Insight:
- Contract manufacturing involves outsourcing production to third-party manufacturers who follow specific client instructions, offering benefits like cost reduction and access to specialized expertise but also presenting risks such as quality control issues and potential IP theft.
- The process typically includes defining product needs, finding suitable manufacturers, contract negotiation, production, and finalized shipment, and it’s widely used across industries for efficient and large-scale production.
The contract manufacturing definition is a little bit similar to the outsourcing manufacturing method. Within this method, other sides help us finalize products. If you would like to work with them, you’d better consider its pros and cons. Besides, you should know how to control a contract manufacturing process to gain the best result.
According to 360iResearch, “global contract manufacturing will reach nearly 604 billion dollars in 2023′‘. Major industries, such as aerospace, pharmaceuticals, food, and beverages, are all looking for outside partners to maximize profit. Via our post, you may learn a comprehensive knowledge of this form of production. Let’s follow us reading this material and look for new paths to optimizing your business!
What is contract manufacturing?
What is contract manufacturing and how does it work? You can think of it as a production outsourcing process. Within this production approach, your company signs contracts with different partners. Then, these partners will help you process and finalize products based on your requirements.
We call our partners third-party manufacturers. They use available production lines, advanced technology, and a huge number of laborers to manufacture ordered products. They’re so good at large-scale production, hence, they can meet various customers’ requirements, leading to our cost-effectiveness.
Nowadays, outsourcing partners can help you process thousands of products. You’ll be surprised to find that almost all the products in your house are manufactured by outsourcing method. Soap, instant noodles, cars, non-sticky fry pans, poker cards, tires, sports gear, smartphones, etc all could be outsourced.
We have an outstanding example of Nike. Its headquarters is located in Oregon, USA. Its shoe tags are labeled “Made in Vietnam“, “Made in Japan“, or “Made in Indonesia”. These countries are Nike’s key outsourcing partners.
Related News
Advantages and disadvantages of contract manufacturing
After reaching out to the definition, we can come up with a discussion of this type of production’s pros and cons for businesses:
| Advantages of contract manufacturing | Disadvantages of contract manufacturing |
| Lower production costs | Potential challenges in controlling quality |
| Focus more on specialized strengths | Intellectual property might be at risk |
| Access to advanced technology | Potential reliance on contract manufacturers |
| Easily adjusting the manufacturing process | The need for clear communication and coordination |
General comparison between contract manufacturing advantages and disadvantages
Advantages of contract manufacturing
The best advantage of contract manufacturing is cost efficiency. As businesses don’t have to invest money in buying equipment or hiring thousands of workers, they have more resources to nurture their core competencies. All you have to do is clarify your requirements and let your partners finalize the ordered shipment.
Our partners have all the needed equipment to process our orders, including labor, technology, equipment, etc. With these available resources, they receive thousands of orders from customers all over the world. Therefore, the production cost is reduced a lot.
Depending on your business major, you can choose one among many contract manufacturers. They have great expertise in food and beverages, cosmetics, auto-engines, pharmaceuticals, etc. These manufacturers often have teams of reputable specialists who understand what you need and what your problems are.
With outsourcing partners, you actively control the goods via production orders. Just when you’re out of stock, you send the production order to partners. In this way, businesses avoid the risk of overstocking and understocking inventory.
Disadvantages of contract manufacturing
Despite its outstanding advantages, working with contract manufacturers, you need to be aware of these issues. Weighing the pros and cons of contract manufacturing requires you to understand both of its aspects:
- When you outsource production to different parties, the quality of goods inevitably changes a little bit between different orders and different partners. Therefore, you need to pay attention to the process of quality inspection.
- Working with third-party manufacturing puts you always at the risk of losing intellectual property. Some manufacturers may have behaviors encroaching on your business success secret.
- Finding a contract manufacturer is hard, but working with them is even harder. To ensure your products will meet set standards, you should track the supply chain by actively maintaining a smooth communication flow with these partners.
- Collaborating with outsourcing partners for a long time could lead to high dependency on them. Sometimes, your manufacturers may get stuck in disruptions and could not handle your order. These issues, of course, also cause delays for you.
The contract manufacturing process
During the partnering phase, there is a lot of work you need to complete. But in general, there are 5 main steps in conducting the outsourcing process:
- Step 1: You should firmly know what you need, what your products look like, and what their specifications are. Contract manufacturers process the goods entirely based on your orders.
- Step 2: After clarifying your needs, you can start looking for a contract manufacturer. If that’s your first time collaborating with a certain partner, you should conduct initial screening and sorting for who is suitable for your business domain.
- Step 3: When you have a list of potential manufacturers, you can actively contact them, express what you need, and negotiate the contract. Within this step, a contract manufacturing template will help you a lot. Having a contract template helps you avoid missing out on dealing with certain terms.
- Step 4: After both parties reach an official contract, you can inform the manufacturer to release the production order. By this time, the production line starts processing your ordered products. You should keep in touch with them and ask for updates on the production line.
- Step 5: When the goods are finalized, the manufacturers complete packaging them. At this time, both parties should urgently finish all custom paperwork ready for the export and import process.
Contract manufacturing in specific industries
Depending on your business domain, you will choose suitable contract manufacturers to handle your request:
- With cosmetics contract manufacturing, you must equip yourself with a desired formulation, unique packaging, and safety regulations.
- With pharmaceutical contract manufacturing, you must carefully explain the stringent safety regulations and essential testing required for controlling quality. Medicines strongly affect human health, therefore, you must be sure that your partner has enough expertise to handle the manufacturing contracts in pharmaceuticals.
- With food contract manufacturing, you should only collaborate with manufacturers who are seriously obliged to food safety regulations. Furthermore, you still have to emphasize the hygiene standards by strictly shipping consignment back to your partners if there are any issues related to spoiled or unhygienic food.
- With beverage contract manufacturing, creating a formulation for a beverage is difficult. It requires your partners to have sufficient sources of quality ingredients and highly advanced technology.
Contract manufacturing vs. OEM
Contract manufacturing vs OEM (Original Equipment Manufacturing) are 2 distinct forms of production:
- With the former one, the client owns the design and the specifications of outsourcing products. The client party has full control over intellectual property related to products. The manufacturers just follow their clients’ instructions and finalize products.
- Another, OEM (Original Equipment Manufacturer) may contribute to the design of products and the client owns the final goods.
Contract manufacturing vs. OEM: Which is right for you? Depending on your needs, you can choose whichever form among them:
- Choosing the first one is optimal when you prefer saving production costs while retaining full control over products’ design and specifications.
- Choosing OEM is better when you want to take advantage of manufacturers’ expertise and technology. Furthermore, if you are in a hurry to launch the products to the market, you should prefer working with OEM partners.
How to start a contract manufacturing business
Most entrepreneurs don’t know how to start a contract manufacturing business. This process contains these basic steps:
- Conducting market research and selecting niche markets: You must clarify which domain your business is specializing in, and then you can serve suitable customers.
- Developing expertise and resources: You must form a team containing designers, engineers, quality control specialists, and production managers to handle all production processes. Besides that, you have to invest money in equipping advanced technology to handle various ranges of goods.
- Creating strong reliability: If you want to maintain a stable position within the product development and manufacturing industry, you must provide clients with consistent quality goods.
- Following legal terms and stated regulations: Throughout the operation process, your business must follow the legal and regulatory requirements of both the government and clients. Furthermore, respecting intellectual property and prohibiting encroaching behaviors are key factors that help your business grow.
Contract between manufacturer and distributor/retailer
Understanding all essential elements of a manufacturing contract: Protect your business! In different cases, manufacturing agreements may contain various elements:
- Product specifications: This term is especially important in a contract between manufacturer and distributor. It states products’ specifications, designs, packaging, materials, and quality, etc.
- Manufacturing process: This term describes how goods are processed and finalized. The manufacturers and the clients would understand and unify the production line ensuring the final products meet the set requirements.
- Pricing and payment terms: This term is vital in a contract between manufacturer and retailer. It states the price, the payment time, discounts, and penalties when failing to clear the balance on time.
- Delivery and shipping: This term is related to logistics. It specifies delivery schedules, shipping methods, insurance, and responsibilities for transportation goods.
- Intellectual property: This term formally states the ownership of intellectual property and the control of both parties related to the product design and production process.
- Confidentiality: This term states many confidentiality clauses ensuring there would be no encroaching behaviors harming both parties’ sensitive information.
- Liability and indemnification: This term states both parties’ liability and indemnification clauses to solve potential issues when unexpected incidents arise.
- Termination clause: This term clarifies the conditions for both sides to terminate the contract and any associated obligations.
- Dispute resolution: This part defines detailed procedures for resolving disputes that may arise within both parties’ collaborating period.
Conclusion
Contract manufacturing is a form of outsourcing the production process to a third party. Based on your order, the contract manufacturers will help you finalize products. It is an essential option for enhancing your business profit. If you’re dreaming of becoming a market leader, try to transform your manufacturing strategy with contract manufacturing!
For more useful knowledge related to outsourcing strategies, such as private label manufacturing, OEM, ODM, etc, you can visit the blog section on our website SourceVietnam.com.
FAQs
What are the benefits of contract manufacturing?
The benefits of contract manufacturing vary. They could include optimizing production processes, maximizing profits, mitigating risks of inventory, leveraging manufacturers’ expertise, quickly adapting to customers’ demands, etc
How do I find a reliable contract manufacturer?
You can find lots of reliable contract manufacturers via public information on the Internet, advertisements in trade shows, referrals, previous clients’ reviews, recommendations, etc
What should be included in a contract manufacturing agreement?
Almost all manufacturing agreements include these 9 elements:
- Product specifications
- Manufacturing process
- Pricing and payment terms
- Delivery and shipping
- Intellectual property
- Confidentiality
- Liability and indemnification
- Termination clause
- Dispute resolution
What are the risks of contract manufacturing?
Collaborating with any contract manufacturers, you may confront frustrating issues including intellectual property encroachment, high dependency, delivery disruption, inconsistent quality, and complex coordination processes.
What are the key differences between contract manufacturing and OEM?
These 2 forms of production are kind of different from each other:
- The former: The client has full control over the products, including intellectual property, design, and production process. The manufacturer is just based on the order, using their resources to finalize clients’ products.
- The latter: The manufacturer may contribute to the products’ designs. They use available resources to design and process components finalizing products. The client retains control over the final product design.
How can I ensure quality control in contract manufacturing?
You can ensure consistent quality control procedures by doing the following tasks:
- State firm contractual obligations for quality requirements
- Collaborate with a reliable partner
- Establish firm quality criteria unified by both party
- Frequently conduct quality inspections and audits
- Utilize advanced quality inspection technology
What industries benefit most from contract manufacturing?
Some industries that may benefit from this production strategy include food and beverages, pharmaceuticals, cosmetics, auto-engines, cars, aerospace, technology, clothing, etc
Is it necessary to sign a legal contract with a manufacturer?
Signing a legal contract is a must when working with a manufacturer. It’s all about protecting your business. Legal contracts officially state both parties’ rights and deputies. They require both side partners to respect the approved terms and indemnify any raised incidents.
