What Is a Contract Manufacturer?

A contract manufacturer is a manufacturer that works with a firm to make particular merchandise. These manufacturers dedicate themselves to the OEM, or original equipment manufacturer, market. In the field of computers and general electronics, contract manufacturers create products by the thousands. The OEM orders these products and thus gets their name branded on the material, and the products are then sold to its customers.

They Are Often Gigantic

Contract manufacturers tend to make some of the hottest merchandise in the business. For instance, the Xbox from Microsoft is actually made by Flex. Ltd., an enormous firm that has factories all over the world and produced almost $15 billion in gross sales back in 2004. Flex additionally makes cellphones for Ericsson, printers for HP, and routers for Cisco. Other big contract manufacturers include Sanmina Corporation and Celestica.

What’s an ODM?

The original design manufacturer (ODM) is just like a contract manufacturer, but it usually owns the intellectual property (IP) for the actual product. Meanwhile, the typical contract manufacturer uses the customers’ designs and IP. While contract manufacturers have the ability to make thousands of products, ODMs typically focus on a smaller amount of categories.

Working With EMS and CEMS

Contract manufacturers within the electronics industry do not solely make merchandise but also provide help with the design, and they typically like to call themselves electronics manufacturing services (EMS) or contract electronics manufacturing services (CEMS).

The Ins and Outs of Contract Manufacturing

Contract manufacturing occurs when an business arranges to have another company make all or part of a product. Usually the hiring company gives a design or formulation to the contract manufacturer to duplicate or enhance. The promotion and advertising of the product are left to the hiring firm unless other arrangements have been made.

Key Points

A contract manufacturer can enter into a contract with a hiring agency to provide part of or all merchandise on behalf of the agency for some agreed-upon cost. There are various advantages to contract manufacturing, and corporations are discovering many reasons to outsource their manufacturing to different companies. Manufacturing outside the company does present risks, however. Corporations should first determine their core competencies before choosing their contract manufacturing practices.

Full Text

The CM provides a quote for the components based mostly on process, labor, tools, and material prices. Usually a hiring agency will request quotes from a number of CMs. Once the bidding process is over, the hiring agency will choose a source, after which, for the agreed-upon cost, the CM acts as the hiring agency's manufacturing facility, producing and transporting items according to the design of the hiring agency.

Benefits

Corporations save on their capital costs because they don't have to pay for a facility and the equipment they need for manufacturing. They'll additionally save on labor costs like wages, training, and benefits. Some corporations seek contract manufacturing in low-cost international locations, like China, for their low labor costs. A contract between the manufacturer and the business it produces for could last many years.

Contract manufacturers are more likely to have their own quality control strategies in place that help them detect counterfeit or broken supplies early. Corporations can concentrate on increasing their core competencies if they can hand off manufacturing to an outside firm.

Contract manufacturers have several clients they produce for. Since they serve a number of companies, they can provide lower prices for raw supplies by benefiting from economies of scale. The more items there are in a single shipment, the cheaper the cost per unit will be.

Risks

When an organization enters into a contract permitting another firm to provide a product, it loses a lot of management over that product. It is crucial that the business form a very good relationship with its contract manufacturer.

Most corporations mitigate this risk by working cohesively with the producer and awarding efficiency with more business. When entering into a contract, corporations should ensure that the producer's requirements are in line with their own. They must consider the strategies through which they check merchandise to ensure that they're of acceptable quality.

What to Look for in a Contract Manufacturer

Below are some examples of what you should look for in a contract manufacturer:

  • Good, clean, well-managed facility
  • ISO-certified (assembly high quality requirements)
  • Drop-ship capabilities (direct to customers)
  • Ability to be versatile and understand market fluctuations
  • Sustainability with demand on product
  • Cooperation with hiring firm
  • Extremely respected within the market
  • Financial security
  • Solutions to your particular manufacturing challenges

If you need help forging a business relationship with a contract manufacturer, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.