A Quick Guide to Contract Manufacturing

A contract manufacturing process involves hiring a manufacturer who will handle all production operations on behalf of a business. Hiring contract manufacturing can save businesses money, increase production, and give them access to additional resources. 

Understanding contract manufacturing and how they do business can help you decide whether outsourcing production is the right choice. This article explains contract manufacturing, how it works, and the different types of manufacturing.

What is Contract Manufacturing?

Contract manufacturing occurs when a business outsources its manufacturing to another firm. This business model can be found in many industries, including electronics, automobiles, pharmaceuticals, and food. Client companies will typically provide detailed product requirements and designs to the contract manufacturer so that the final products meet the specifications of the client company.

Small to midsize companies (SMBs) can benefit from contract manufacturing. SMBs can save money using contract manufacturing, as they do not have to invest in equipment or labor. It allows SMBs to concentrate on their core competencies instead of learning to be efficient in manufacturing. SMBs can easily scale up production in response to increased demand.

Different types of Contract Manufacturing

Contract manufacturing comes in many different forms.

  • Turnkey Manufacturing: The contractor will provide complete manufacturing solutions. This includes everything from sourcing raw materials, assembling the production environment, and packaging the final product.
  • Partially turnkey manufacturing: The contractor is responsible for certain aspects of the manufacturing process, such as product design, raw material sourcing, and shipping.
  • Joint Venture Manufacturing: The contractor and the contractor may form a joint venture in which they are each responsible for manufacturing various products from the contractor.

Other common scenarios in contract manufacturing include prototype manufacturing (where the contractor creates potential new products) and subassembly production, where the contractor produces specific components rather than a completed product.

Benefits of Contract Manufacturing

The most critical advantage of contract manufacturing is cost savings. Production facilities, equipment, labor, and maintenance expenses can quickly add up. Contractual manufacturing is frequently more cost-effective because the contractor has already invested in the required resources.

Streamlined Operations

Beyond cost savings, contract manufacturing can also streamline the contractor’s business operations. With predictable costs and product turnaround times, contract manufacturing allows an organization to allocate its labor, finances, and time. In full turnkey manufacturing scenarios, the contractor is freed from the burdens of working with vendors and sourcing materials. Many forms of contract manufacturing offer packaging and distribution services, reducing costs and time spent.

Access to the latest technology

Contract manufacturing also gives the contractor access to the newest equipment and technology. A contract manufacturer will likely have computer numerical cutting (CNC) machines, chemical manufacturing equipment, scientific instruments, and state-of-the-art production facilities powered by the latest manufacturing software. Taking advantage of these offerings often results in better products, giving the contractee a competitive edge they otherwise would not have.


Scalability is another benefit of working with contract manufacturers. Contract manufacturers typically have multiple contractors with large manufacturing facilities to match. Scaling up production for a contractor is simply a matter of increasing their order. Doing the same in-house requires significant capital investment in new production equipment and facilities.

Slowing down production without penalty

Conversely, ramping down production during the slow times is more feasible with contract manufacturing. A contractor can reduce their order or even put production on pause until demand for their products increases again. With in-house manufacturing equipment and staff, slowing or stopping production is less attractive since it means paying salaries and maintaining equipment until demand returns.

Some Examples of Contract Manufacturing

Contract Manufacturing is a very common practice. Organizations of all sizes and types use contract manufacturers. These are the industries that produce a large number of components and products under contract manufacturing agreements.

  • Softgel Manufacturing: To make soft gel capsules, liquids or semi-solids are encapsulated in a gelatin shell. The process begins with the formulation and preparation of the filling material. This can include active pharmaceutical ingredients, herbs, vitamins, or other compounds.

    Using specialized equipment, the fill material is encapsulated in gelatin shells. Softgels offer several benefits, such as precise dosage, improved stability of sensitive ingredients, and ease of swallowing. Due to their versatility, these capsules are used widely in the pharmaceutical, nutraceutical, and cosmetic industries.
  • Capsule Manufacturing: The production of capsules is a process that involves making shell-like containers, usually made from gelatin. These capsules can encapsulate, deliver, and store various substances such as pharmaceuticals, dietary supplements, herbal extracts, etc.

    Manufacturing involves formulating fill material, encapsulation, and quality control measures to ensure consistency and safety. The capsule manufacturing process is crucial in the pharmaceutical and nutraceutical sectors, providing a convenient and efficient dosage form for many products.
  • Custom Gummy Manufacturing: Custom gummy production involves creating gummy candy tailored to meet specific needs, including flavor, color, and shape. The process begins with a base of gelatin or pectin, then adding the desired ingredients such as vitamins, minerals, or herbal extracts.

    Finally, it is molded into gummy shapes by specialized equipment. The custom gummy industry serves a variety of industries, including food, beverage, nutraceuticals, and pharmaceuticals. It offers a convenient and delicious way to deliver active ingredients and nutrients.
  • Liquid & Tincture Formulations: Liquid or tincture formulations are created by dissolving active ingredients in liquid bases such as alcohol or glycerin. These formulations are used widely in pharmaceuticals and herbal medicine.

    They also make great dietary supplements because they are easy to administer and absorb quickly. This process involves selecting and combining the ingredients, maceration, or extraction of active compounds. Filtration is also often used to ensure consistency. Liquid or tincture formulations are popular because they offer easy dosing versatility and can be used to deliver medicinal or nutritional benefits.

End Note

A contract manufacturing business model is one in which an organization hires a manufacturer to produce products and provide services. 

Contract manufacturing saves the company money by not investing in equipment, facilities, and personnel dedicated to one product or component. Resources and attention can be focused on improving the company’s core competencies and main business goal. 

It has many other advantages, including cost savings from economies of scale. It also offers increased quality, efficiency, globalization opportunities, and a greater ability to respond to changing product demands.

A company that enters into a contract manufacturing arrangement loses some control over certain aspects of its business. The performance of a contract manufacturer can have a significant impact on the hiring company.


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