July 31, 2014 2:14 pm

You are an entrepreneur with a new product idea you would like to bring to the marketplace but don’t have the production equipment needed to produce the item yourself. Perhaps you are hoping to sell or license your innovative idea to a company but need stock of the product to show its value, usefulness, and sales potential. These are the types of scenarios that might send you looking for a contract manufacturer. Just what is a contract manufacturer and what can you expect one to do in return for your investment?

Bringing Ideas to Life

A contract manufacturer is a for-hire firm that will produce a specific quantity of your product for a set fee based on agreed-upon specification. The fee will be based on the best guess of processes, labor, tooling, and material costs. For start-up businesses and single entrepreneurs, this option may make sense as it allows them to entrust the entire product creation process to one entity without having to outlay funds on manufacturing equipment. Some contract manufacturers are also willing to inventory and ship the product, crossing off two more labor-intensive and costly tasks off the list.

Buyer Beware

As with any venture, there are risks associated with outsourcing about which an inventor should be aware. You are encouraged to speak with an attorney before moving forward to make sure you have a thorough understanding of what you are paying to have performed. In general, however, keep these general ideas in mind when contemplating working with a contract manufacturer.

  • You Get What You Pay For: Sometimes the lowest price is not the best. You might be falling for a tactic in which you are given a price that is not truly representative of the real costs and then get socked later with expensive and necessary add-ons. Or the quality of the materials for which you conscripted may be sub-standard. Less expensive might not always be a bad thing, but be sure you are very careful and compare specifications between different companies and that you know exactly what you are getting for the cost.
  • The Harder They Fall: On the flip side, bigger is also not necessarily better. Don’t sign up to work with an expensive big-name manufacturer based solely on a known name. Get competitive bids from a number of manufacturers. Ask for references, and check their rating with consumer sites. Again, compare the specifications across the bids to make sure that you are comparing apples with apples and that each is giving you comparable materials and labor. If a lesser-known company can provide you with the same service and quality materials as the big-name competitor for a quarter less of the cost, and the smaller company has rave reviews, you need to think hard before signing on to spend more money.
  • A Garage Full of Widgets: A simple law in manufacturing is that the more widgets you purchase, the less each one will cost to produce. Why is that? The processes and preparation work that make up the pre-production phase of manufacturing is what costs the most money. Once the machines start to run, the only difference between producing 500 and 5,000 of a product is adding more raw materials to assembly line. If you don’t need 5,000 widgets, don’t buy them simply because the per-unit price is less. Think of it as the Bulk-Buying Club Syndrome. It’s fantastic to buy 20 pounds of ground meat at Sam’s Club or Costco because your cost per ounce is so much cheaper than you can get at your local supermarket. But if the meat goes bad because you are not able to use it all, that’s money down the drain. Don’t buy more than you need.
  • Specific Specifications Need Specified: In manufacturing, your job costs are based on a set of agreed-upon specifications; that is, a listing of the materials of which your product will be created as well as its dimensions and other physical boundaries. If there is a misunderstanding as to the size of the finished product, or the type or color or brand of plastic to be used, the entrepreneur might be stuck with a pile of defective items or be forced to expend more money to have it done again. Conversely the manufacturer might be forced to redo the work, and the relationship might be irreparably damaged to the point that any further production will cost more. It is easiest and best to make sure, before signing on the dotted line, that both you and the manufacturer have a clear understanding of what is to be produced, how it will be created, what materials are to be used (with brand names and weights, if possible), the time it will take from start to finish, who pays for shipping and delivery, and any other aspect of the production of the pieces. You also don’t want to find yourself halfway through production facing additional charges because you thought items A, B, and C were to be included but were not part of the specifications listed on the agreement.
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