Six Potential Risks of Outsource Contract Manufacturing

Contract manufacturing is the production of a product by means of an agreement between an organization and a contract manufacturing company. It can be a very generic term for many different types of production processes and strategies, but in this article I will narrow it down to what it specifically entails. In my opinion, it is the bridge between generic and mass production. Let's explore the definition.

Contract manufacturing is the production of a product by means of an agreement between a manufacturer and a contract manufacturing company. In this case, the contract manufacturing company is actually a third party, sometimes a joint venture partner. It's a type of outsourcing where the manufacturers themselves don't produce the raw materials and products, but instead they provide the tools, equipment and manufacturing know-how. A contract manufacturer doing packaging operations on an organization is known as a contract packer or copier.

When an organization has a large-scale manufacturing operation and needs help in the production process, they typically outsource the work to a contract manufacturer. The manufacturers they choose depend on the size of the operation and what the manufacturer knows about the particular product line the company specializes in. For example, if they only make chairs, they might hire a small, mid-range or large contract manufacturer. Typically, they have a standard set of qualifications and experience in the type of products they are producing.

Since this is a specialized area with specialized people, there are some risks associated with this outsourcing of responsibility. One of the main risks is that the contract manufacturers are not experienced enough in producing large quantities of the product. They might know what the product ideas are, but they don't have the knowledge to produce large quantities in volume. They also may not have the appropriate infrastructure in place to store, transport, handle, package and handle the large volumes of materials. Most often, they are paid on a project-by-project basis and they work on small production runs using a specified number of units.

Another risk is that contract manufacturers don't have the skills in place to produce the product quickly. It can take months before the first machine is delivered and produced at all levels of the supply chain. Often they are only paid if they meet delivery dates and exceed their lead times. This can mean that they aren't paid for the time they invest into training their own personnel, which can result in lower quality standards and delayed delivery times.

The final risk associated with outsourcing contract manufacturing is that some contract manufacturers are trying to gain competitive advantage by charging higher prices than established independent manufacturers. Sometimes they will price their products way above what an independent manufacturer would charge. While it is generally accepted that prices should be competitive, there are times when the contract manufacturer can undercut the competition. If the customer isn't aware of this potential cost savings, they may be paying too much. Always make sure to ask the manufacturer about their rates before purchasing from them.