Supply Chain Lingo: What's the Difference Between Contract Manufacturing and Private Label?

Posted on 
May 4, 2021
Adam Fugate
VP, Customer Solutions, Specright

So you’re ready to make a new product. A key consideration during the ideation phase is how you plan to make it - especially if you’re not an in-house manufacturing company and need outsourcing. Production is critical, since it shapes the amount of control, customization, and planning that goes into your new product.

The good news? You’ve only got a couple options.

The bad news? Those options are vastly different and come with their own lists of pros and cons. So let’s talk about the difference between contract manufacturing (commonly referred to as co-manufacturing or “co-man”) and private label.

Contract Manufacturing: Your Customizable Production Solution

Contract manufacturing is like a build-your-own pizza. You pick everything, from the ingredients to the materials, to the packaging, and a contract manufacturer produces it to be sold under your own brand.

The high level of autonomy is great for some companies, but it can also be a lot more work. With contract manufacturing, you’ll typically have multiple vendors working to complete your final product. This means more stakeholders, more supply chain complexity, and ultimately, more money. But the investment doesn’t come without returns.

Contract manufacturing enables companies to better differentiate their products, building a sustainable competitive advantage.Contract manufacturers are required to follow the specifications and formulation you provide, enabling novel ideas to get to market.

Overall, if you have a product that’s unique to the market, has a strong projected ROI, and you plan to make a lot of it, go with a contract manufacturer.

A Quick Overview of Private Label Manufacturing

Private label manufacturing is the “you get what you get and you don’t throw a fit” of manufacturing. Well, sort of.

Private label manufacturing is for what we call “generic products.” But make no mistake, generic doesn’t mean bad or cheap, in fact, private label products have become highly competitive in the marketplace.

That being said, going the private label route removes a lot of the input you get in the final product and shortens the product development cycle. Also known as the “off the shelf approach” the primary effort a company must put forth in the production process is finding a private label company that makes a similar product to what they have in mind. Private label manufacturers will then produce that product for the company seeking to extend their product line and boom, you have a new offering, sans the long development period and upfront investments.

Because you’re ultimately picking from a menu of already made products, you’ve got much less control over the manufacturing process.  So who benefits from private labeling? Smaller companies or companies focused on other parts of the business. With lower production barriers such as time, cost, expertise, and reduced minimum order quantities, private label manufacturing is a much lower strain on resources.

Success Stories in Both Private Label and Contract Manufacturing

Both options have potential to be successful – if well-leveraged. For example, Costco’s Kirkland Signature brand is extremely popular (not to mention, valued at $75 billion). Why does it work? Low prices and market opportunity.

Private label manufacturing provides a turnkey solution that’s usually cheaper to manufacture, enabling many of the largest retailers to offer “own brand” products at lower prices while still ensuring product quality. But low prices don’t guarantee a product’s success. Retailers like Costco are constantly evaluating the market and their sales, ensuring that they’re providing products customers want alternatives for.

For example, Costco stopped producing Kirkland soda because “no one was looking for a third major cola.” There were already brand name products by Coke and Pepsi that dominated the market – Costco’s own brand version simply couldn’t compete.

On the other hand is contract manufacturing. Contract manufacturing is still the most widely used manufacturing method (although private label continues to grow and claim space in the market). Foxconn is one of the biggest players in contract manufacturing, making products for tech giants like Apple and Amazon. Why are they successful? Foxconn focuses on making high-value products and has extensive expertise in their field. A critical gap in contract manufacturing success is ensuring you have a knowledgeable and quality provider. You still give up a level of control with contract manufacturing, and must rely on the knowledge of the manufacturer you’re working with.

Some final food for thought - here’s a quick list of factors to consider when deciding between contract manufacturing and private label:

  • How different is your product from your own products/current products on the market?
  • Does your product idea need minor tweaks from something already out there or is it a brand new idea?
  • What resources do you have and what do you need?
  • What’s the ROI potential, target profit margins, and end goal? (from both private label and contract manufacturing lenses)
  • What macro factors may influence your product’s success?   For example, is the economy down? Will your customers be able to cover premium pricing for contract manufactured products? What’s the shipping landscape like? Will it be challenging to distribute non-standard products? What are the start-up costs for each?

Using Specification Management to Decide Which Manufacturing Method is Right for You

The time has come to make a choice: private label or contract manufacturing?In order to choose wisely, you need to have visibility into your supply chain. This means knowing whether you have the capacity to scale your supply chain network, or if your new product idea shares a lot of specs with a product you currently offer.

Mapping out your supply chain specs will give you a better understanding of the level of autonomy your business can handle and a clearer idea of potential ROI.

Specright is the leader in Specification Management software, which provides private label retailers and brands that work with contract manufacturers the ability to better manage products across their supply chain network. Download our ebook to learn more about Specright’s role in improving supply chain performance and visibility.


Adam Fugate

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