Considerations to make before you start contract manufacturing
Are you dreaming of producing you own product or maybe you just think that you can produce an existing product cheaper yourself. If this is the case maybe contract manufacturing is a way to go. Getting other to produce your products is also for small businesses and it can be relatively cheap to get your products produced in for example Asia, but you need to be aware though there are many pitfalls to look out for.
What is contract manufacturing?
Contract manufacturing (outsourcing) means that your company hires another company to produce or assemble their product.
When using contract manufacturing your company will still handle the following tasks:
- Product development.
- Sale activities.
The company that you hire for the contract manufacturing will handle the actual production. The greatest cost benefit will typically be in countries like China or India.
What is the job of the contract manufacture?
The contract manufacture produces or assembles the product in agreement with your company. Your company has made the product specifications. The contractor will then carry out the work according to the specifications you made. The contract manufacturer will then provide labor and buy the necessary raw materials and parts.
If your company has any know-how about producing the product it can be a good idea to transmit this to the contract manufacturer, as this will easy his work and help the learning process.
What are the benefits of contract production?
The main benefits of choosing contract manufacturing are:
- You can start your production without a large investments and thereby reduce your financial risk.
- You can “skip” any trade barriers for the foreign market. This way contract manufacturing can be a part of your international strategy.
- You can focus on other value chain activities for example development, marketing and sales activities.
- In times of decreased demand you have the possibility to quickly reduce production.
- You can stop the production more or less from day to day without great loss and cost.
What are the disadvantages of contract production?
- You do not have complete control over the production process and thereby the quality of your product.
- You need time to specify you product, its features and quality.
- Poor working conditions for the employee’s of the contract manufacturer can be associated with you.
- If you don’t have a patent, the contractor can sell your product to a competitor or turn into a competitor.
- Disagreements can be costly in lawsuits.
- To gain any financial value you will properly need to order a large amount.
What should you consider before doing contract manufacturing?
There are a lot of things to consider before hiring a contractor to do your production.
What is your goal?
Getting your products produced in for example China may be cheap but there is a lot of risk and uncertainty involved in it. Therefore it is maybe worth asking yourself if you can achieve your goal in another way.
What are the resources of your contract manufacture?
You need to get some good insights of the resources of your contractor:
- Does he have experience in your line of production?
- Does he have excess capacity to handle fluctuations in your production?
- How fast can you get new products produced and shipped?
Is the contractor financially stable?
If you contractor goes bankrupt it can have huge consequences for you. You may have paid some money in advance for the production of your products, money that you properly will never see again.
Do you have good product specifications?
Before getting anything produced it is very important to have specified exactly what the functionality and look and feel of your product is. I is maybe an idea to send the contractor a demo of your product to show exactly what you expect.
What quality can be delivered?
You need to make sure that your contractor can make the products you want in the quality that you want. A way to do this is to get the contract manufacture to make you a demo copy and send it to you. You can then examine the quality and see if it is what you expected. This will properly cost you a little more but it is well worth the money as you will not end up with a pile of products that you can’t sell.
What are the TOTAL costs.
Before going into an agreement with a contractor it is a must to make a full calculation of all the cost associated with getting your products produced. Here are some examples:
- Demo copy.
- Insurance of your products when shipped.
What about Payment vs. delivery?
Nobody wants to pay for something that they do not get. Therefore you need to find some delivery and payment terms that both you and the manufacture can accept.
When you choose not to do the production yourself there is a broad range of risks. For example, there may be a chance that your contractor will turn into a competitor or maybe sell your products to one of your competitors?
Do you need a patent?
A way to protect yourself in regards to getting your product sold to a competitor or even for the manufacture to turn into a competitor, is to get at patent on your product. That is if this is possible. For some common products you will properly not have the chance to do so. This would be the case with Karate Suits, wooden toys etc.
If you are contracting overseas you not only need to consider the language barriers but also the cultural differences. It is important that there is a mutual trust and respect between you and your partner, and that you communicate openly and well.
Ask for references.
A way to get insights to the experience of your contractor could be to ask them if they have produced for other (western) companies. If these companies are not in direct competition with you they may be helpful with their opinion on the manufacture.
All in all you need to sum up the above and ask yourself if getting your products produced by a contractor offers the benefits that you expect.
A few links to find contract manufacture.
What is your experience with contract production?
Do you have any experience with contract manufacturing, or have you ever thought of outsourcing your production? Please leave a comment.
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