Contract Manufacturing 101: A Beginner’s Guide

man manufacturing product

Some of the world’s most successful companies rely on outsourcing their manufacturing to deliver quality items to consumers cost-effectively and quickly. Companies such as Apple, IBM, Cisco Systems, Wal-Mart, and countless others opt to outsource manufacturing. In other words, they rely on contract manufacturing. But what exactly is contract manufacturing, and why do so many companies embrace it? Read on for the definitive beginner’s guide to contract manufacturing. 

What is Contract Manufacturing?

Contract manufacturing is a common practice wherein one company, often referred to as the original equipment manufacturer (OEM), hires another company to make its products. Although outsourcing manufacturing to Asia has long been a common practice, today, more and more companies based in the U.S. are choosing near-shore manufacturing in Mexico.  

Companies may hire a contract manufacturer to provide services ranging from private label manufacturing to individual component manufacturing, assembly, or end-to-end manufacturing.

Why Do Companies Use Contract Manufacturing?

Contract manufacturing is successful for U.S.-based companies because, as its name implies, a contract ensures that both the OEM and the manufacturing partner get what it needs from the collaboration. 

Simple contract manufacturing agreements may only involve renting a manufacturing facility from another company. Other agreements may involve the contract partner taking over nearly all of the manufacturing responsibilities, including providing the facility, securing the labor, packaging, and shipping the items.

In a contract manufacturing partnership, the OEM reaps benefits, including reduced labor costs, ramping up current manufacturing capabilities, the opportunity to bring new products to market, expediting speed-to-market, and avoiding significant investments in employees, facilities, and equipment. The contract manufacturing company benefits through payment for services.

What is Involved in a Contract Manufacturing Agreement?

The agreement will confirm the chosen facility for manufacturing. In addition, it will detail who is responsible for sourcing and purchasing the materials needed for production.  Moreover,  you will need to agree with your manufacturing partner on very specific details, including quality expectations, delivery dates, the volume of products, and who will be responsible for testing and research. Each contract will be specific to the deal negotiated between the OEM and the manufacturing partner.

How Do I Find a Contract Manufacturer? 

There are several avenues for finding a manufacturing partner. Trade shows, manufacturing consultancy companies, your personal network, and the internet can all introduce you to manufacturing partners. 

However, you’ll need to conduct plenty of research and significant due diligence to confirm that any partner you’re considering can provide quality products safely and timely.  For that reason, it’s often best to work with a contract manufacturing partner with lots of experience, and a portfolio of past or current clients in your industry. 

Because certain products, such as electronics and medical devices,  are subjected to extreme oversight and regulations, it is best to look for a manufacturing partner that specializes in these highly intricate products.  

You’ll also want to carefully consider where you want your products to be manufactured. Although manufacturing in China was once the cheapest option, due to rising global tensions, supply chain issues resulting in delays, and distance from the manufacturing facilities, many companies are now opting for nearshore manufacturing in Mexico. After all, Mexico is much closer and does not require overseas shipping or travel. This proximity gives OEMs greater oversight and faster access to the facility.  

Is Outsourcing Manufacturing Right for You?

Outsourcing manufacturing is good enough for some of the world’s most innovative companies. So, it’s likely a cost-effective way to grow your business while producing a high-quality product. Just be sure to do your homework (and then do more for good measure)  for the best chance to forge an invaluable contract manufacturing partnership.

Coastline International has been a trusted Contract Manufacturing Partner since 1982. They hold themselves to the highest standards for quality, service, and delivery. 

Sarah Ross

Sarah Ross