The Pros and Cons of Contract Manufacturing | The Federal Group USA
July 8, 2020

The Pros and Cons of Contract Manufacturing

Contract manufacturing is the process of outsourcing certain production processes to a third-party company. For example, a company may outsource the production of specific components for a product that they then assemble. Many firms employ contract manufacturers to help them overcome challenges associated with product production, scaling, and supply chain management.

What is Contract Manufacturing?

Simply put contract manufacturing is when you engage a third-party to produce a product or component that is then used in the production of your final product. A company may engage a contract manufacturer for a variety of reasons. For instance, as a product becomes more complex, it typically becomes less cost-effective to handle the fabrication of every individual piece internally.

A popular example of this could be in the aviation industry. Airplane manufacturer Boeing builds a wide variety of aircraft that each require thousands of individual components. While they may produce many of the parts and components in-house, they also employ a number of contract manufacturers to produce things like bolts, fasteners, metal components, and even software.

Once Boeing engages a contract manufacturer, the third-party then becomes responsible for either sourcing or producing the parts and delivering them to Boeing.

Outsourcing the production of these products has a number of benefits for Boeing. Most importantly it frees up the overhead that would be required to invest in machinery, materials, and additional workforce. It also simplifies the production process and streamlines the production supply-chain.

Firms like Boeing may outsource their work locally or seek international partners depending on the requirements. Generally, the most important factors when selecting a contract manufacturing partner will be price, quality, and production capabilities.

Pros of Contract Manufacturing

Just like with any business strategy, there will be both pros and cons associated with contract manufacturing and outsourcing.

Lower Overhead & Maximize Profits

Primarily, contract manufacturing makes it easier for a company to produce its products without having to take on considerable overhead. Once a company has a finished prototype, all that company needs to do is find a good contract manufacturing partner to produce the products for them to sell or components for them to assemble.

For a company that makes products that include metal components, this can mean a difference in tens, if not hundreds of thousands of dollars in startup costs and ongoing overhead. Things like raw materials, fabrication equipment like CNC machines and die casting equipment, labor, and equipment maintenance are a significant barrier to entry for a smaller company.

Technical Expertise

Another benefit to contract manufacturing is taking advantage of the manufacturer’s technical expertise. For example, a good contract manufacturer will be able to guide you on the best materials, processes, and applications when sourcing a new product.

Along with the manufacturer’s technical expertise, you can also take advantage of their quality control processes. Typically a manufacturing partner will take responsibility for inspecting your products and replacing any defective items.

This process would not only be time-consuming for an internal work-force, but you would also be financially responsible for the wasted materials.

Scalability Opportunities

Typically when a company thinks about scaling their manufacturing efforts, they will begin to search out international partners. International fabricators in countries like China or India are often able to produce products at much higher volumes and for a much lower cost. While there are clear benefits to moving your production offshore, this also comes with a new set of challenges.

Contract manufacturing partners can help to simplify these challenges and bridge the gap with international suppliers. When your company engages a contract manufacturer with existing international relationships, this means you won’t have to worry about things like language barriers and expensive overseas trips. You can save yourself months, if not years of vetting and relationship building by leveraging a contract manufacturer’s existing relationships.

Cons of Contract Manufacturing

While there are a number of pros associated with contract manufacturing, there are some cons that should be taken into account, too.

Partner Reliability

The most important thing you can do when sourcing a contract manufacturing partner is to thoroughly vet them. As you will be relying heavily on this partner, it’s crucial that the contract manufacturer you engage has a well-documented history and references.

The last thing that you’ll want to deal with is an unreliable partner that misses deadlines, produces low-quality products, or uses sub-standard materials. Any of these scenarios could have a major impact on your business that could end up costing you a lot in the long-run.

Intellectual Property Risks

Just like in any industry, there will always be people operating in the contract manufacturing industry with inherently bad intentions. While it is not common, there have been contract manufacturers that have stolen intellectual property or sold proprietary company information to third-parties or competitors.

In some cases, the contract manufacturer may steal valuable company information and use it to launch its own brand. Unfortunately, when another brand or company has important information concerning another company in the same niche and market, it can use it to become a worthy competitor or rival. Many companies have been destroyed this way.

While this rarely occurs, it just goes to reinforce how important it is to thoroughly vet your potential manufacturing partners. In addition to speaking with the company’s representatives, you should also look to online reviews and platforms like ThomasNet for additional information.

contract-manufactured-productsProducts produced through contract manufacturing

Higher Long-Term Costs

While you will save a ton on upfront costs for equipment and workforce, there is usually a long-term financial upside to producing products in-house.  Generally, this would be represented in a “per-unit” cost, for example, $.25 per unit.

When you work with a contract manufacturer, you will likely get price breaks on your per-unit cost as you increase your order quantity, however, there will always be a number of things factored into that cost in addition to the material costs like shipping, labor, quality control, and profitability.

Once a company has paid off the fixed cost of the equipment required for in-house fabrication, this means the per-unit cost can drop considerably lower than a manufacturing partner’s price which means more profit and lower costs in the long-term.

Working With A Contract Manufacturer

Contract manufacturing is an excellent way to keep overhead low and quality high when producing custom products. No matter what it is you’re producing, chances are you can find a reliable contract manufacturing partner to reduce some of your production burdens.

While there are some cons that come with contract manufacturing, in most cases the pros heavily outweigh them. It can help businesses cut down costs, speed up the manufacturing process, and expand their business.

If you’re interested in working with a metal fabrication contract manufacturer we’d be happy to speak with you about your requirements. The Federal Group USA has been working with clients to deliver the highest-quality metal parts and components for more than forty years.

We provide scalable, customizable, and cost-effective metal fabrication services and manufacturing solutions to our customers by fulfilling their needs through world-class sourcing, engineering expertise, and adherence to internationally acclaimed manufacturing standards.

When we work with a client, our professionals are focused on improving product performance, decreasing time to market, and lowering manufacturing costs.

If you’re interested in speaking with a member of our team or requesting a quote for your product, contact us today to get started.

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