Contract Manufacturing Services vs. Manufacturing Services

Contract Manufacturing Services vs. Manufacturing Services

Companies often turn to partner manufacturers to keep up with tight high-volume production schedules. The outsourced partner typically works on a contractual basis under legally binding terms that determine the scope of work, timing, fees, and copyright, among other issues.

Also known as outsourcing, it’s a common practice in various industries by companies of all sizes for the same reason: to save money on production costs comprised of labor, materials, and investment in equipment.

With proper quality control, the products manufactured by partners should ideally meet companies’ own standards. These partners come in two different types, including freelance DFM services and contract manufacturing services.

Manufacturing Services

When one company hires another to function as an external factory, the former covers the cost for using the latter’s facility and the resources necessary to complete the required manufacturing process. The company does not just rent the physical building and the equipment, but it also pays for the labor that goes into making products.

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Large companies outsource manufacturing services to increase production capacity or get higher profitability than cheaper labor costs overseas. For smaller businesses, the same method enables them to quickly get their products to store shelves even when they don’t have manufacturing facilities of their own, eliminating the need to make large investments during the start-up phase.

Since the venture is essentially like hiring someone to build something specific, the company should seek out a factory partner with expertise in the type of products to be manufactured. For example, home appliances, cosmetics, foods, computers, and so on. There are some criteria to look for in a manufacturing service provider, whether local or overseas:

  • ISO-certified manufacturing quality standard
  • Financially healthy
  • Large scale production capability
  • Secure facility with good safety standard

Dropshipping capability must be taken into account if the company wants to send the finished products directly to buyers. This is especially important if the partner is located overseas and intended for an international market. Instead of sending the product back and forth from the factory to the local warehouse then back to overseas buyers, it would be much quicker and cheaper to let the manufacturing service handle the shipping.

How Manufacturing Services Works

Once the company finds a manufacturing service with the right expertise and specializations, it provides the product design for the manufacturer to replicate to create a product. For example, a small business wants to sell mechanical toys made of wood and metal materials. The business owner hires a direct manufacturing service to mass-produce it with the same specification.

Now that the manufacturing process is already handled by a third-party company (for a fee), the business can focus on a marketing campaign and handling sales. If the manufacturing service also does dropshipping, the hiring company can act solely as the toy product’s owner and marketer. This way, the business doesn’t even need a warehouse, to begin with. It arguably is the most practical option, but such a turnkey service costs more money.

Why Hire a Manufacturing Service

The primary reason to work with a design for manufacturability service is the ease of getting new products to the market. With the dropshipping benefit, the hiring company is relieved from the logistical requirements of storing and distributing the products.

Hiring a manufacturing service to do almost the entire production process (except for the designing part) and distribution means the company has to spend quite a lot of money. Yet, the total amount would still be a mere fraction of the investment otherwise required to build a production facility and staff it with professionals. There is no need to build a warehouse and all the overheads that may come with it either.

A company can further increase the profit margin by hiring a manufacturing service located in a low-wage country. Moreover, the company can more easily introduce the product overseas without worrying too much about international shipping costs that may significantly increase the price.

Disadvantages

As mentioned earlier, proper quality control makes sure that any product manufactured meets the hiring companies’ standard, although this can be tricky. Even if the company and the factory partner are located in the same country, maintaining quality control is impossible.

The company does not always have direct access to the manufacturing process or how it’s run daily for various reasons, such as keeping trade secrets or concealing proprietary technology in the production line. There is always a chance that the hiring company gets inconsistent results, but a preventative workaround could be put in place beforehand in the contract.

A design for additive manufacturing service provider offers their expertise to multiple companies and is very rarely working with just one business at any given time. If you hire a factory partner, keep in mind that you might not be the only customer. And just like all other for-profit entities, every manufacturing service has its own priority. A high-profile client can boost the provider’s portfolio.

Some “unethical” manufacturing services might go as far as giving away product ideas legally owned by small companies to favored clients. The worst-case scenario is they manufacture the products with some slight changes in design and claim ownership.

A company should hire an attorney to write a robust legal contract or non-disclosure agreement to prevent such behavior. When working with a manufacturing service located overseas, a company must identify the appropriate legal system that governs the partner’s business operation.

Contract Manufacturing Service

Another type of factory partner is known as a contract manufacturer. Companies hire either manufacturing services or contract manufacturers to save money on production costs or use the partner’s specialized expertise to improve product quality. They differ mainly in the scope of work.

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Manufacturing services provide a turnkey process. The partner handles nearly the entirety of the production, from obtaining raw materials to delivering finished products built to match the exact design and specifications determined by the hiring company. On the other hand, contract manufacturers offer their services in a much more flexible manner.

A company may choose to hire a contract manufacturer only to fabricate specific components for a product, assist with research and development, suggest design improvements, build a prototype, assemble a product, handle product warehousing or distribution, etc.

Depending on the type of service provided, a contract manufacturer is not always required to deliver a finished product. For example, if a small business has an idea, it can hire an industrial design service to suggest an improvement or make a prototype to pitch to investors. When the business owner acquires the needed funds, then it can move on to mass production.

Why Hire a Contract Manufacturer

Flexibility is the key feature. When a product is comprised of multiple components, a company may want to outsource the production of individual parts to some highly specialized contract manufacturers. The point is to make sure that every piece is built to the highest possible standard.

Judging from the scope of work, turnkey service is a more significant entity than a contract manufacturer. When it comes to outsourcing, a larger company is often presumed to be better. It’s common to assume that a bigger contractor with a higher price tag makes higher quality products, but this is a misconception. Price should be determined by the quality and production speed rather than who does the manufacturing.

While specialization matters, exclusivity does not. In the context of outsourcing, multiple companies may hire the same contract manufacturer to provide the same service. For example, two or more competing laptop brands may end up installing cameras made by one contract manufacturer.

Quality control is also much more manageable. With turnkey service, a company is handing over the entire production process to a factory partner. Sometimes the distribution and shipping are included as well. It is practical, time-saving, and cost-efficient, but this may also mean an absence of strict quality control. The hiring company doesn’t even have a meaningful oversight on how every product is packaged and shipped.

Cad Crowd’s Manufacturing Connections Can Help

At Cad Crowd, we have a network of some of the best manufacturing services on the market. If you’re looking to get your product manufactured, or if you’re at an earlier stage, let us help. Find out how it works today.