How you can use contract manufacturing to grow your business

10/05/2019

Metal grinder making sparks - contract manufacturing

Metal grinder making sparks - contract manufacturing

The evolution in online business has opened up new opportunities and new business models that are becoming increasingly popular. And for a reason. If you’ve been considering scaling up your business to take on global online sales, you may be wondering about the best way to source, manage and distribute products. What if you could produce and sell products “without having to invest in machinery, equipment or specialized product knowledge”? Contract manufacturing may be an option for you to grow your business.

Entrepreneurs and businesses of all sizes are leveraging the power of contract manufacturing to get their own custom products manufactured quickly and sell into global markets. Now may be the perfect time to get to know more about the many benefits of contract manufacturing for companies of any size, even for those with limited resources.

Product design, production and distribution

Contract manufacturing (CM) is a form of outsourcing between a manufacturing firm (known as contract manufacturer) and the hiring company to produce a finished product or parts. Usually, a company has two options. They can invest and purchase the machinery and factory to make the product themselves or hire an outside company (i.e. a CM) with already-established production lines to make it for them.

Contract manufacturers can handle many aspects of product development, production and distribution:

  • Manufacturing and assembly of your product
  • Design and engineering of your product
  • Quality Control
  • Management of your orders
  • Management or consolidation of the supply chain
  • Planning and coordinating shipping and logistics

The benefits of contract manufacturing

  • Cost savings
    • Outsourcing your product to a CM means not having to waste capital on any maintenance and operational costs of tools, machinery, and equipment.
    • A CM lifts the burden of hiring, salaries, wages, HR, and benefits for the operators.
  • Allocation of resources
    • The costs one can shave off can be allocated to other vital areas such as your marketing budget.
  • Shorter lead time
    • Hiring a CM will allow you to leverage a CM’s existing supply chain network and expertise to provide you with faster lead times.
  • Quality
    • Reputable CM’s will have quality control processes in place throughout the production process to improve your product’s production quality.
  • Advanced skill sets
    • Companies can supplement their lack of manufacturing knowledge by working with a CM. A good CM will have established connections with raw material suppliers and have a better understanding of producing your product.
    • Experience can include different types of materials and properties, tooling, production lines, quality and testing required to create your product as efficiently and cost-effectively as possible.
  • Engineering & development support
    • Depending on the scope and size of the CM, a CM may be able to provide you with development and engineering support to get your project off the ground.

Who needs a contract manufacturer?

While it’s true that large business partnerships seem to get all the attention, contract manufacturers can work with a business of almost any size. As long as you have a product, working with a CM is an option worth considering.

Large companies have the capital to invest in their very own production lines, so why do they often avoid this option? Simply put, setting up a factory requires a huge investment of time, money, resources and unnecessary risk. When billions of dollars are on the line, larger companies know they should be focused on activities that generate revenue.

It’s no coincidence companies like Apple, Nike, Black & Decker and are marketing powerhouses, and they allocate their resources on branding, innovation, and the constant churning of new innovative products and designs. They recognize that their core strength rests on innovating the next big thing.

Who can benefit from a contract manufacturer?

  • Startups
    • Most businesses can benefit from working with a CM, including startups, which can take advantage of leveraging the resources of CMs without over-straining their own sometimes limited resources.
    • Developing an early partnership with a CM is a great resource considering they can act as an extension of your team from the development side of your business.
    • A CM can help develop and build a product more efficiently and economically and supply the extra boost that will allow you to launch your product quicker to the market.
  • Companies looking to improve quality
    • Good CMs will have time-tested quality systems in place. If you have quality issues then you may want to consider switching to a CM.
  • Companies looking to improve overall efficiency
    • Contract manufacturers have the resources, knowledge, and services that can improve your overall supply chain.
  • Companies looking to improve their profitability
    • Factories work on economies of scale and are not set up to produce small quantities – a problematic situation for companies looking to launch a few products to test the market. For a company to achieve economies of scale, it is necessary to work with a CM who has the existing clients and vendors using the same or similar materials.
  • Companies looking to scale up production
    • A company that is growing quickly will need a CM that is able to absorb higher quantities. A CM should be set up in order to scale up production during peak times or during a time of growth from the client.

The contract manufacturing process

After vetting and selecting the appropriate CM, the hiring company and CM will sign a contract to have the CM purchase and manufacture the products for the hiring company. Some of the details that should be covered in the agreement include:

  • Manufacturing the product
    • The CM carries the responsibility to produce the hiring company’s product as well as coordinating any subcontractors of subcomponents and raw materials.
  • Volume
    • The number of units purchased by the company from the contract manufacturer.
  • Pricing
    • The price per unit based on the agreed upon volume.
  • Quality
    • The quality conditions agreed upon between the company and the CM.
    • The CM supports the quality specifications established by the hiring company. The CM will utilize its quality procedures to carry out the requirements set and agreed upon between both parties.
  • Lead time
    • A time mutually agreed upon to complete the order. A schedule should be included detailing the time the order is placed to the time the order is ready for shipment.

A CM can manage the supply chain for your products

  • Managing the order
    • The CM will bear the burden from the day the order is placed to track, manage, and provide the hiring company with project updates.
  • Orchestrating the supply chain
    • The CM will be responsible for coordinating the production and final assembly of the project along with all the vendors.
  • Logistics
    • The CM may be contracted to take on the distribution and shipping plan and coordinate the logistics for the hiring company. This includes arranging everything from the freight of the product to the nearest port, warehousing, and shipping delivering the goods to end customers.

Entrusting the drawn-out process of manufacturing to a CM helps free up the hiring company’s resources and budgeting. This means more resources can be allocated to the most crucial part of any business – sales and marketing.

Weigh the risks, but consider the benefits too

The decision to hire a contract manufacturer may seem a little daunting as it transfers responsibility away from the company, however, the rewards can outweigh the risks, if it’s done correctly.

Carefully vet and perform due diligence on all possible contract manufacturers prior to making the switch. Perhaps most importantly, the best results come from forming a relationship based on trust and a long-term approach.

Disclaimer: The opinions expressed in this article are those of the contributing author, and do not necessarily reflect those of the Forum for International Trade Training.

About the author

Jared Haw

Author: Jared Haw

Jared Haw is the President of EPower Corp, an American and Hong Kong-owned contract manufacturer that works with entrepreneurs and helps them bring their innovative products to life. With production lines based in China, EPower Corp streamlines the process from development to production.

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