If you’re unfamiliar with contract manufacturing, you’re not alone. While it’s an industry that many are unaware of, it’s an excellent opportunity for those looking to grow their product-based businesses rapidly. Many successful, at-scale companies use contract manufacturing to maximize efficiencies and reduce cost.
What is Contract Manufacturing?
At its core, contract manufacturing is a type of outsourcing. The business and the manufacturer enter into a formal agreement regarding the construction of parts, components, or complete products. All the products produced by the contractor for the business are sent to the business for use in product construction or final sale. Thus, the contract manufacturer acts as a supplier to the business in the process of production.
How is Contract Manufacturing Used?
Many business models can use contract manufacturing. The most common forms are:
- Production of parts or components: also known as contract machining, this form of contract manufacturing allows the business to obtain highly specialized, detailed, and complex parts that would be too cost-prohibitive to make in-house.
- Production of complete goods: Referred to as private-label manufacturing, a business contracts with a manufacturer to make an entire product that is then sold under the business’s brand rather than the manufacturers.
- Use of facilities and equipment: a way for manufacturers to make money during equipment downtime, this model lets a business “rent” equipment from a manufacturer to make their parts or product.
Why Use Contract Manufacturing?
For many companies, contract manufacturing is a way to reduce costs. Machining equipment and facilities require large capital expenditures. When scaling a business, that capital is better spent elsewhere. Another reason is to reduce manufacturing time for products. Contract manufacturing allows you to have two or more teams working simultaneously to complete the components for the product.
You should now have a better understanding of what contract manufacturing is and why businesses use it. If you’re looking to scale your product-based business, contract manufacturing could help.