Building a full-scale production from the ground up is a major challenge that most startups struggle with–they’ll need to invest in equipment, facilities, and labour to produce their products. 

But, what if you want to scale and market products immediately? 

Hiring a third-party manufacturer to produce products on your behalf can allow your brand to scale efficiently without the heavy upfront investment. Specifically, this manufacturing solution is called contract manufacturing. 

Instead of spending months or even years building production capacity, startups like you can leverage contract manufacturing solutions to start manufacturing immediately and ramp up as demand grows.

However, like any business decision, it’s not without its benefits and challenges. 

In this guide, we’ll share everything you need to know about contract manufacturing, its pros and cons, and some quick tips on choosing the right manufacturer to partner with. 

What is Contract Manufacturing (CM)?

Contract manufacturing is a business agreement where one company hires another to supply the parts needed to create a product or to make the product fully. Essentially, a contract manufacturer is a specialised third-party provider, allowing brands to outsource their manufacturing needs.

Contract manufacturing services involve a legal document that outlines the terms and conditions of your working relationship. It may include quality control processes, delivery schedules, production quantity, and liability and ownership rights, among others. 

Furthermore, contract manufacturers are helpful across various industries, such as electronics for printed circuit board (PCB) assembly, automotive for producing vehicle components and parts, or the medical field for manufacturing health devices under strict regulatory guidelines.

CM vs OEM vs ODM: What’s the Difference?

Overview
ODM	Manufacturer has pre-existing designs, your brand can slightly customise.
OEM	Your brand provides the design the manufacturer builds.
CM	Your brand provides and has ownership of the full design, and the manufacturer strictly builds.

As you start business production, contract manufacturing services aren’t the only solution startups can rely on. There are other types of manufacturing services, specifically, OEM (Original Equipment Manufacturer) and ODM (Original Design Manufacturer). 

In an ODM service, the third-party manufacturer owns the product design, and the brand can either tweak the design slightly or buy it straight from the manufacturer and label it with its brand’s logo/branding. 

Meanwhile, in an OEM service, the manufacturer builds a new product using your brand’s design, but using their own knowledge and resources in that product category. 

On the other hand, a contract manufacturing service gives full ownership of the design to your brand. The manufacturer is only responsible for producing according to your specifications and drawings, without being involved in the product design or development.

How Does Contract Manufacturing Work?

1. Product Design & Prototype Development

In contract manufacturing, a company provides the product design or formula to the contract manufacturer, who then calculates a price based on production costs like labor and materials.

2. Finding the Right Contract Manufacturer

Typically, companies will solicit multiple quotes to compare options. However, price point isn’t the only consideration businesses should factor in. They should also consider the contract manufacturer’s experience level, capabilities, staff competencies, and more. 

3. Contract Negotiation & Agreement

A contract manufacturing agreement will be drafted, highlighting key elements such as scope of work, penalties for non-compliance, quality standards, schedules, and intellectual property (IP) protection. 

Protecting your intellectual property (IP) is essential because it’s your competitive advantage; without it, others could steal your ideas and outcompete you. 

4. Production & Quality Control

After accomplishing contracts and negotiation matters, developing a detailed production plan will be the next step, outlining timelines, resource allocation, and workflows. 

Materials will be sourced either by the contract manufacturer or the hiring company. During various stages of the process, quality control and assurance procedures will be observed, such as inspections, testing, and audits. 

5. Logistics & Supply Chain Management 

Finished products are shipped either to the hiring company or directly to customers (depending on the arrangement). You’ll need efficient logistics planning that optimises delivery times and costs. 

In the process, it is also essential to ensure compliance with industry standards, safety regulations, and environmental laws, along with proper documentation for audits and inspections.

Benefits of Contract Manufacturing for Startups

Upfront costs when building a large-scale production are financially burdensome and time-consuming, which is not ideal for businesses just starting out. Even famous brands like Fitbit relied on contract manufacturers in its early stages. 

Below are some of the advantages of hiring a contract manufacturing company for startups: 

• Cost Savings: With contract manufacturing, there’s no need for in-house production–your contract manufacturing company handles that. This, in turn, saves your financial resources. 

• Faster Time-to-Market: Experienced manufacturers use the most advanced tools, helping them create products quickly and efficiently. With this, they can help you launch your products to the market immediately. 

• Focus on Core Business: Production takes up a lot of your time. Outsourcing them through contract manufacturing services can help you focus on other important aspects of your business such as branding and marketing. 

• Scalability & Access to Advanced Technology: You can easily modify your production volume based on market demand, without concern for the limitations of facilities. Your trusted contract manufacturer can give you access to their technologies and capabilities, helping you meet your customers’ changing needs. 

Risks and Challenges of Contract Manufacturing

Working with a contract manufacturer also has its fair share of risks, especially on quality control and IP rights. Below are some of the challenges startups should watch out for: 

• Quality Control Issues: When you handle manufacturing internally, you maintain complete control over product quality. However, outsourcing production to a contract manufacturer means you’ll have less control.

• Supply Chain Limitations: Be aware of your manufacturer’s supply chain practices. In-house manufacturing gives you complete control over your supply chain, but outsourcing to a contract manufacturer means less control, which can pose challenges if you’re highly particular about the quality of your product’s components.

• Intellectual Property Theft: Your product design should be patented, and sharing some of those patented details with your contract manufacturer is necessary. However, this carries a risk, as they could use that information without proper authorisation. Proper licensing should exist to prevent any breaches or legal issues. 

• Dependency on Third-Party Manufacturers: Because you’ll rely on their production capabilities, any issues or weaknesses in their facility can directly affect your operations, particularly if delays occur.

Despite the risks, there are ways to mitigate such challenges, including choosing a reputable manufacturer, selecting a company that specialises in your industry, and implementing a well-phrased legal contract to protect your rights and liability. 

How to Choose the Right Contract Manufacturer

• Industry Experience & Certifications: Choose a contract manufacturing partner that has experience and expertise working in your industry. Look for those with a proven track record and relevant certifications to ensure they understand your specific needs.

• Production Capabilities & Scalability: Do they have the capabilities to ramp up production quickly when you need them to? Check for their flexibility in accommodating your potential future needs. 

• Quality Assurance & Compliance: Quality assurance, risk management, and regulatory compliance are important to consider to protect your company’s reputation and product safety. Evaluate your CM’s Quality Management System and ask for their industry-specific quality certifications. 

• Cost & Payment Terms: Negotiate clear and competitive pricing, and establish mutually agreeable payment terms to avoid financial surprises.

• Location (Nearshore vs. Offshore Manufacturing): Consider the trade-offs between nearshore (closer) and offshore (farther) manufacturing, balancing cost, lead times, and communication.

• Intellectual Property Protection: Probe into how they protect their client’s intellectual property. They must have strict protocols and secure data management systems to prevent unauthorised access. You can also verify their track record in handling sensitive information. 

Ready to Launch? Partner with a Trusted Contract Manufacturer for Your Startup

As a brand just starting, limited budgets, manpower, and facilities can get in the way of getting your products to the market faster. It’s either you assemble a manufacturing operation in-house (which can be very costly), or you hire a CM, where you can outsource the manufacturing job.

With a contract manufacturer, startups can prioritise other aspects of their business that are significant for their growth and branding. While hiring one also has certain risks, the key is partnering with a reputable CM that understands your vision and maintains high-quality standards. 

With almost 40 years of experience, Aztech Technologies Pte Ltd are experienced in handling high-quality and streamlined production, efficient procurement methods, and supply chain strategies. We cater to diverse industries such as communications, automotive, health tech, and industrial applications, among others. 

Aside from contract manufacturing services, we also provide product design engineering, OEM, ODM, and JDM services. Contact us to learn more.