In the manufacturing industry, every business cannot have the expertise, resources, time, and funds to make the whole product by themselves. Sometimes they need to outsource some parts/components of the product or the final product to a Contract Manufacturer (CM).
Contract manufacturing is a form of outsourcing, in which a hiring firm approaches the contract manufacturer with a product’s design. Later, they both agree that the contract manufacturer will produce the product for the hiring firm.
Depending upon the need, a contract manufacturer can produce parts, components, or the whole product. Sometimes the Contract Manufacturer (CM) will also act as a packager, known as a contract packager or copacker.
In the case of small businesses, a contract manufacturer can also act as the Drop-shipper. If need be, they can also ship the product directly to the customer on behalf of the hiring firm. Contract Manufacturer (CM) can reside in the same region/country or can be residing overseas as well.
What’s in it for me-
- Business Model of Contract Manufacturing
- Different Types of Contract Manufacturing
- Advantages of Contract Manufacturing
- Disadvantages of Contract Manufacturing
- How to choose good contract manufacturers?
- Top Contract Manufacturers in India
Business Model of Contract Manufacturing (CM):
The business model of Contract Manufacturing is very simple. The Contract Manufacturer will reach an agreement with the hiring firm about the manufacturing of the product or components of the product.
Afterward, the Contract Manufacturing company will do trial production runs. After getting the promising result from trial and validation runs, they will start mass production. In the Service Level Agreement (SLA), the manufacturing contract is laid out.
It includes various terms like product specifications, manufacturing conditions, quality requirements, product volume to be supplied regularly, and delivery arrangements to be met by the contract manufacturer. The hiring firm compensates the contract manufacturer upon fulfilling these terms successfully.
Different Types of Contract Manufacturing:
Depending upon the agreement between the hiring firm and the contract manufacturer (CM), there are various types of contract manufacturing. Most of them fall under these four contract manufacturing types. Each type has its benefits and disadvantages, which we will see later.
- Private Label Manufacturing
This kind of manufacturing is very ideal. It happens with the businesses that have a well-designed product but still want to outsource their production due to various reasons. In this type of contract manufacturing, the Contract manufacturer produces and delivers the product specified by the hiring firm which hired them.
The product can be delivered to the warehouse or directly to the consumer/store. If the designed items consist of various components then, the contract manufacturer assembles them before shipment. In Private Label Manufacturing, the hiring company hires an Original Design Manufacturer (ODM).
The ODM paves the way for the product from conceptualisation to production. In this type of manufacturing, the hiring firm does not require capital, product research, and development. This type of agreement is more beneficial to those manufacturers who are comparatively new in the market, and desperately want to launch their product and make their name in the field.
- Component Manufacturing
In this type of manufacturing agreement, the hiring firm and the contract manufacturer agree to the terms that the contract manufacturers will produce one or more components of the final product. The produced component will later become part of the larger component or final product. The component produced by the contract manufacturer will be assembled by the hiring firm or some other contract manufacturer depending upon the product. This kind of manufacturing is ideal for those companies that have some in-house manufacturing but can not produce all the necessary components for the final product.
- Service or Labour Subcontracting
In this type, the contract manufacturer is hired by another contract manufacturer for their specialised role in one part of the larger process and acts as a subcontractor. They are involved in this process for their specialised services and they deal with the contract manufacturer instead of the hiring firm. It is adapted to increase the efficiency of the product, increase production and save the overall cost of the product.
- End-to-End Manufacturing
In this type, the contract manufacturer is more involved in the design and also gives their feedback about the product. The contract manufacturer is also involved in the specifications of the product. This type of manufacturing is suitable when the company wants to make some products quickly, affordable, and of good quality.
Advantages of Contract Manufacturing:
- Contract manufacturing makes it easier to bring and distribute the new products in the market
- Small business owners can use contract manufacturing to bring their products into the market and drop ship them. It is cost-effective. Someone who has the design and idea of the product but was not able to make their product due to lack of funds and expertise can now make the product easily.
- The employees of the hiring firm can focus on marketing and building the supply chain of the product. It saves their energy from being wasted on something that they don’t know or probably have very little idea about – production.
- If the hiring firm hires the contract manufacturer from a low-wage country/region, it can save them money. Also depending upon the region they can save taxes as well.
- The money and efforts which would be spent on building the infrastructure for the production are now saved.
- The product can be introduced to the country in which it is getting manufactured and in neighbouring countries as well.
- The saved resources from contract manufacturing can be prioritised and can be used where it is needed the most.
Disadvantages of Contract Manufacturing:
- The biggest disadvantage of contract manufacturing is the lack of direct control over the production and quality of the final product.
- The hiring firm can not control what is happening daily in the manufacturing unit.
- There is always a risk of duplicating the product. Some unethical contract manufacturers are found to be compromising the originality of the product and sharing the details with other competition or making the product by tweaking a few things and selling it at a lower price.
- For overseas contract manufacturers, the language and culture are a big hurdle to doing business.
- When a company outsources its production, there is always a chance of layoff that will give rise to job insecurity among the employees.
How to choose good contract manufacturers
Choosing the right man for the job has always been a problem. The same is true in the case of contract manufacturing. Choosing the correct contract manufacturers has always been a tough task. There are a few qualities that you should always look at before hiring a contract manufacturer. There are risks attached to the process of outsourcing, one should always analyse the benefits as well as risks for finding the right fit for the job of contract manufacturing.
- Quality Facilities
Quality in a product comes from well-organised infrastructure, skilled and disciplined labour, and well-maintained machines or equipment. So, while outsourcing the production of a product or components, one should always look out for the quality facilities in a contract manufacturer. The manufacturing unit/location should be well maintained and clean. They should have enough skilled human resources and up-to-date machines for production. The facility should be well organised and disciplined.
ISO-certified manufacturers often provide quality products. The ISO 9001:2015 is the standard that is used to determine the requirements for the QMS(Quality Management System). By hiring an ISO 9001 certified manufacturer, the hiring company can get quality products and services. They will be getting a product that customers need at a good quality that will eventually give customer satisfaction. It will eventually lead to retention of the customer and increase the revenue of the company in the long term.
The durability of the product is the ability to withstand severe surrounding conditions and this property of the product is very important. Contract Manufacturers, who can deliver a product with high durability should get your contract. While looking for them, you should consider this factor as well.
- Understanding of the Complexity
Some of the components or products are very complex like microprocessors, Integrated-circuits (ICs), and other electronic equipment. To produce these products, the manufacturer must have an understanding of the complexity of the product. The contract manufacturer with a better understanding of the complexity of the product can deliver a quality product. So, while hiring a contract manufacturer, the company needs to test the contractor on this parameter.
- Scope for Automation
As the demand for the product increases, there will be a need to automate most of the processes involved in the production. If the contract manufacturer does not have the right infrastructure to be able to automate those processes then the overall production might get affected. To avoid this problem at the later stage of the business, we need to be prepared. So when looking for the contract manufacturer, the hiring company should look for the scope of automation. It will always be an advantage to have the ability for automation.
- Ability to meet quality and demand of products
As the demand for the product increases, the contract manufacturer will have to meet the requirement. In this process of upscaling, they can not compromise the quality. So the hiring company needs to look for this ability in the contract manufacturer while outsourcing them the production.
- Transparency and open communication
Having an environment of open communication and maintaining transparency between hiring firms and the contract manufacturer is very important. These two are the most important virtues in the business.
- Good understanding of the market
The contract manufacturer needs to have a better understanding of the market so that they can compete with the competitors and deliver a quality product.
The location of the contract manufacturer plays an important role in terms of revenue in the business. We have already seen how they can affect a company’s revenue. The contract manufacturer should be based in a region where the taxes should be low, the resources should be easily available, and it should be safe to produce, store and if needed ship the product directly from the warehouse.
Top Contract Manufacturers in India
- Arwen Fragrances Pvt. Ltd.
It was established in 1988 as an exporter of aroma chemicals. They are one of the fastest-growing companies in the manufacturing sector. Arwen Fragrances Pvt. Ltd. is the manufacturer of Perfumes, Skin Care, Hair Care, Personal care, and Hygiene and Sanitation products. Their vision is to bring world-class product design and resources into the market. They offer their service to create the product from design to reality. Their brands include Arwen Designer Scents, Ital Veloce, Otto Quotidano & One Wipe.
- Dhwani Polyprints Pvt. Ltd.
Dhwani PPL has been the leader in packaging since 1978. This Mumbai-based company was founded by Mr. Rajesh Roongta and Mr. Sanjay Roongta. Currently, they are exporting their products to 45 countries over 5 continents. The current CEO of the company is Mr Aditya Roongta, a chartered accountant and MBA graduate having expertise in marketing. The company is offering their services in the field of security packaging solutions for e-commerce companies, logistics, banks and educational institutes.
- Maroon Sea Exports
Maroon Sea Exports is a global manufacturer and exporter of fabrics, readymade garments, and designer clothes. The company was established decades ago and achieving milestones in the textile industry since years.
Apart from manufacturing fabrics and clothes for their own label and exporting the products to various countries, Maroon Sea Exports is also a large scale contract manufacturers. It is a reliable name for many traders in the clothing and textile industry.
The main manufacturing unit is based in Rajasthan and the company produces tons of fabrics and readymade garments for various garment traders. It provides fabric processing, printing, and finishing with precision and produces durable clothes.
- Prakruti Products Pvt. Ltd.
Prakruti Products Pvt. Ltd. was founded in 1998 and is the largest manufacturer of Garcinia cambogia all over the globe. Prakruti Products is the expert in the production of phytochemicals, standardised herbal extracts, organic ingredients and nutraceutical ingredients for leading dietary / food supplement manufacturers around the globe. It is an ISO 9001:2005 Certified-Company, approved by FSSAI(Food Safety and Standards Authority of India), Halal Certified. FAMIQS Certified, WHO GMP Certified, Approved by Ecocert COSMOS Organic/Natural, GMP certified by AYUSH, Government of India, ISO-22000:2018, Kosher certified ingredients by Star KOSHER, Organic certified: NPOP, NOP, and EU. They have bagged multiple awards for their work of excellence in the field of manufacturing. With a legacy of over 24 years, they are exporting to more than 26 countries in the world.
- Dr Reddy’s Laboratories:
It was started in 1984 with 20 employees and modest investments. They currently have over 23,000 employees and they are present in over 56 countries. They are constantly working towards making access to innovative and affordable medicines.
- Cipla Limited:
Cipla Limited was incorporated in 1935 by Dr K.A Hamied. They have had a presence in 80+ countries for over 8 decades. It is considered to be the most trusted brand among health care professionals and patients. Currently, more than 25000 employees are working for Cipla and they have produced over 1500 products successfully in the market.
- Aarti Industries Limited (AIL):
Aarti Industries Limited is a leading manufacturer of speciality chemicals in India. They manufacture chemicals that are being used in pharmaceuticals, agrochemicals, polymers, additives, surfactants, pigments and dyes. In the last decade, it has shown exponential growth and transformed from an Indian company servicing the global market to a global icon itself. It was established in 1984 and now they have a team of more than 65 PhDs and 200 postgraduate scientists.
- Varun Beverages Ltd:
Varun Beverages Ltd is a leading manufacturer in the field of beverages and soft drinks. They are the contract manufacturer for Pepsi in India. VBL was incorporated in 1995 by Mr Ravikant Jaipuria. Currently, they have a total of 37 manufacturing centres in the world, out of which 31 are in India. They are producing beverages for Pepsi India since 1990 and as of now, they are serving in 27 States and 7 Union Territories in India.
- Dixon Technologies (India) Limited:
Dixon Technologies (India) Limited is a leading electronic manufacturing services (EMS) provider in India. It was founded in 1993 and started making television in 1994 in India. Now, they have expanded their business to various segments of electronics. They are providing home appliances, lighting, consumer durables, security devices, mobile phones, set-top boxes, wearables and medical equipment to customers across the globe, along with repairing and refurbishment services of LED TV panels. They have 17
State-of-the-art manufacturing facilities are located in Uttar Pradesh, Uttarakhand and Andhra Pradesh. With Research & Development facilities in India and China, they are the employer of over 1900 people. They are an ISO-certified company. In the Financial year 2021, they have generated ₹ 64,482 Million.
- Fine Organics:
Fine organics was founded in the year 1970 by Ramesh Shah, a Mumbai-based businessman and Prakash Kamat, a skilled technocrat from the Institute of Chemical Technology. They have products in different categories such as food, plastics, cosmetics, textiles, paints, inks, rubber and many more. Fine Organics is a technology & chemical driven company having a privileged position in the speciality additives industry globally. The reason for the growth of Fine organics is oleo chemistry, in-house manufacturing technology, customer-centric research and development and a techno-commercial mindset.
Contract manufacturing is expected to have a boom in upcoming years. It made it easier for the young entrepreneurs to start their brands with almost no capital and expertise. They can transform their idea into a product by using the expertise of contract manufacturers. Moreover, there are so many contract manufacturers in the market you can contact them for your product and can launch your brand.
- How can I contact manufacturers for my brand product?
Ans: Almost every contract manufacturers have a presence on the internet. You can easily get their email address and contact details from their website or social media accounts. You can contact them to enquire about the manufacturing of your brand product.
- Is contract manufacturing different from outsourcing?
Ans: Manufacturing is a form of outsourcing whereas outsourcing is usually a tactic to redistribute resources and help with cost savings and other economies of scale.
- Which countries have the cheapest contract manufacturing?
Ans: Asian countries have the cheapest contract manufacturer. The reason behind this is low-wage human resources and the availability of raw materials. India is in 2nd place after Vietnam. China is at 3rd.
- Which type of contract manufacturing is most used?
Ans: Private label manufacturing practice is used the most in current times. Due to e-commerce giants like Amazon, Flipkart, E-bay, etc, more entrepreneurs are coming forward as small businesses. This in turn requires production which is fulfilled by contract manufacturers.
1 thought on “What is Contract Manufacturing? Top 10 Contract Manufacturers in India”
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