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Contract Manufacturing - Emerging Trend in the Manufacturing Sector

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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.

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Opportunities in the Contract Manufacturing

Contract manufacturing is one of the most popular business partnerships these days across several industries including but not limited to pharma, chemical, food, FMCG, textile, toy, automobile, packaging, electrical and electronics, etc.

Contract manufacturing is quite popular in global arena. However, the contract manufacturing market has gained momentum in India only recently. And the market is going to register significant growth in India in future, considering the low manufacturing costs and cheap availability of labour in the country. Corroborating this are report by various market research firms. According to a report by Mordor Intelligence, the Indian Contract Manufacturing Organization (CMO) market is expected to become USD 27.80 billion by 2026, with a CAGR of 17.6%. The Electronic Contract Manufacturing market is expected to reach USD 152 billion by 2025 from 23.5 billion in 2019-20, growing at a CAGR of 14 percent, says Electronic Industries Association of India (Elcina). At the same time, the global Electronic Contract Manufacturing market is projected to reach USD 1,055 billion by 2025 from USD 832 billion in 2019.

The PLI scheme which provides production-linked incentives to manufacturers is expected to boost the electronics contract manufacturing in India in a big way. Betting big on the PLI scheme, India has set an ambitious target of USD 100 billion exports of mobiles in the electronic segment in the next five years, which would be around 25% of the global mobile market.

As per the estimates of 2020, there are around 700 electronic contract manufacturing companies, including 600 domestic and 100 global firms. Contract manufacturers by acting as a crucial link between components and finished goods allow companies to overcome disruptions in the supply chain operations. With companies looking for more than one source to maintain supply chain continuity post covid, the importance of contract manufacturers is going to increase in the near future.

Advantages of Contract Manufacturing

Contract manufacturing offers several benefits that make it the most preferred choice for many companies cutting across several business verticals.

    It helps companies to increase their production levels and meet the increased customer demands in an easy and quick manner. In contract manufacturing, there is no need for the brand to expand its manufacturing capabilities to increase the production, as contract manufacturers will take care of production as per the orders of the brand. This enables the brand to increase production without spending huge amounts on the manufacturing facilities.

    As the complete manufacturing activities will be handled by the third-party contract manufacturing firm, there will be a room for the brand company to focus more on core operations and R&D. It enables them to design innovative products. When the manufacturing activities are outsourced to another firm, the chances are more for a brand to analyse the requirements, trends and preferences in the market in a timely manner and deliver better products to its customers.

    The primary reason why a many companies for contract manufacturing is the cost-effectiveness. When a company outsources their manufacturing activities to a firm in the geographical areas where labour costs are low then the cost of manufacturing will automatically come down. Less manufacturing costs will help to reduce the overall cost of the products, enabling the brand to deliver products at relatively less prices.

    Contract manufacturing helps to enhance the operational efficiency of a company. Outsourcing manufacturing processes to a third party firm would eliminate the space required to manage the inventory. In the contract manufacturing, parts manufactured by the third-party firm can be directly forwarded to a contact packager that is an expert in packaging. Following the packaging, the items can be shipped to market for sale.

    The third-party firm as a company with expertise in manufacturing activities can provide top-class quality products to the brand. This will help to improve the brand image of the company in the market with better quality products. As the brand company will have ample amount of time for R&D, the possibility of delivering of innovative products with premium quality is more in the contract manufacturing.

    Contract manufacturing not only reduces the manufacturing cost of the product but also minimizes the time to market. When the brand outsources different activities like manufacturing, assembling, packaging, distributing, etc., the time required to release the products into the market will be reduced. This will help to have an edge over the competitors in the industry in terms of faster release of the products.

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.

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How SolutionBuggy Helps You?

Conventionally, there is a belief that contract manufacturing is only for the OEMs. But, even small and medium scale companies can also go for the contract manufacturing and reap its benefits. However, while entering into a contract manufacturing agreement with contract manufacturers, businesses should consider a lot of factors.

When outsourcing the manufacturing activities to a third-party firm a company should be clear about its requirements in terms of product quality, quantity, delivery time, etc. It should also be clearly put forward the terms and conditions of intellectual property and its usage. After narrowing down on their requirements, one should go for selecting the manufacturer based on various factors such their experience in manufacturing, location, costs, etc.

If you are planning to collaborate with contract manufacturers related to your manufacturing activities, then kindly register with SolutionBuggy. Our manufacturing consultant can connect you with number of contract manufacturers and help you in selecting the right one as per your requirements.

We also help entrepreneurs who are looking forward to set up contract manufacturing plant and manufacture on behalf of other brands. We help entrepreneurs easily start their contract manufacturing business by undertaking complete execution of the project.

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