How does contract manufacturing work?

Contract manufacturing is a process in which companies outsource their product manufacturing to external service providers in order to save costs.

Contract manufacturing employees - how does contract manufacturing work

Contract manufacturing is a process in which companies outsource their product manufacturing to external service providers in order to save costs.

This method is frequently used in mechanical engineering in particular. Contract manufacturing works by a company handing over the manufacture of its products to an external producer, known as a contract manufacturer.

Companies often offer their goods for sale, but do not manufacture them in-house for certain reasons. In this case, they outsource the production order. The external manufacturing company is referred to as a contract manufacturer.

It has highly trained specialists in the production of certain components or assemblies. Another term for contract manufacturing is external manufacturing, which is often colloquially referred to as an „extended workbench“.

Within contract manufacturing, the client hands over responsibility for the entire production chain to the external partner of its choice, who thus becomes the independent product manufacturer during the production period. However, the client remains the intellectual owner of the project.

The rights and restrictions are precisely defined in a corresponding contract. In particular, this ensures data protection, also vis-à-vis the end customer, which is particularly important nowadays.

Contract manufacturing employees

These sectors award contract manufacturing agreements

Various industries make use of contract manufacturing. Typical examples include

  • Mechanical engineering company
  • Plant construction companies
  • Car manufacturer
  • Medical technology manufacturer
  • Conveyor technology companies
  • Furniture manufacturer

What are the advantages of contract manufacturing?

Many companies initially produce in-house, but then quickly realize the cost benefits that contract manufacturing can bring and decide to outsource. These include training, wage and material costs, which are often higher than with external production.

In addition, contract manufacturing completely eliminates the acquisition costs of machinery. The often high energy costs that the company has to cope with in internal production should also be taken into account. The decision in favor of contract manufacturing therefore often increases profitability at the same time.

Increasing customer satisfaction with high flexibility

With contract manufacturing, your service provider takes care of production, while you can devote yourself entirely to your own tasks such as order acceptance and sales. This ability to focus means that you and your team are more flexible when it comes to customer inquiries.

You don’t have to worry about possible delivery bottlenecks, even at peak times, because the contract manufacturer is equipped with highly specialized personnel and equipment and can also respond at short notice.

This also benefits you when customers have special requests and your partners have the necessary expertise to implement even the most specific customer requirements quickly and precisely.

The contract manufacturer also has advantages

The contract manufacturer has the primary advantage of receiving clear wishes and requirements from you. He can meet these with his specialist knowledge and focus entirely on production. He bears no entrepreneurial risk with regard to the sale of the product range and also has no costs other than the calculable fixed costs associated with production. Nothing stands in the way of a flawless business relationship.

The biggest advantages of contract manufacturing at a glance

For the client:

  • More customer satisfaction through fast processing
  • No supply bottlenecks
  • Specialist know-how on both sides
  • Lower training and wage costs, more money for training your own employees
  • more capacities
  • Time flexibility in accepting and placing orders
  • No acquisition costs for machines and materials
  • Lower energy costs
  • Individual and fast production requests possible, new cooperation opportunities


For the contractor:

  • Clear instructions from the client
  • Calculable costs
  • No entrepreneurial risk, no sales costs
  • No development costs
  • Low financial risk

Which parts are worthwhile for contract manufacturing?

Contract manufacturing is booming in the processing of plastic and metal components, particularly in mechanical engineering. This is due to the fact that contract manufacturing companies such as CNC24 not only have many years of expertise, but also the latest process technologies and machines such as 3-axis and 5-axis CNC milling machines, which are often much more expensive to purchase in-house than outsourcing the production of components.

Turning, milling and eroding are some of the typical machining processes that many companies are happy to outsource, as they often require extreme precision and manufacturing expertise. If the contract manufacturer makes the decision wisely, it can also keep machining and set-up times low and throughput times high – a win-win situation on both sides.

Get a quote for your parts

Conclusion

Production companies abroad often entice customers with particularly attractive prices. But in the end, this does not always mean a real bargain.

This is because disproportionately low prices often reflect inadequately trained staff, outdated machinery or miscalculated transportation costs. You should therefore be on your guard if you are presented with such an offer.

At CNC24, we offer fair prices with conscientiously high quality components made in Germany – regardless of our global network of over twenty possible manufacturing countries.

We have modern machinery at our disposal, including the latest CNC milling machines on the market. We can also call an in-house measuring center at our Berlin location our own.

Equipped with innovative coordination measuring machines and contour measuring devices, we can guarantee you double quality control to the highest standards.


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Find out now which 9 points you should consider so that you can find the right supplier and reduce your costs by up to 40%.

Please note that the whitepaper is only available in the German language.

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