Which Companies Utilize Contract Manufacturing?

Which companies utilize contract manufacturing? Is it only limited to auto parts manufacturing and a few other industries?

We get these questions all the time. The answer is that every single industry utilizes contract manufacturing to some degree. Most companies use contract manufacturing to make:

• Parts that require large capital investments in equipment, such as metal stamping or machining equipment.
• Parts that require very specific manufacturing knowledge, such as printed circuit board assembly.

Some companies even have entire products made by a contract manufacturer. Contract manufacturing makes a lot of sense for all kinds of companies, including:

• Behemoths like Apple or General Motors
• Companies with lower volume products such as medical device manufacturers 

We can think of four reasons why.

1. Minimize Capital Investment And Risk

Building a manufacturing facility or even just retooling a production line requires a substantial capital investment, and requires many other resources. In addition to capital, these resources will be needed:

• Construction management
• Manufacturing engineering
• Financial analysis resources
• Project management

In addition to the above resources, the project will take quite a bit of time. Investing a lot of resources can make sense for products that are well established and relatively low risk. For less well established, more speculative products, contract manufacturing makes a lot of sense.

2. Cost And Timing Certainty

Even if your company has plenty of capital to build a factory, the final product cost is still uncertain. If there are cost overruns during construction, or production labor costs are higher than anticipated, those things will raise the cost of the product. The timing of production is also at risk with any new project. Several items can negatively impact the timing of production:

• Construction delays
• Delays in arrival and installation of manufacturing equipment
• Hiring and training new production employees

If you want to know exactly how much your product will cost and when it will be delivered, hire a contract manufacturer with a track record. They will crunch the numbers for you and provide costs and delivery timing in the contract. It’s that easy, as it should be.

3. Flexibility

Running your own manufacturing facility requires the commitment of capital and human resources. Once those commitments are made, it becomes really difficult to make changes. For example, it’s very challenging to change:

• Production processes
• Manufacturing technologies
• Tooling
• Raw material suppliers
• Manufacturing locations

No company wants to deal with the headaches of making changes at a factory. This rings true when they could be spending their time and energy on the core of their business, such as sales. When you contract with a manufacturer, you don’t have to worry about any of the internal changes they make (unless they directly impact your parts). It’s the manufacturer’s responsibility to uphold their end of the agreement with you. That means their internal issues are irrelevant to you as long as:

• You get your parts on time
• These parts meet your standards

You have the freedom to change manufacturers or move production to another country. You will only have to wait for your contract to end. A lot of companies audit their manufacturers at the end of their contract. If you find that the contract manufacturer doesn’t meet your standards, you can go with another manufacturer. Imagine if that was your own factory. You wouldn’t be able to just up and change manufacturers. You’d be stuck with that factory and its problems.

Here’s more information on why contracting with an experienced manufacturer is often the smartest move.

Flexible Production Volumes

Contract manufacturing also offers flexible production volumes. It doesn’t make sense to have your own factory if your parts don’t need full-time production. If you need a small volume of parts, say, every 2 weeks, it doesn’t make sense to invest in a facility, equipment, and workforce. 

A lot of contract manufacturers, especially overseas, will only fulfill large minimum orders. They have several reasons for this:

• They have to fill entire containers to ship to you
• They need to move their inventory of raw materials and/or sub-components
• They don’t have an existing production process for the same part or a similar part

This post has more information about the points listed above.

The good news is that some contract manufacturers, especially ones located close to you, may be able to offer much smaller production runs. If you want to place smaller orders, look for a contract manufacturer that:

• Can ship your order via truck, rail, or air
• Has low production costs and can pass the savings along to you
• Has inexpensive setup costs
• Can provide a precise minimum run number without a lot of back and forth communication

4. Experience And Expertise

There’s a popular saying: “Do what your company does best and outsource the rest.”

Is manufacturing not your company’s strongest suit? Then it makes sense to outsource to an experienced manufacturer. We’ve talked about how opening your own factory costs an arm and a leg. Even if you had more money than Jeff Bezos, your state-of-the-art facility still wouldn’t hit the ground running. A manufacturing company needs time to work out the kinks before it can become as good and streamlined as an established manufacturer. That will:

• Impact your company’s bottom line
• Hit the quality of your products

If you want to make a strong first impression on your customers, go with a quality contract manufacturer that:

• Has experience making your product or a similar product
• Can start production quickly
• Produce quality products
• Employs skilled workers
• Has quality certifications like IATF 16949:2016 and ISO 9001:2015

Experienced contract manufacturers (like Intran) know the ins and outs of manufacturing. Instead of reinventing the wheel, most companies would be so much better off hiring a manufacturer that’s already established and experienced.

Private Label Or Contract Manufacturing?

When you outsource manufacturing to another company, you have two basic options:

1. Private label manufacturing: Also called white labeling, private labeling is when you order already-made parts from another manufacturer and have them put your brand on the parts. You’ll have no control over the following factors:
   1. The design of the part
   2. The price per unit
   3. Who else gets the exact same parts from the private label manufacturer
2. Contract manufacturing: When you go with this option, you’re hiring a manufacturer to build your parts to your specs. You have complete ownership of your part and full control over the following factors:
   1. The design of the part
   2. The materials used to build the part
   3. The production process
   4. Any improvements you want to make to the part and/or process

This comparison guide explores both options. Are you debating between going with a private label manufacturer or a contract manufacturer? The guide should help you reach an informed decision.

The Importance Of Finding The Right Contract Manufacturer

Not all contract manufacturers are created equal. In theory, contracting with a manufacturer saves you so much money compared to opening your own factory. But that’s only the case when you contract with the right manufacturer. Contracting with the wrong manufacturer could cost you a lot of money in the long run.

You definitely don’t want to simply go with the lowest bidder. It’s important to thoroughly review every bid you get. It’s the only way to identify a quality bidder that delivers the most value. Here’s a great guide on reviewing bids and knowing what to look for.

It’s in the best interests of your company to go with a contract manufacturer that offers the following benefits:

• Short supply chain
• Close proximity to your company (a three- or four-hour flight away, at most)
• Highly-skilled labor pool
• Competitive labor costs
• Low shipping costs
• Stringent intellectual property laws
• Socially responsible manufacturing
• Quality certifications
• Solid reputation in the industry
• Partnerships with reputable companies
• Continuing investment in equipment, facilities, and employees

This post does a great job explaining why each benefit is important.

Got any questions about contract manufacturing? We’ll be happy to answer them if you reach out to us.