Contract Manufacturing - Emerging Trend in the Manufacturing Sector

What is Contract Manufacturing?

Contract manufacturing is a business process wherein a company outsources its manufacturing activities to another company called contract manufacturer or third-party manufacturer, that is skilled at manufacturing. In other words, production of goods by one company under the brand name of other company is called contract manufacturing.

In contract manufacturing, the contract manufacturer, also known as third-party manufacturing firm manufactures products as per the design and specifications of the company that has outsourced. And the company then sells the products under its brand name. Here a company can outsource entire manufacturing process or a part of the process to one or more third-part manufacturers as per its requirements. Both large OEMs with huge customer orders as well as small companies with no proper manufacturing facilities and capabilities can go for contract manufacturing process.

Challenges in Contract Manufacturing

While it is true that contract manufacturing offers several advantages such as scalability, more productivity, cost-efficiency, reduced time-to-market, innovation, etc., one must not forget various challenges associated with the contract manufacturing.

Some of the major challenges of contract manufacturing that companies must be aware of include, supply chain management, ensuring product quality, establishing proper communication channels, safeguarding intellectual property, maintaining regulatory compliance, etc.

As far as supply chain management in the contract manufacturing is concerned, it is quite difficult for a company to have full control over the operations across the supply chain. A lot of parties are present in the value chain such as manufacturers, assemblers, packers, suppliers, distributors, etc. So, managing all their parties to ensure transparent operations in the supply chain is a challenging task for any company. Supply chain mismanagement may result in disastrous outcomes for the company. So, it is imperative to effectively manage the supply chain when you outsource the manufacturing activities to a third-party firm.

We have already discussed that contract manufacturing helps to deliver top-quality products to the customer. Interestingly, product quality can both be an advantage and dis-advantage of the contract manufacturing. As manufacturing activities occur outside the brand premises, maintaining better quality cannot always be in the hands of the brand that actually markets and sells the products to customers. Poor product quality can damage the reputation of the company in the market in the long run. So, the company should perform regular quality checks at the manufacturing facilities of the contract firm that is in control of the production so as to ensure quality of the products.

Contract manufacturing may involve more than two parties in the process, since a company can outsource either all the manufacturing activities to a single third-party firm or each activity to each contract firm as per their capabilities and areas of expertise. So, maintaining proper communication by establishing robust communication channels is a great challenge for the company that outsourced its manufacturing activities. Lack of communication can largely impact the outcome of the business. So, one should establish effective communication channels while going for contract manufacturing, particularly when outsourcing to more than one third-party firms.

Intellectual property protection is one of the hurdles in the contract manufacturing. In contract manufacturing, a company that is outsourcing manufacturing activities must share its intellectual property with the third-party firm related to the products to be manufactured. So, there exists a risk of intellectual property theft or misuse by the third-party firm in the contract manufacturing. However, one should definitely share the IP with the contract manufacturer in order to get the products as per its specifications and requirements. Therefore, businesses should take extra care while outsourcing their manufacturing activities to prevent their intellectual property theft and misuse.

Compliance to regulations is another major challenge when you outsource manufacturing activities to third-party firms. The contract manufacturer which actually manufactures the products on behalf of other company might not have knowledge about the regulations put forth by regulatory authorities. So, the chances of non-compliance of regulations are high in the contract manufacturing. The brand must be accountable for the products manufactured by the other firm in contract manufacturing. Hence, the brand must ensure that third-party firms must follow all the regulatory compliances.