collaboration between the two parties. ProjectManager is a cloud-based work and project management software that lets users track time and costs. You can create manufacturing schedules, share with contract manufacturers and track progress and costs in real time. Get started for free today.
TYPES OF MANUFACTURING
Mass Production
Mass production focus on large quantities of a given product using a Linear method of production.
Several workers are stationed as these assembly lines where they help convert raw materials and resources into the respective product.
Mass production emphasizes speed to achieve large volumes of a finished product very quickly and moves faster with higher output once the production line is set to up.
Consequently, a QA/QC process should be carried out more strictly as the production yield tends to be lower than Tailored Production.
Tailored Production
It centers around the production of smaller quantities to meet customer’s specific needs.
A few workers to build the whole product. We use high level workers to oversee getting the product done with high quality and precision according to customer’s demand.
It can be used to assess the assembly process (DFA) and Production Line flow.
Custom production is performed in workshops (1 or 2 stations) using high level and skillful workers (or engineers).
it’s slower than mass production but the production yield tends to be higher.
TYPES OF CONTRACT FOR MANUFACTURING
There are different types of contracts agreements between companies that enter into contract manufacturing field. However, when we talk EMS service most fall under these three categories:
Private Label Manufacturing
This type of contract manufacturing is when the contractor (factory) delivers the finished product, as specified by the client or in some cases, the design house. The product is delivered to either an inventory warehouse, directly to the store or wherever the client wants to have their product shipped. Sometimes, these items are the product of several components. In that case, the components will be assembled prior to shipment. This is an ideal relationship for businesses that have a clear product vision but want to outsource the entire production.
Individual Component Manufacturing
Here, contract manufacturing is only responsible for making one component that will at the end become a part of a larger, and more complicated final product. In this case, we are only responsible for the manufacturing of this particular component, one of the many components that were designed during the product development process. Other contracted companies must assemble that component into the finished product. This is a solution for companies that have some in-house manufacturing capabilities, but can’t produce all the components necessary for their final product.
End-to-End Manufacturing
As in private label manufacturing, the product or component is completely outsourced. However, in this case, the contract manufacturer is more involved in the product design and offers feedback to the product manager. Therefore, the company that contracts the manufacturer isn’t solely responsible for specifications, and the contract manufacturer takes on a lot of the product design work. It’s ideal for companies that want to quickly make something, fast and inexpensive but with quality.
BENEFITS OF CONTRACT FOR MANUFACTURING
Benefits of Using a Manufacturing Contract
Companies may choose to create a manufacturing contract for a few main reasons. In general, these contracts make it less expensive, more efficient, and simply easier to bring new products into a market and then achieve broad distribution. The main benefits of using a manufacturing contract include:
- Cost savings: Your company can save a lot of money if you contract with a manufacturer that has already invested in the right equipment and knows the manufacturing process. You might do this with a manufacturer that produces similar but noncompeting products. Depending on the manufacturer’s location, you could also enjoy savings in terms of:
- Energy costs
- Labor costs
- Overhead
- Raw materials
- Taxation benefits
- Distribution: Contract manufacturers can sometimes drop-ship a product to customers in a specified geographic area, or they may even ship your product to all of your customers. Some manufacturers handle individual customer shipments. Others may deliver the product to a central warehouse, and then you will need to take care of shipments as the hiring company.
- Easier market entry: It may be difficult to enter the market where you produce your goods, but you can still make them at low prices and export them to nearby countries that would be harder to reach if you manufactured your products elsewhere.
- Focus on core competencies: By using a manufacturing contract, you can free up people at your own company so that they can focus on their true strengths, such as marketing or selling. Otherwise, your firm may not have the capability to make your product in a country or factory setup that saves you money.
