It’s the same story with many companies who consider contract manufacturing. They grow, begin exceeding in-house production capacities, decide to find a contract manufacturing partner, and realize outsourcing is just too difficult and confusing.
But it doesn’t have to be that way. In fact, within fifteen minutes you can learn the entire process of selecting a contract manufacturing partner, what it will mean for your business, and what pitfalls to watch out for. This guide will walk you through the first considerations to evaluate, which questions to ask a contract manufacturer, and how to know contract manufacturing is right for your organization.
Keep reading. Because by the end of this article, you will understand exactly what you need to know – not only to navigate the contract manufacturing scene, but how to select the right partner that is best for your unique situation.
Table of Contents
What Is Contract Manufacturing?
Of course the first consideration when evaluating outsourcing options is to ask, what is contract manufacturing? What all does it entail?
Boiled down, contract manufacturing is essentially the practice of establishing a manufacturing agreement between two companies. The contract manufacturer specializes in fabricating parts, materials, or whole products on behalf of the client company. The client can place orders in batches of all sizes and specifications, effectively delegating the manufacturing function offsite to benefit in-house operations.
Indeed, this model works very well across many industries – from pharmaceuticals to aerospace vehicles to electronics. Contract manufacturers are adept at adopting quality standards, product specifications, and timetables required by the client. And the result is a closely integrated working relationship between two separate entities, allowing the client to maintain oversight while reducing much of the hassle associated with in-house manufacturing.
Why Contract Manufacturing
1. Cost Savings
The first reason to consider contract manufacturing is quite simply money. And you can save a ton of it by outsourcing some operations to the right manufacturing partner. Some industries are able to cut production costs by as much as 35% with the right contract manufacturer. What could your company do with that kind of savings?
The reason outsourcing can cut so much from your costs is because contract manufacturers already have the facilities, equipment, technology, and fully-trained staff to handle your specific task. Typically, they do all this under one roof, specializing in efficiency, cutting-edge methods, and saving you cash – a lot of cash.
2. Resource Management
Another of the many contract manufacturing advantages is the ability to focus resources where you want them. And relying on a trusted outsource partner frees you up to better manage your resources and direct them elsewhere. For example, what if you could focus more on research and development? What if you could free up resources to rebrand or launch a new marketing focus? What if you could invest in improving your administrative structure and corporate culture?
With contract manufacturing, these are all completely real possibilities. Shifting some of your production to the right contract manufacturing partner removes a burden on your resources. And those resources can then be diverted to other initiatives and improvements that otherwise might have been passed over.
3. Quality Control
You already have in-house processes to oversee and ensure quality in your products. But choosing the right contract manufacturer means an extra set of eyes on your manufacturing process, doubling the quality levels for your output. Essentially, outsourcing allows for twice the brainpower, oversight, and handling that goes into quality control. So products are not only made more efficiently – they’re made better.
4. Scaled Production
This goes back to the reason that probably got you interested in contract manufacturing to begin with. Scaling up is the holy grail of the manufacturing industry. What works well now may not translate into the same success on a larger scale. However, contract manufacturing negates this consideration to a large extent. Because these factories are accustomed to changing batch sizes, reducing lead times, and maintaining quality and efficiency standards at all output levels.
Using cutting edge technologies, methodologies, and equipment, contract manufacturers are highly specialized and streamlined for scaling up your production. Many use the power of lean manufacturing to minimize scaling impacts.
How to Know if Contract Manufacturing is Right for You
While there are numerous contract manufacturing advantages, it’s not necessarily for everyone. And it may well be it’s not the best timing for your organization. If you’re on the fence about whether or not to secure a contract manufacturing partner, here are some signals to guide you.
- Complicated Supply Chain: If your supply chain is getting too complicated or complex, it might be time to simplify. Experienced contract manufacturers greatly simplify the whole process and reduce moving parts for your company.
- Small-Medium Business Size: While smaller to mid-range companies often have the resources to manage contracts remotely, operating in-house is more of a challenge. Acquiring and housing equipment can be rather difficult for operations of this size, so outsourcing offers distinct advantages to start-ups and medium- or smaller-sized organizations.
- Limited Focus: Some companies are capacity bound and unable to invest in their strengths. If you wish to divert attention to expanding in non-manufacturing areas, this may be perfect time to secure a contract manufacturer. A lack of functionality or internal bandwidth is a strong indicator that your company’s potential could benefit from outsourcing.
- Variable Demand: If the demand for your products is frequently in flux, you are losing efficiency to the friction of scaling up and down. Producers in this situation are able to offset considerable cost by outsourcing to a contract manufacturer more specialized in demand fluctuations.
Selecting a Contract Manufacturing Partner: the Myths
The process of selecting the right contract manufacturing vendor is crucial to the success of your company. However, many companies approach the process with the wrong ideas. There are many myths about partnering with contract manufacturer (or CM). As a result, the endeavor is often doomed from the start.
Make sure your company has the right vision and expectations before jumping into this process. Here is a brief list of some of the more common misconceptions to watch out for:
1. Choose a CM partner willing to invest in your business.
Wrong. The idea here is essentially to seek out a vendor willing to do your manufacturing at a loss. The strength of a contract manufacturer is that they are able to remain competitive and make a profit for both their company and yours. Don’t look down on this – it works to your advantage.
2. Choose a Tier 1 CM partner.
This one is kind of silly. Tier 1 is only a term coined by the financial markets to distinguish large companies from smaller ones. You want a contract manufacturing partner that is the right fit for your business and for your unique needs. That might mean choosing a CM that isn’t the biggest company in their space. Instead of choosing based on size, consider the following alternative criteria:
- Corporate culture
- Management philosophy
- End market experience
- Business model
3. Choosing the right CM partner means no hassle.
No, it means less hassle. You’re still in charge of your product line. So there’s no getting out of that responsibility. However, contract manufacturing delegates a large portion of the headache to specialists who may be more suited to managing a particular task. OEMs succeed by effectively delegating tasks, but not by forgetting them. You still have to manage the relationship to an extent.
4. Choose the CM partner with the lowest quote price.
As with all things, shopping around for the lowest quote can be a flawed strategy. While your contract manufacturing partner should offer competitive prices and save your company money, and while you should of course request a quote, the quote does not necessarily tell the whole story. In fact, the cost per unit price often only captures approximately 75% of the total supply chain cost. Some contract manufacturers pass along to the OEM the remaining 25% in the form of fees. Consider the whole package, and choose a CM partner based on all relevant factors.
Selecting a Contract Manufacturing Partner: Important Considerations
The process of seeking out a contract manufacturing vendor can be lengthy, involved, and costly to change. So take care to consider all relevant aspects before settling on a contract manufacturer. The advantages of contract manufacturing can be offset by the cost of getting it wrong.
Your first step may be to consult a directory of outsource service providers. These directories contain literally hundreds of providers, sorted by size, industry, specialties, and location. But while they are extremely helpful, they are only the first stop in a longer process that should include careful consideration of the following factors:
In creating a shortlist of vendors, collect a list of capabilities. This summary will enable you to get a snapshot of what all the CM can offer. Chances are, your product will require more than one service, so go down the list checking against their services.
Is the contract manufacturer experienced in your industry? How many years? What are their current assets and equipment? Do they possess appropriate certifications to work in your industry and produce to the level of quality you require? One of the greatest values CMs offer is their tried-and-tested knowledge to determine the best path to market.
Regulatory compliance is an important factor. Ask your potential contract manufacturing partner early on what their process is for ensuring compliance. Regulations vary from country to country. So if your value chain involves multiple countries, finding a partner accustomed to meeting compliance standards internationally is always a plus.
It is important to understand what the vendor is capable of handling. Determine if you will be their largest or smallest client. Either extreme can pose challenges. If you are the smallest client, will your needs be adequately addressed? If you are the largest, do they have the space, equipment, and processes to handle your workload?
Remember, manufacturing rises and falls on people. And this encompasses the people at the top of the operation all the way to the bottom. How competent are the managers and operation personnel? Does your team mesh well with theirs? How about the people on the floor? Of course, while you are not involved in their actual hiring, you do have a legitimate interest in their training processes to ensure your product line is matched to the proper skill level.
6. Equipment & Technology
The right contract manufacturing partner will be able to utilize the proper technology and equipment for your job. And this means either possessing the tools, themselves, or having access to them within their network. Therefore, if new equipment is needed for a very customized process, clearly establish early on who is responsible for paying for it, and how long it will take for it to come online.
The contract manufacturing provider might produce components in multiple places. But will final assembly be in a location suitable to your company? Of course, the primary consideration here is whether or not your team will want to be on site from time to time. So then, is the assembly location suitably close? US companies often realize considerable savings by outsourcing manufacturing to foreign soil – but Mexico may be considerably better than an Asian location on the other side of the planet.
8. Financial Stability
It goes without saying, but it is absolutely essential that your company perform a risk assessment analysis to determine the stability of your preferred CM. Essentially, choosing the right contract manufacturer means looking ahead to foresee possible disruptions that might be caused by:
- Equipment failure
- Unrealistic goals and standards
- Mismanaged inventory
- Contractor delays
- Inadequate supplier capacity
Ask the Right Questions
After searching for relevant providers, going through your checklist of relevant considerations, creating your shortlist of potential contract manufacturers, there are even more questions you should ask. Doing due diligence means leaving nothing to chance. Don’t overlook anything. Pertinent questions may vary by industry or project, but some good questions to ask contract manufacturer may include:
- “What protections do you afford for our intellectual property?”
- “Is pricing transparent; are there any hidden fees or costs?”
- “Can we expect any inconsistencies from order to order?”
- “Can you demonstrate fair program renewals with past clients?”
- Will there be a dedicated and qualified point of contact handling our project?”
- Do you have lean manufacturing or other processes to ensure smooth flow on site?”
Prepare for Success
Choosing the right contract manufacturer can be a long and arduous process. And there are many factors to consider, many questions to ask a contract manufacturer, and plenty of talks to be had. However, following this guide and checklists to ensure all your bases are covered is a great way to simplify things. Indeed, OEMs who follow these guidelines will likely enjoy a high level of success in selecting the right contract manufacturing partner. Typically, they enjoy greater quality, efficiency, productivity, flexibility, and profitability.
Remember that a partnership with contract manufacturer should be strategic. So leave nothing to chance. Never assume the other party has all the bases covered. But when you’ve selected the right partner, give them the chance to show you what they can do. Provide them with the inputs and feedback they need to excel and grow your bottom line. Then sit back and enjoy the success of a well-crafted partnership with a highly qualified contract manufacturing provider.