Contract manufacturing is when a small business hires another company to produce its products. It enables small businessmen to start selling their products without having to obtain the large amount of capital required to build and run a factory.

Learn more about contract manufacturing and its advantages and disadvantages for small businesses.

What Is Contract Manufacturing?

With the popularity of shows like Shark Tank and online marketplaces such as Amazon and eBay. An entrepreneur can dream up just about anything, have it manufactured relatively easily. He then begin selling it to the public, thanks to contract manufacturers. These companies agree to manufacture a certain number of products according to the specifications given to them by the hiring company.

A contract manufacturer or may be located overseas. The hiring company should look for a contract manufacturer who has expertise in the type of product the company wants to make. That expertise can take the form of more than just manufacturing. The company may be able to offer help with chemical or engineering processes or packaging.

Here are some other things to look for in contract manufacturing in Mexico:

• highly reputed in the market
• financially sound
• A clean, well managed facility
• ISO Certified Manufacturing Quality Standards
• Dropshipping capabilities to ship products directly to customers if that’s something the business needs
• the ability of a product to meet production demand

Alternate names: Outsource manufacturing, outsourcing.

How Does Contract Manufacturing Work?

The hiring company usually provides a design or formula for the contract manufacturer to replicate or improve. The hiring company typically focuses on marketing and selling the products.

For example, a small business may want to sell specialty cleaning products using a formula developed by the owner. The small business can hire a contract manufacturer to manufacture and package the cleaner according to its specifications. The business would then be freed to focus on finding customers for its products and handling sales from a central warehouse.

If the manufacturer is able to act as a drop shipper—handling a supply of products in a warehouse and sending orders in the direction of the business. The business development Mexico will basically be a marketer of the developed products. Alternatively, the manufacturer may be able to ship products only within a specified geographic area.

Advantages of Contract Manufacturing

Businesses choose contract manufacturing for a few primary reasons. That make it easier and less expensive to bring all new products to market and distribute them widely.
The biggest cost advantage of using contract manufacturing is not having to build a production facility and staffing it with workers and managers. In addition to that obvious benefit, companies can save money by hiring a manufacturer in a country with a low salary. The location of the manufacturing plant can offer savings in energy, overhead and raw material costs as well as tax savings.

Contract manufacturing frees up the hiring firm’s people to focus on their core strengths of marketing and possibly sales. If the owner’s background is in those areas, they may be able to hire fewer people to help them.

The company may be able to easily offer its products in the country in which they are made. It can also get entry in the markets of neighboring countries.

Disadvantages of Contract Manufacturing

Perhaps the biggest disadvantage of contract manufacturing is the lack of direct control over the quality of the final product. The hiring company cannot manage what happens on a day to day basis, and may not get what it wants on a consistent basis.

A business that hires a contract manufacturer should keep in mind that it will not be the only customer. It may not be as important to the manufacturer as other, larger customers.

The hiring company also takes the risk of appropriating its ideas. Some unethical contract manufacturers have been known to pass product ideas from one customer to another preferred customer. To produce their own similar product with only one or two minor variations.

Business owners should hire an attorney to obtain a strong legal contract that will protect against any such behavior.

When dealing with a foreign manufacturer, business owners should be careful to identify which country’s legal system the contract is governed by.

If a business is working with a manufacturer in another country, cultural and language differences may also be considered. In addition, potential political and economic risks must be weighed when choosing a manufacturer.

Key Takeaways

• Contract manufacturing to produce the products of a business, perhaps in the U.S. It is the practice of hiring another company outside the U.S.
• It enables small businessmen to sell their products without having to build and run a factory.
• The hiring company usually provides a design or formula for the contract manufacturer to replicate or improve.
• The hiring company typically focuses on marketing and selling the products.