Advantages & Disadvantages of Contract Manufacturing

by Andra Picincu ; Updated December 03, 2018
Product manufacturing plant

Are you ready to launch your own products but don't have a manufacturing facility? In this case, you may consider contract manufacturing. Those who offer this service produce goods under the brand or label of other companies based their own formulas and guidelines. This means you'll have full control over the design and technical features of your products without the need to rent or purchase expensive manufacturing systems. Before getting started, make sure you understand the perks and disadvantages of outsourcing manufacturing.

What Is Contract Manufacturing?

Organizations across all industries outsource production to save time, reduce labor costs and ensure their products meet industry standards. The electronics contract manufacturing market, for example, was worth $430 billion in 2015, and this number keeps going up. This business model is widely used in the pharmaceutical, medical, cosmetics, food and technology industries worldwide.

Contract manufacturing allows companies to have their goods produced by specialized professionals. Basically, it's a form of outsourcing. An American clothing brand, for instance, can outsource production to China to free up capital and get quality products for a lower price. Since the average wage in China is considerably lower than in the U.S., you'll pay less on manufacturing. You could also save money on materials, accessories, ingredients and so on.

This business model involves outsourcing certain production activities to a third-party. A pharmaceutical company, for example, may outsource the production of bottles, medications or both. Therefore, it will sign a contract or formal agreement with every manufacturer involved in the process. Some manufacturers specialize in product assembly and distribution, while others offer design or production services.

The Advantages of Contract Manufacturing

Like everything else, this business model has its pros and cons. A major advantage is that it allows you to maximize profits by saving time and money. Starbucks, for instance, doesn't own any coffee farms. Its coffee, cocoa and tea ingredients are sourced from farmers and suppliers worldwide. The company aims to provide 100 percent ethically sourced cocoa and tea by 2020.

Another reason to work with contract manufacturers is that they have a good understanding of your project and industry. They can handle your project from start to finish, identify flaws and spot potential risks throughout the supply chain.

If you hire your own manufacturing team, they may or may not be able to do these things. A trusted producer, on the other hand, has years of experience in your niche and has worked with dozens or hundreds of companies like yours.

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Contract manufacturing also makes it easier to manage your budget. With this business model, you can keep the design, fabrication, production, finishing and other processes in one facility. This may reduce your expenses, lead times and overall costs. The producer may even offer discounts to customers who purchase multiple services.

When you hire a contract manufacturer, you don't have to be an expert in every aspect of your product. Let's say you're planning to launch a new protein powder. You have a solid formula, a business and a marketing team. However, you may not know what kind of bottle or container works best for your product and what materials are needed to ensure its safety and lifespan.

Your manufacturer will be able to make recommendations, help you decide on the best materials and handle the entire process on your behalf. Furthermore, he is legally required to produce your goods at an agreed upon level of quality. Not to mention that he already has the tools and equipment required for production, so you don't need to spend extra on these things.

The Disadvantages of Outsourcing Manufacturing

The disadvantages of outsourcing manufacturing are mostly related to the producer’s ability to deliver on its promise. Hiring unreliable or inexperienced manufacturers may lead to quality issues, sudden shutdowns, random fluctuation in production and conflicts. That's why it's essential that you have a solid contract and non-disclosure agreements with the companies you consider outsourcing to.

Another drawback is that you'll have less control over the product. Again, a solid contract can help you avoid any issues and conflicts that may arise.

Furthermore, you may risk losing the intellectual property. It's easy for those who work at a production facility to steal and use your formula or design. Sure, you can sue them, but the costs will add up. You'll lose time and money, and it can even shut down your business.

Consider the advantages and disadvantages of manufacturing through another company before you make a final decision. Assess the costs involved and determine whether it's worth the risk.

About the Author

Andra Picincu is a digital marketing consultant with over 10 years of experience. She works closely with small businesses and large organizations alike to help them grow and increase brand awareness. She holds a BA in Marketing and International Business and a BA in Psychology. Over the past decade, she has turned her passion for marketing and writing into a successful business with an international audience. Current and former clients include The HOTH, Bisnode Sverige, Nutracelle, CLICK - The Coffee Lover's Protein Drink, InstaCuppa, Marketgoo, GoHarvey, Internet Brands, and more. In her daily life, Ms. Picincu provides digital marketing consulting and copywriting services. Her goal is to help businesses understand and reach their target audience in new, creative ways.

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