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Contract Manufacturing 101

By Kahl

“No person will make a great business who wants to do it all himself or get all the credit.”

                                                                                Andrew Carnegie, Scotland-born American steel magnate

If you are trying to grow your business and need sound advice, look no further than the sayings of a legendary titan of industry Andrew Carnegie.  Bottom line: if you want to expand your business and succeed, you need to learn the art of delegation. Contract manufacturing is just the process to level up your company profits and scale new heights of market ownership.

What is involved in contract manufacturing?

Say you are a company providing custom handbags to a national retail clothing chain. One well-known starlet was spotted with your bag, and now you can’t keep up with orders. A great problem to have, but what can you do to solve it?   Well, if you consider your core business to design, and want to keep up with the latest trends, your best strategy is to contract out the actual manufacturing of some or all of your product. This frees up precious real estate in your mind and your factory and will create the flexibility and lean operation that can guarantee lower overall costs that you can pass on to your customers.  You can now focus on creating more of what put you on the map (designing fashionable accessories) and less of the logistics of operating machinery, materials, supplies, and other factors (and headaches) of manufacturing products yourself.

Contract Manufacturing

On the Dotted Line

Contract manufacturing involves two or more companies entering into an agreement to supply one of the parties with either components or finished pieces of a manufactured product.  The contract manufacturer, or CM, can produce items for competing firms.

Additionally, some contract manufacturers will agree to oversee shipping and the ordering process for you.

The procedure is such: a company will approach a number of contract manufacturers with an idea, design, or formula. The CM will then quote a price based on such variables as materials, tools required, labor and the necessary processes to produce the components or product. Once the bids are in, you can evaluate them to find the right fit for your product and company.

Job production versus contract manufacturing

A quick note: contract manufacturing is sometimes mistakenly placed in the same category as job production, but there are some notable differences. Job production usually involves very small batches or custom work.  It is also known as “one-off” production, or “jobbing.”

Job production is one branch of the manufacturing production trinity, with the other two domains being (large) batch production and mass production methods.[1]

Job production is found in the craft industry (custom home fixtures, wedding favors, and décor, etc.) and the fabricating machine shops are called job shops. It is basically a subset of contract manufacturing.

Which industries participate in contract manufacturing?

Many differing types of industries employ contract manufacturing to produce parts or entire product lines for them. Aerospace, pharmaceuticals, medical devices, electronics, and the military represent are just a few of the many benefitting from this strategic outsourcing move.

Weighing the Benefits and Risks of Contract Manufacturing

Contract manufacturing’s obvious benefit lies in the reduced cost of capital: no plant, no machinery, no staff, no inventory to manage.

The skill set a contract manufacturer is likely bigger and more finely-tuned than what you have, so take advantage of this and, as the Greyhound bus company used to boast, “leave the driving to us.” CM’s manufacture items every day, month in and month out. They have tested and tried processes and determined, through trial and much error, what works. They know hacks and shortcuts and will use them to quickly produce your idea, component, or prototype.

Because they know the tricks of the trade, quality of products is almost guaranteed. Manufacturers who have been around for a while typically set high standards for themselves, and exceptional quality is a welcome byproduct of a dogged dedication to craftsmanship.

Economies of scale loom large, and the cost savings to you can be significant. Because many of the highly-skilled contract manufacturers are serving several clients and firms at once, the purchasing of raw materials in bulk, at a markedly lower price, will undoubtedly benefit all of you.

Locating your contract manufacturing in another country can reduce the tax liability on you, the parent company. Apple produces many of its lucrative product lines in China, using the contract manufacturer Foxconn.[2]

Risky Business

Of course, not all contract manufacturers are going to be the meticulous, scrupulous, fair, master craftsman that you envision. Plus, have you asked yourself how comfortable you are with the much-reduced oversight and control you have relinquished, sometimes to a far-away land? Did you consider yet that your eager CM may run off with your great idea and plagiarize it, leaving you bankrupt?

To reduce the risk that your CM will copy your product and slap its own label on it and start selling, you may want to take steps other companies have learned, to protect their core businesses. Steps such as:

-Cisco Systems maintains in-house manufacturing for its prototypes and their latest models of routers and switches

-Sony Ericsson will only outsource the production of its older product line devices, assuming correctly that they have already been copied

-Alcatel, having sold off most of its 100 manufacturing plants since 2000, many to former CMs, retained specialty equipment in a few remaining factories. This remnant’s specialty equipment is used to create only new products and very high-tech items almost impossible to reproduce elsewhere[3]

While the risks are hard to minimize, the benefits of finding the right CM for your business offer a wealth of potential reward that is hard to ignore. Do your due diligence, get referrals, and listen to your gut. This may be the best decision you will make, for yourself and your business.

Resources:

[1] https://en.wikipedia.org/wiki/Job_production

[2] https://en.wikipedia.org/wiki/Contract_manufacturer

[3] https://hbr.org/2006/09/when-your-contract-manufacturer-becomes-your-competitor

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