Contract manufacturing involves the production of a product by a third-party company. A contract manufacturing company is an organization which contracts with an individual firm for products or components. It's a kind of outsourcing. In other words, a contract manufacturer doing packaging operations is commonly known as a contract packer or copasser. Contract manufacturers sometimes do work similar to the packaging and labeling service. They are sometimes called "fabricators" or "manufacturers" but they aren't required to perform these services.
Contract manufacturing has numerous benefits, especially for companies looking to save on production and labor costs. Contract manufacturers usually have established relationships with suppliers, so they're able to pass on the savings to their customers. This is also the case if they work with companies who outsource production, since they may negotiate for lower rates with providers. Because contracts can be customized to suit the needs of each company involved, they are beneficial to many different types of businesses.
One of the main benefits of contract manufacturing is that the risks are limited to the parties contracting with each other. Since it's a between-and-between arrangement, there aren't any unexpected risks such as damages, defective goods, delays, or events beyond the control of the parties. There are also typically no third-party risks such as payment damages, because everything is between the two companies. With that said, there are some common pitfalls of contract manufacturing that companies should be aware of.
One way that some companies take advantage of a contract manufacturer is to provide them with too much input into how the final product should be built and packaged. When this happens, it often results in a lower quality product, since the contract manufacturer didn't consider all the aspects of the request, and the company didn't take into account the other factors that could affect the end result. If a manufacturer is willing to take on such a big part of the project, and is skilled at it, they should be able to get a great deal done. However, if the company is inexperienced or doesn't have a steady flow of work, it could end up taking too long to complete the job, and might ultimately cost more than anticipated. In addition, inexperienced contractors may also push for features that they don't really need, and could result in them pushing for too much money from the manufacturer.
Another issue that companies can run into when working with a contract manufacturer is getting the right amount of direct control over the entire production process. Contract manufacturers typically provide a large portion of the materials and the tools necessary to manufacture what you want, but not all of the steps. Because of this, you can use this direct control to your advantage by putting together an elaborate plan that includes the phases of the product, who is going to do what, and the amount of money and resources needed. A large portion of the cost of the product is in the execution of that plan, which can become problematic if you've never done it before.
Turnkey suppliers are also another thing to consider when contracting with a contract manufacturer. If the manufacturer has a large enough network, they should have no problem providing you with the products you need. However, just because they are contracted out, it doesn't mean that they don't have relationships with other firms that could save you time, effort, and money. While contract manufacturers have the ability to take care of most of the details, you could find yourself working with different people on different parts of a project that you are not very familiar with.