.jpg)
It wasn’t long ago that brands were reluctant to use contract manufacturers (also known as co-manufacturers or co-mans). After all, the reasoning typically went, they would never “trust someone else to run their product!”
But brands are starting to change their views of co-manufacturers as a result of changing market dynamics.
During the product development phase, companies evaluate the product’s viability by analyzing their available in-house manufacturing resources, including machinery, workforce, and raw materials. As part of their manufacturing strategy, companies conduct interviews and speak with contract manufacturing firms to identify the most suitable partner for making their product. Contract manufacturing providers present an additional avenue for companies to consider when assessing their manufacturing requirements, as they possess the requisite resources, equipment, and skilled personnel to fulfill project demands.
Let’s dive deep into what contract manufacturing entails, including the types, how it works, the benefits and risks, and how to choose the right contract manufacturer.
What Is Contract Manufacturing?
Contract manufacturing is an agreement between a company and a manufacturer to fabricate components and products based on the specifications and guidelines provided by the company outsourcing the project. The manufacturer undertaking this contract to make the products is called a contract manufacturer. The manufacturer may be involved in several aspects of the manufacturing process, such as product design, manufacturing in various stages, and shipping. The products manufactured by the hired company are then sold by the company that outsourced this project. This way, the company does not have to deal with issues related to initial costs, lack of resources, or manpower. The outsourced manufacturer becomes a third-party organization that subcontracts and sells the manufactured products to other companies.
Types of Contract Manufacturing
Companies and manufacturers can enter into many types of contracts regarding manufacturing services. Most agreements of such kind fall under four general categories:
Private Label Manufacturing
In this type of manufacturing agreement, the manufacturer produces components or products for the company that hired them. These products bear the brand of the hiring company. In most cases, the final products are delivered to the hiring company’s warehouse or the establishment where they are sold. Such an avenue is perfect for companies that want to sell products depending on their specifications and requirements but do not have the resources, funds, or technical understanding to carry out the entire production process.
Individual Component Manufacturing
Under this type of contract manufacturing, the manufacturer is only responsible for producing a single component that is part of a much larger product. In this case, manufacturing different components that makeup one whole larger product is outsourced to different manufacturers. It happens in cases where the hiring company already has some in-house production capabilities but needs the services of other manufacturers to fabricate individual components and finally assemble them.
Labor or Service Subcontracting
Under this manufacturing agreement, the hired manufacturer serves the purpose of a subcontractor and only provides services to perform one part of the production process that the hiring company cannot perform themselves. This enables the hiring company to carry out mass production and assembly at a lower cost and faster rate.
End-to-End Manufacturing
This type of contract manufacturing involves most aspects of private-label manufacturing with one significant difference. Here, the hired manufacturer has a say in the design specifications and manufacturing process required for the product. This is beneficial for companies that may not have the best idea to come up with ideal specifications to ensure the production of the highest quality products. Thus, outsourcing the process is a cost-effective option that can help them maintain superior design and quality.
How Does Contract Manufacturing Work?
The process is pretty straightforward and does not involve any complex stages. A company that requires the production services of a manufacturer searches for a suitable firm and then hires their service to manufacture products or sometimes even helps in the design process as per their requirements. Once the products are manufactured, the hired company either transports the products to the hiring company’s warehouse, delivers them to the stores where they are sold, or even ships them directly to that company’s customers. A sample or a prototype product is usually prepared during the initial stages of the contract to get the thumbs up from the hiring company before starting the manufacturing process.
The Benefits of Contract Manufacturing
Leveraging a co-manufacturer allows brands to hold onto precious capital and not have the financial burden of production and all the incremental costs that come along with it on their P&L. Instead, brands can repurpose dollars that would typically be tied up in production and apply them to marketing, sales, and customer acquisition.
It’s not a coincidence that we’ve seen a rise in challenger brands coming to the market in a blaze of glory: co-manufacturers give them the needed flexibility and capacity to scale to market quickly.
The rise of co-manufacturers certainly comes with challenges and tradeoffs. Historically, some of the main challenges stemmed from quality control. After all, companies that leverage co-manufacturers had to coordinate with departments across multiple companies and geographies, along with the FDA and the USDA. Not an easy task, especially if you’re a younger brand.
The advantages of contract manufacturing are:
Reduction in Production Cost
A hiring company does not have to worry about all the costs incurred due to the procurement of additional equipment, hiring of extra manpower, and resources to help design and facilitate the various production processes. They only need to pay the agreed-upon costs per the contract drafted at the beginning and maybe some additional expenses incurred during the manufacturer’s fabrication process.
Better Utilization of Existing Resources
A company with limited financial capital, technological resources, manpower, and supervising and managerial staff does not have to waste these valuable resources on designing and manufacturing products. Instead, they can hire other expert firms to carry out various aspects of production. Moreover, the existing resources can be used to focus on more critical operations to grow their business.
Increase in the Overall Rate of Production and Reduction in Manufacturing Times
The overall production rate increases when a company does not have to take care of the entire design and manufacturing process as it has been outsourced to another or multiple other expert firms. Every company involved carries out its production processes, and every party can solely focus on its task. Furthermore, the overall time taken to manufacture and assemble all the products is drastically reduced, resulting in improved lead times and cost savings.
Easier Market Entry
It becomes very easy for a company to maintain and boost brand awareness and reputation when its products constantly hit store shelves without delay or dip in stock availability. Moreover, always maintaining high quality in your production process will ensure that consumers trust your brand.
What Are the Risks Involved In Contract Manufacturing?
As with any type of outsourcing or business agreement, the contract manufacturing business model also involves a few typical stumbling blocks that one must be aware of, such as:
Neither Party Has Complete Control Over the Process
When a company hires a manufacturer, all it can do is provide the necessary specifications and guidelines to manufacture the product. The hiring company will not be aware of any issues until the final product is presented. At the same time, the manufacturer has no control over the specifications and guidelines. They may offer better suggestions to improve the design, but there is no saying if the outsourcing company will agree to the changes.
Risk of Receiving Products That Are Not Up to the Mark
It is always possible to end up getting into an agreement with a manufacturer that cannot deliver the desired quality level of the products. This can happen for several reasons, such as improper communication, insufficient research into the manufacturer’s background, not reading reviews and testimonials from past clients, or a disagreement over the design specifications. To avoid this outcome, a company must always do its due diligence and establish firm guidelines before beginning the process.
Downsizing
Often, when small businesses start to outsource various processes, the upper management makes tough decisions to cut labor costs by laying off certain employees.
What Industries Use Contract Manufacturing?
Contract manufacturing is utilized by companies across various industries, such as electronics, metal fabrication, plastics and rubber, chemical, automotive, aerospace, pharmaceutical, medical, consumer goods, and food. While organizations of all sizes and types can benefit from contract manufacturing, it is particularly useful for small to midsize businesses (SMBs), as it eliminates the need to invest in raw materials and labor and helps with cost savings.
Market Trends Driving Contract Manufacturing
According to the Contract Packaging Association’s 2018 State of the Industry report, “the market has been growing at an 11.9% CAGR for the past five years, an astonishing two- to four-times faster than the industries it supports. By 2020, the CPCM (Co-Packing, Co-Manufacturing) market is forecast to break the $75 billion mark—a conservative number, notes the report—rising from $53.6 billion at year-end 2017.”
Global cost pressures, the rise of private equity in the food and beverage industry, hyper growth direct-to-consumer brands, and retailers demanding product faster than ever has opened the door for co-manufacturers to play a pivotal role in bringing the next wave of products to market.
Fortune 500 companies and challenger brands alike are strategically aligning themselves with contract manufacturing companies for a variety of reasons.
How to Choose the Right Contract Manufacturer
The process of choosing the right contract manufacturer should involve considering the following factors:
Adequate Facility Standards
Before agreeing to a contract, the company must learn about the manufacturer’s facilities. The premises of production facilities should be well-organized, and the best cleanliness and hygiene standards should be maintained. Moreover, the working staff must be skilled and experienced. The equipment used for manufacturing must be up to code and regularly serviced. Finally, the company must ensure that all processes are carried out in a structured manner to ensure the production of high-quality products.
ISO-Certification
The ISO 9001:2015 standard establishes the criteria for a company’s quality management system. If the manufacturer does not maintain the necessary ISO-Certification standards, then one cannot expect the final products to maintain high-quality standards. This is essential to safeguard the quality of your intellectual property in the manufacturing industry.
Maintaining Open and Efficient Communication
When interviewing prospective contract manufacturers, it is paramount to determine whether they maintain an efficient and open communication channel and understand the project's requirements and guidelines. Furthermore, it is essential to note whether they make relevant inquiries and try to clarify doubts. This will help gauge their core competencies and commercial acumen.
Awareness of Market Trends
Finally, a company must gauge whether the manufacturer has deep knowledge of the market trends, economic and consumer behavior changes in that particular industry, and the launch of new products. This is an indicator of how the manufacturer will approach the project.
Enabling Brand Collaboration with Contract Manufacturers
The good news is, quality risks are being mitigated by software solutions that enable brands, suppliers, and co-manufacturers to better collaborate.
At Specright, we’re enabling this collaboration through our Specification Data Management platform, which serves as the single-point-of-truth for customers and their co-manufacturers. Documents like certificates of compliance, quality control records, formulas, and packaging specs can be stored and shared on Specright’s globally accessible, cloud-based platform.
Workflows are then layered on top of specifications to ensure that critical tasks and approvals aren’t missed in the process. Brand users can also see what changes have been made and proactively audit specifications.
Not only is this beneficial for brands, but also for co-manufacturers - after all, it allows them to do what they do best: focus on production instead of managing specs.
Creating traceability, visibility, and accountability between brands and co-manufacturers will help bridge the trust gap and ultimately make it easier for brands to explore the world of co-manufacturing. This will lead to better partnerships between brands and co-manufacturers, and also better, more innovative products for customers.
In The Evolution of Products and Packaging, Specright CEO Matthew Wright provides a first-hand account of the trends that ushered in an explosion of SKUs and an increase in supply chain complexity that plagues manufacturers, brands, and retailers still today.
Over the course of Wright’s journey, the answer to this complexity seemed simple: to keep up, the professionals would need to embrace data to make better, smarter, more sustainable products and packaging. You’ll recognize stories of the common pitfalls organizations slip into when it comes to managing their most important data and get a glimpse into the future of how data can drive the answers to some of our most pressing supply chain challenges.
