The Benefits of Contract Manufacturing
Contract Manufacturing can benefit brand owners through three main areas: (1) free up capital and management focus on growing the brand, (2) take advantages of economies of scale of a strong contract manufacturer and (3) strengthening the supply chain through specialization.
Company leaders are trying to stay ahead of the rapid changes in consumer taste while also increasing operator margins. While most leadership teams can successfully manage both sales and marketing while at the same time optimizing the operation, time and focus suffer. Brand owners who want to stay fashionable should consider focusing on their customers and partnering with a strong contract manufacturer.
3 Major Benefits of Contract Manufacturing
- Free Up Capital and Management Focus: when ranking which projects are priority for the company time and capital, we tend to have a list that can be dozens, if not hundreds long. There are those projects that are great projects, with a strong ROI that make the list every year but never get implemented. This is because no matter how good we are at multi-tasking, we have limited resources and must ruthlessly prioritize. So what happens when growth is the #1 goal but leaders have to decide whether to invest $5mm in a new product launch or $5mm in repairs and maintenance capex for aging equipment? This are the decisions we don’t want to have to make and by outsourcing parts of the supply chain to companies such as contract manufacturers, leaders can now double down on growing top line and reinvest freed up capital to do so.
- Economies of Scale: matching sales demand with labor supply has become increasingly difficult as lead times are getting compressed. Further, the rapid advances in new manufacturing technologies are rendering older equipment obsolete faster than ever before. A contract manufacturer will not only balance your workload against its entire customer base in order to smooth out seasonal demand, they will also keep up to date with the most efficient equipment to keep you cost competitive. And the good part is if they don’t, companies have the flexibility to switch to a new contract manufacturer who will be looking to offer price concessions to fill up their new equipment..
- Strengthen the Supply Chain: division of labor and specialization has been a driving force of capitalism. And it still applies to us today. As we focus on our core competencies, and outsource manufacturing to others who specialize in it, we are both able to benefit from this exchange. A lower cost structure, along with the ecosystem of contract packaging and logistics that a good contract manufacturer will maintain, will strengthen your supply chain. Further, when working with more than one contract manufacturer, diversification can be added – whether that is geography, capabilities or disaster recovery..
Getting started down the contract manufacturing path can be scary. Especially as it will make the operations team very nervous to be outsourcing a function that they perform. The best way to go about it is to try out contract manufacturers with high mix low volume products. Give them a chance to earn your business with the work that slows your production plants down. And you may find out that instead of a full contract manufacturing program, just outsourcing these items will increase your productivity and garner a large percentage of the benefits of a full program.