Contract manufacturing has been around for many decades. It seems that its popularity has skyrocketed in recent years, as more and more businesses opt for this way of manufacturing their products. As Fortune Business Insight reports, “the global Contract Manufacturing Organization (CMO) market size was valued at USD 92.42 billion in 2018 and is projected to reach USD 188.07 billion by 2026.”
You may wonder what leads so many business owners to embrace this type of manufacturing. In this article, you’ll learn all about the benefits of this process, but firstly:
What Is Contract Manufacturing?
Contract manufacturing is the practice of a business hiring another company to manufacture its products. The hiring company usually provides the product’s formula and the contractor will make a component, a part, or the whole product.
There are many reasons for a firm to employ contract manufacturers. Most of the time, businesses employ contractors as they face issues with production or supply chain management. But these are not the only reasons. The advantages are plenty and will help your enterprise optimize its operations.
Advantages of Contract Manufacturing
Establishing a production line from scratch is a very grinding task and needs a large budget. Even when all your expensive machinery is set, you’ll need trained personnel to operate them. This of course will require spending time and money to train as well. You will also need to pay taxes for those aspects, purchase raw materials, and rent warehouses to store them and maintain them in sellable conditions. You can avoid all this by hiring a contractor to manufacture your products. Especially if you order just enough items, your business won’t need a large warehouse to store your products.
Perfect for a Start-up or an SMB
The most common scenario for a Start-up or an SMB is that they have a limited amount of money to operate. Furthermore, when entering a new market, producing a large volume of products contains high risk, so mass production isn’t an option for them.
One of the great advantages of contract manufacturing is that you don’t need great capital to start your operations. A very small budget can be adequate for your contract manufacturer to produce enough items so you can start selling them and making a profit. As your business progresses and sales rates are growing, you can increase the number of products produces, thus maximizing revenue.
Accurate and On-Time
As your business grows, so will the number of products you’ll need your contractor to manufacture. Maybe the complexity of your products will be increased too, making the process more time-consuming and intricate.
An expert contract manufacturer can accurately calculate the time needed for your stock to be ready and delivered to you. What is more, if contractors delay orders, they will lose their clients’ trust and will damage their reputation. So being on time is of utmost importance for them as well, to maintain a viable enterprise.
Raw materials can be extremely costly, particularly when shortages occur. Most contract manufacturers have a wide client base and acquire raw materials for better prices by economies of scale. The way scalability works is that the more raw materials or components or products you buy, the more their price per item decreases.
Therefore, if your contractor has a large clientele, you can expect to pay less for your products, as their manufacturing cost will be minimized.
One of the best aspects of contract manufacturing is the producers’ expertise in the field. If a contractor operates his company for many years, it’s highly likely that they’ve gained valuable knowledge and skills on how to create products better and more efficiently.
If your business is new to the manufacturing world, it would be wiser to trust an expert with the manufacturing process so as to be certain that your products will be of high quality!
Lastly, you could minimize your expenses by hiring a manufacturer from a foreign country with lower wages than the one you live in. This can also be an opportunity for your products to enter their domestic market more easily. Goods that are sold in the countries they are manufactured in, tend to fare well in their domestic markets.
It might seem that this manufacturing practice doesn’t have any obstacles. However, there are many things to keep in mind before you decide to implement this way of manufacturing in your business.
When you give away your formula to a contract manufacturer, it does not mean that you’ll wait idly for them to prepare and deliver them to your establishments. You have to be on top of the manufacturing process, overseeing it and regularly getting updates about its status. You will manage the work happening as well as pay for the storage facilities that house your products.
Another thing you need to keep in mind is that you have to be aware of your products’ quantity, their transfer from one location to another, and their exact place inside the warehouse. If your contract manufacturer is in a foreign country, take into consideration the extra cost needed for customs and transportation.
All those activities need to be paid for by your business, and keeping everything under control can be a tiresome and hectic task. A cloud inventory management system like Megaventory could be a solution to this problem. Megaventory can keep track of your products’ numbers, the warehouse they are in, and their exact location in them. The software will be your all-knowing personal assistant, simplifying all the tedious and time-consuming tasks mentioned above.
Seeing a great deal of benefits contract manufacturing can provide to a business, it’s no wonder that its popularity has escalated so much nowadays. For a new business with a low budget, it is the most advantageous way to start its operations.
If you’re considering hiring a contractor, you should do thorough research to find the one that fits your business’s needs. Lastly, before making up your mind consider all the disadvantages mentioned and the extra expenses you might need to pay to manufacture and receive your goods.
Zoi Vasileiou works as a Marketing Assistant for Megaventory the online inventory management system that can help businesses synchronize stock and manage purchases and sales over multiple stores. She loves content creation, keeping up with the latest marketing updates, and always enhancing her skills.