Understanding Contract Manufacturing
A business unit with a proficient design but lacking in key manufacturing skills or bandwidth to handle large consignments might seek to enter into contract with a manufacturer that is skilled at the manufacturing process. A manufacturer may outsource one or more tasks of the production process to a third party. From designing to the end product, any scaled-down process that is outsourced would be bound by Contract Manufacturing. In simple words, production of goods by one firm under the label/brand of other, mutually benefiting each other.
Process of a Contract
The company before getting into the contract sets up its requirement in terms of quality, quantity, delivery and also establishes guidelines or even inspection. They state their requirements and then select a manufacturer based on the price quoted, that meets the requirements. At times, one manufacturer can provide most of the services like a Tooling and Die manufacturer would be well equipped to broach, grind, forge and even doing aluminium die cast which a gear manufacturer requires.
- It is cost effective to a business, enables them to increase their production capacity, also acquire new orders which the business would not be equipped to manufacture.
- Decreased labour cost-if the manufacturer belongs to a lower labour cost region, then cost of production reduces drastically.
- Operational advantages, when the demand for product increases or if the product has seasonal demand, the business can outsource production only for the specific period resulting in cost saving.
- Professional expertisewill amplify in production of flawless components to improve the current product or to enhance quality and also reduce defective products. Like a copacker/contract packager or even CNC machining companies that are mostly used for the processing of complex components and their assembly.
- Reduced inventory costs, outsourcing the processes would eliminate inventory space necessity. For example, manufactured parts can be forwarded to a copacker/ contact packager, an expertise in packaging and directly shipped to market.
- Reduced material costs, a manufacturer might produce the same or similar products for various companies resulting in economies of scale due to bulk purchase.
- Shipping, outsourcing the manufacturer from a low labour cost region can involve shipping costs or even damages to products whilst shipping which might not turn out to be economical.
- Risks, distant location can cause a barrier in communication, day to day control or quality control. Manufacturers having clients of similar field can cause issues of having competitors as clients which might also result in losing commercial or technical information.
- Complexities, having multiple CM’s can make a business model inefficient and complex if one of the CM fails to abide the delivery time. This would result in delay of the entire production processes.
- Loss of intellectual property, giving away the core formula to a CM can result in duplication of the products affecting the business.
Contract manufacturing comes with its own pros and cons, but many Medium scale companies are increasingly adopting it as it allows them to be more nimble and scale quicker.
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