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As the word suggests contract, there is a contract between the two parties and the word manufacturing contract suggests that there is a contract between the two parties for the manufacturing parts or product. Sometimes companies of small size or startup companies with some tangible product in their portfolio want to manufacture their part or product. But due to the high cost of machinery, talent and resources they face difficulties. That’s when contract manufacturing will come into picture and give solutions to this type of problems in the manufacturing. So in this blog we will discuss about the What contract manufacturing is? What are its benefits? What are the types of contracts manufacturing? And so on.

What is contract Manufacturing?

Contract Manufacturing means, Manufacturing services are provided by one company based on the contractual agreement. There are OEMs (Original Equipment Manufacturer’s) who have the orders from big companies or from the government, then they search for an expert and experienced company to manufacture some parts or sometimes whole product (that they don’t have any capabilities or expertise). They receive the number of quotations based on the order they have advertised. From a number of quotations they choose the right manufacturer based on some criteria. After finalizing the quotation they do sign a contract with the manufacturer mentioning the quality, quantity, price, delivery time and other terms and conditions. After that the real manufacturing begins. 

Contract Manufacturing or Manufacturing as a service is not only performed by OEM’s or Government but also can be performed by Small Manufacturers or Startups. They can have a contract with other manufacturers for the part they can’t produce or manufacture.

History of Contract Manufacturing:

• One of the earliest examples of this was the Singer Sewing Machine Company, which outsourced the production of its sewing machines to third-party manufacturers in the late 1800s.
• During the early 20th century, the contract manufacturing industry continued to grow as companies sought to reduce costs and increase efficiency by outsourcing production to specialized manufacturers.
• In the 1970s and 1980s, advances in technology and the globalization of the economy led to a further expansion of the contract manufacturing industry. In this era NASA and IBM are some companies that used contract manufacturing to reduce their cost of manufacturing and reduce the environmental issue. 
• Today’s Contract Manufacturing is very lucrative. Due to improvement in the technology and betterment in the communication made contract manufacturing more efficient.

How does it work?

1. The company or startup looking for the contractor for their work posts advertisements about their work on an offline or online medium.
2. After looking at the quotations received from the contractor they select one of them by considering the price, delivery time, quality and reputation of the contractor. 
3. They may discuss with a few contractors and visit their manufacturing setup.
4. After that, the company establishes a contractual agreement with the contractor. In this agreement they decide the delivery time, quality, quantity, and price of the parts or product. 
5. After the successful signing and agreed terms and conditions, contractors can start to supply the parts or product on the regular basis.

Types of Contract Manufacturing:

1. Private Label Manufacturing

In this type of contract, manufacturers deliver the finished product to the customer and deliver it to their warehouse or to store. In some cases they deliver several parts and assemble them and ship them to the customer location.

2. Individual Part Manufacturing

Here, the contractor is responsible only for manufacturing the single component from the large product with having numbers of parts. There may be a number of contractors for the number of parts to be manufactured and assembly of those parts.

3. Outsource Manufacturing

This is also known as Manufacturing Services, as the name suggests the meaning of the outsourcing is that you do contract manufacturing agreements with foreign companies. But sometimes it is referred to as a company outside the OEM and can be named as an outsourced contractor. 

4. End-to-end manufacturing

The company who wants to manufacture a product or part in real quick time then they give the responsibility of the product or part design to the contractor. In this case contractors do a lot of work in the design and directly report to the project manager. So the contractor is not wholly responsible for the quality of the parts produced, it is the responsibility of both the contractor and company.

Benefits to OEM’s (Contract Giver):

1. Company saves a lot of investment in the machinery.
2. Also saves a lot of money in the process of Manufacturing. 
3. Even if they don’t have the employees then also they can benefit from the capabilities of the manufacturing facilities.
4. They have all the expertise of the contractor as they are working for the company. 
5. They can launch the product in a quick time.
6. Contract manufacturing helps small companies and startups to compete with big players in the market by using the expertise, resource and manpower of the manufacturer.

Benefits Manufacturer (Contract Receiver):

1. Contractor will have continuous work from the companies which are mentioned in the contract. 
2. They will have a good relationship with the main company and it is beneficial for them in the future. 
3. They will improve their skills while doing the work according to the designs and quality standards. 
4. While doing work according to the contract they will have to improve their quality standard and that is very beneficial for them while serving other clients outside the contract.
5. They will have added work in their portfolio and it will help them in the sales and marketing.

Disadvantages:

1. There is a risk of intellectual property. Due to sharing with contract manufacturers they will have access to your drawings, 3D modeling and other confidential information. Your IP will go through a number of people in the manufacturers team. A company can reduce this risk by seeking proper legal cover when entering into an agreement with a contract manufacturer, which clearly outlines permissible actions and possible penalties.
2. Companies don’t have full control over the procedure of the contract manufacturer’s production. Companies should have proper communication with the manufacturer in order to have some insight into the manufacturing process.
3. There is risk of hiring the wrong contractor for manufacturing your components and there is risk of low quality of the components to be manufactured.

How to choose right contract manufacturer?

1. Quality Facilities: The manufacturing facilities where your work will be going on should be appropriate, neat and clean. There should be skilled employees, and well managed space. All the quality norms should be followed. 
2. ISO Certifications: The contractor should be ISO certified. Certified manufacturers generally provide high quality parts and high standards in production also.
3. Communicative: Both the parties should have open communication between them. There should be free exchange of ideas, problems, issues and solutions to those issues/problems. 
4. Aware of the Market: The manufacturer should adapt to market change and current trends.

Things to consider when signing a contract:

1. Whether the manufacturer has the best in class manufacturing facilities, technologies and machineries.
2. Whether they follow all the quality standards or not.
3. If they meet your quality standards then how much time they need to deliver the needful.
4. Can they work with you on a trial basis? Can they provide some sample parts of your requirement before signing the contract?
5. Contract manufacturers should be trustworthy and should have a good reputation in the market. 

Looking for a reliable and efficient way to outsource your manufacturing needs? Look no further than contract manufacturing! Our expert team can help bring your product to life with our state-of-the-art facilities and years of experience in the industry. From design to delivery, we handle it all so you can focus on growing your business.

FAQs:

Q: What is contract manufacturing?

A: Contract manufacturing refers to a business arrangement where one company hires another company to manufacture parts or products based on a contractual agreement.

Q: Who uses contract manufacturing?

A: Contract manufacturing is used by various companies, including OEMs (Original Equipment Manufacturers), small manufacturers, startups, and even government entities, to outsource manufacturing tasks they don’t have the capabilities or expertise for.

Q: How does contract manufacturing work?

A: Companies seeking manufacturing services advertise their requirements and receive quotations from potential contractors. After evaluating factors like price, quality, delivery time, and reputation, they select a suitable manufacturer and sign a contract specifying the terms and conditions. The manufacturer then begins production as per the agreed-upon terms.

Q: What are the types of contract manufacturing?

A: The types of contract manufacturing include Private Label Manufacturing (delivering finished products to customers), Individual Part Manufacturing (manufacturing specific components), Outsource Manufacturing (contracting with foreign companies), and End-to-End Manufacturing (involving contractor input in product/part design).

Q: What are the benefits of contract manufacturing for OEMs (Contract Givers)?

A: Benefits include cost savings on machinery and manufacturing processes, access to the expertise and resources of the manufacturer, faster time-to-market, and the ability to compete with larger players in the market.

Q: What are the benefits for manufacturers (Contract Receivers)?

A: Benefits include a continuous workflow, strengthened relationships with contract givers, skill improvement through adherence to design and quality standards, enhanced portfolio for sales and marketing, and potential future opportunities.

Q: How can I choose the right contract manufacturer?

A: Consider factors such as the quality of facilities, ISO certifications, communication capabilities, adaptability to market trends, and the reputation of the manufacturer. It’s also important to have a trial period or request sample parts before finalizing the contract.

Q: What should I consider when signing a contract with a manufacturer?

A: Factors to consider include the manufacturer’s facilities, technologies, and quality standards, their delivery timeline, the possibility of a trial period or sample parts, and their reputation in the market.

Contact us today to learn more about how we can help you streamline your manufacturing process and increase your bottom line.