What is contract manufacturing? examples and types (2023)

Contract manufacturing allows companies that may not have the resources or funds to invest in heavy machinery to work with other companies to fulfill orders.

Let's take a closer look at the types of contract manufacturing and some examples of how it works!

What is make-to-order?

Contract manufacturing is when one company enters into an agreement with another to manufacture components or products for a specific period of time. This is shop floor outsourcing and, like employee outsourcing, allows companies to compete in areas previously unattainable.

It is a business arrangement whereby one company pays another to provide the components needed to assemble finished products or even to manufacture the entire product. Contactors are third party suppliers and most only work as subcontractors or sell their products to other companies.

Typically, a company in need of a contract manufacturer will approach one with a design and request a quote for processes, labor, tooling and materials. If the price of doing business is below the cost of production, then it's good to move on.

For this relationship to work, there must be transparency and collaboration between the two parties.project manageris an online work and project management software that allows users to control time and costs. You can create manufacturing schedules, share them with contract manufacturers, and track progress and costs in real time. Get started for free today.

Types of make-to-order

There are many different types ofcontract managementAgreements between companies entering into manufacturing contracts. However, most fall into these four categories:

private label manufacturing

This type of contract manufacturing occurs when the contractor delivers a finished product as specified by the contracting company. This product is shipped to an inventory warehouse or direct to the store. Sometimes these elements are the product of multiple components. In this case, the components will be assembled before shipment. This is an ideal relationship for companies that aclear view of the productbut would like to outsource the entire production.

Production of individual components

Here, make-to-order is only responsible for producing one component that becomes part of a larger and more complicated end product. You are solely responsible for the manufacture of this component, one of many components developed during theproduct developmentProcedure. Other contracted companies have to assemble this component into the finished product. This is obviously a solution for companies that have some in-house manufacturing capability but are unable to manufacture all the required components for their end product.

Related: 10 free Excel templates for manufacturing

Subcontracting of work or services

The contract manufacturer is only involved in part of the larger process and acts more as asubcontractorsin connection with a general contractor. They are hired by a general contractor who needs their specialized services. This is used in the manufacture of very complex products, and contract manufacturers can help by offering lower costs and faster production cycles.

End-to-End Manufacturing

Similar to private label manufacturing, the product or component is completely outsourced. In this case, however, the contract manufacturer is more involved in the design of the product and provides feedback to theproduct manager. Therefore, the company that contracts the manufacturer is not solely responsible for the specifications, and the contract manufacturer does much of the product design work. It's ideal for businesses that want to do something fast, fast, and cheap, but with quality.

Examples of made-to-order production

Starbucks does not grow coffee and does not have plantations on which to grow, harvest and dry the coffee beans. Shesubcontractall this work to focus on serving its customers around the world. Here are some more examples of contract manufacturing in different industries:

manufacturing industry

Heating, air conditioning, and ventilation (HVAC) companies are required to install forced ventilation systems in homes and businesses. Sheet metal ventilation systems are required to circulate this cold air. Depending on company size and facility, some companies build them in-house, but often turn to outside sheet metal fabricators. HVAC contractors provide the sheet metal fabricator with the necessary specifications, and once the ventilation components are ready, HVAC contractors attach them to the HVAC system in the home or business.

pharmaceutical industry

In the pharmaceutical industry, there are many opportunities for contract manufacturers to work with drug manufacturers. For example, drug development can be very expensive and is often outsourced. Once a drug has been developed, companies often contract out the manufacturing and commercial production of the drug. Due to inherent industry regulations, documenting compliance with FDA regulatory requirements may be outsourced. By providing formal stability, scaling and registration batches can be sent to contractors.

Marketing industry

When an agency or marketing department is working on an advertising campaign, much of the work can be done in-house, e.g. E.g. writing, editing, design etc. But if they are producing a commercial, website or billboard, it is unlikely that they will have the resources or skills to create any of these creatives. Contract producers can be video producers, web designers, or sign painters, all of whom can hire the marketing team.

Benefits of Made-to-Order

Contract manufacturing can help companies that don't have the people, resources, or expertise to make the products the company wants to make, but it can also benefit those who have many or even all of these skills. For example, outsourcing work can result in high-quality products because the contract manufacturer will typically only do the work you need and have the tools and experience to deliver better and faster than you.

This can also cause itreduced costs. Rather than investing in the equipment, training, and more needed to manufacture the component or product, you can pay another company to do it for you at a price that is likely less than paying the entire cost would take the job. This helps you keep overheads low and improve return on investment (ROI), not to mention savings in resources and labor.

Using a contract manufacturer can also result in faster time to market. This is because contract manufacturers have the equipment, skills, and people who know how to quickly manufacture your component or product. In addition, contract manufacturing helps with scalability. Contract manufacturers allow you to negotiate prices for raw materials in bulk and keep costs low as production increases.

It is also a winning combination for startups andsmall businessThey don't have the deep pockets that others on the market might have. This offers them a strategy to gain a foothold in the market and compete with larger competitors without investing all their resources in it. This is especially true for end-to-end services that handle everything from start to finish. Also, contract manufacturers are more likely to provide you with accurate timelines and cost estimates.

Disadvantages of contract manufacturing

That's not to say there aren't downsides to contract manufacturing. Having a quality contract manufacturer is great if you can find one. You need to do your research and make sure you are outsourcing to a reputable company. Sometimes it is difficult to find a contract manufacturer that fits your capacity, capacity and project needs.

In that sense, once you contract with a third-party manufacturer, you lose control to a large extent. That doesn't necessarily have to be a bad thing, but it does mean that the skills, equipment, and experience required to create the component or end product are critical skills that you won't have. Not only does this hamper your ability to bring work in-house, but if there is a problem with production, you won't be able to figure out how to fix it.

Not only that, you are also risking your intellectual property. Your component or product and everything needed to make it is no longer in your hands but passes through dozens or more people who are not under your control. This can result in your company secrets being exposed. However, this depends on the reliability of your contract manufacturer, which underscores the importance of our first point, which is finding the right company to work with. It is also important to make solidsProject documentationto track your budget, schedule and project plan.

Managers use ProjectManager for contract manufacturing

project manageris a cloud-based order and project management software that gives you transparency about the manufacturing process. We'll help you track progress and performance so you can quickly identify an issue and quickly resolve it.

Create Gantt plans for contract manufacturers

Organize all your tasks, resources, costs and more inour interactive Gantt chart.You can link dependencies, set milestones and even filter by critical paths. Set a baseline and you can monitor progress against your plan in real time. It's also easy to share, so there's a source of truth.

Monitor real-time progress and performance on the dashboard

However, the Gantt chart tracks progressour dashboard in real timegives you six metrics to monitor time, cost, workload and more. No configuration required like inferior software. It's ready when you are, automatically collecting and calculating real-time data and displaying the results in easy-to-read graphs and charts.

Drill down into data with one-click reports

If you need more than a general view of the output,then generate reportsimmediately. You can view Status Reports and Portfolio Reports when working on more than one AssemblyLine. There are workload reports, timesheets and more. Everything can be filtered to show only what you need to see and then shared to keep management up to date.

project manageris award-winning software that connects hybrid teams so they can work better together. Whether these teams are under one roof or spread across the world, you're in constant touch with them and stay connected with real-time data to help you make informed decisions.Get started with ProjectManager for free today.

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What is contract manufacturing examples? ›

Examples include commuter rail lines, rubber products, textiles, heavy machinery, and plastic injection molding. Industrial contract manufacturers can also produce some industrial electronic items.

What are the different types of contract manufacturing? ›

The types of contract manufacturing arrangements are component manufacturing, private label manufacturing, labor subcontracting, and contract manufacturing for the use of equipment and facilities.

What are the three forms of contract manufacturing? ›

This category includes private label manufacturing, contracts for manufacturing individual components or parts, labor or service subcontracting, and end-to-end service contracts.

Who uses contract manufacturing? ›

Many industries use this process, especially the aerospace, defense, computer, semiconductor, energy, medical, food manufacturing, personal care, packaging, and automotive fields. Some types of contract manufacturing include CNC machining, complex assembly, aluminum die casting, grinding, broaching, gears, and forging.

What are 2 examples of manufacturing? ›

Examples of manufacturing include automotive companies, bakeries, shoemakers and tailors, as they all create products, rather than providing services. However, for example, logging or mining are not manufacturing, as they do not change goods into new products.

What are the 4 types of contracts? ›

Federal government contracts are commonly divided into two main types, fixed-price and cost-reimbursement. Other contract types include incentive contracts, time-and-materials, labor-hour contracts, indefinite-delivery contracts, and letter contracts.

What are the 4 classifications of contracts? ›

Contracts may be classified according to their performances as (i) Unilateral contract (ii) Bilateral contract (iii) Executed contract (iv) Executory contract.

What are the 3 common types of contracts used in business? ›

Understanding The Different Types of Business Contracts
  • General business contracts.
  • Employment contracts.
  • Sales-related contracts.

What is another name for contract manufacturing? ›

Other terms for contract manufacturing include international outsourcing and international subcontracting. The company that needs its products manufactured will provide the manufacturing company with the specifications for the product.

What are 5 benefits of contract manufacturing? ›

Five Benefits of Working With a Contract Manufacturer
  • Improved Production Efficiencies.
  • Access to Industry Experts.
  • Consistent, Controlled Quality.
  • Engineering Expertise.
  • Lower Overhead Costs.
Jul 9, 2021

Who is the largest contract manufacturer in the world? ›

Top 50 contract manufacturers ranked
  • 1 Hon Hai Precision Industry (Foxconn) — Tucheng City, Taiwan.
  • 2 Flextronics International Ltd. — ...
  • 3 Jabil Circuit — St. ...
  • 4 Celestica — Toronto, Canada.
  • 5 Sanmina-SCI — San Jose, CA.
  • 6 New Kinpo Group — Taipei, Taiwan.
  • 7 Shenzhen Kaifa Technology — Shenzhen, China.

What is a real life example of contract manufacturing? ›

An important real example of contract manufacturing is Starbucks that does not have any coffee farms of its own. It outsources all its main ingredients to serve its customers in different parts of the world.

What are the two basic contract types? ›

There are two fundamental types of contracts: Fixed-price and cost-reimbursement. Performance risk is higher for the U.S. Government under a firm fixed-price contract, while cost-reimbursable contracts place a higher cost risk on the U.S. Government.

What are the two types of contracts? ›

Unilateral and Bilateral Contracts

Bilateral contracts, on the other hand, involve both parties agreeing to exchange items or services of value. These are also known as two-sided contracts and are the kind of contract that is most commonly encountered.

What is contract manufacturing in simple terms? ›

Contract manufacturing is when one company enters into an agreement with another to produce components or products over a specific timeframe. This is outsourcing on a manufacturing level, and like outsourcing employees, it lets companies compete in areas that were previously unreachable.

What are contract manufacturing companies? ›

A contract manufacturer (“CM”) is a manufacturer that enters into a contract with a firm to produce components or products for that firm . It is a form of outsourcing. In a contract manufacturing business model, the hiring firm approaches the contract manufacturer with a design or formula.

What are some examples of contract work? ›

Common positions for contract employees
  • Web designer.
  • Graphic designer.
  • Writer.
  • Editor.
  • Online teacher.
  • Web developer.
  • Blogger.
  • Social media manager.
Jul 26, 2021


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