Great products start with great ideas—and solid designs. But it takes strong manufacturing resources to bring these designs to life. The good news is that companies don’t have to run their own factories to create their products. Contract manufacturing allows businesses without the necessary production infrastructure or capacity to tap into an expert manufacturer’s infrastructure and expertise. This type of outsourcing arrangement helps businesses avoid the headaches of running a factory, boost existing factory capacity, or gain better economies of scale for components used to assemble complex products.

The real trick lies in finding the right contract manufacturing partner, one that understands the company’s needs and can deliver reliable quality for the right price. Read on for steps to find the contract manufacturer that best meets your requirements.

What Is Contract Manufacturing?

Contract manufacturing is the practice of hiring a third-party manufacturer to produce components or finished products in accordance with detailed specifications and timelines. It’s a type of outsourcing used by manufacturers and non-manufacturers alike to bring products to market faster, reduce costs, and allow them to focus on their own core competencies.

For instance, a small startup might hire a contract manufacturer to produce a low volume run of a new product its engineers just designed. A large manufacturer, on the other hand, might turn to contract manufacturing to produce high volumes of a single component—such as a circuit board—that it can use when assembling its finished product.

Key Takeaways

  • Contract manufacturing is an outsourcing arrangement in which a company hires a third-party manufacturer to make parts or completed products.
  • The best contract manufacturing relationships are partnerships grounded in strong collaboration and communication.
  • Companies choosing a contract manufacturing partner should consider a broad range of evaluation criteria beyond price, including capacity, location, scalability, and certification.
  • A structured process for finding and evaluating contract manufacturers offers the best chance for establishing a successful relationship.

Contract Manufacturing Explained

Contract manufacturing serves as a powerful production option for companies that want to make products or product components without incurring the significant capital expense and risk of running their own factories. This manufacturing outsourcing approach allows businesses to allocate their resources on their core strengths, such as R&D, product design, marketing, sales, or service delivery.

This is an obvious win for small businesses and startups that don’t yet have the manufacturing acumen or resources to stand up their own facilities. In addition to providing production services, contract manufacturers can help these smaller companies refine their product designs, choose the best materials, and enforce quality standards during production. Meanwhile, companies that already have their own production facilities may use contract manufacturers to help them quickly produce prototype or experimental products without needing to retool their own factory lines. These businesses might also lean on contract manufacturing to temporarily boost production during busy seasons, allowing them to flexibly respond with scaling production up or down as market demands change.

Manufacturers that assemble complex products composed of many parts often find it more cost effective to let a contract firm make some of their components. For certain commodity items, the contract manufacturer might be able to achieve a better economy of scale than smaller component volumes produce with in-house teams. Contract manufacturers also often operate in specific niches, producing highly specialized components that may require advanced equipment and expertise, such as precision-machined parts for medical devices or aerospace systems.

Not to be overlooked, the importance of contract manufacturing as a powerful tool for building greater supply chain resilience enables businesses to partner with manufacturers in different regions to avoid relying too heavily on a single supplier or location. Taken together, all of these reasons to use contract manufacturing have created a $740 billion worldwide market with a compound annual growth rate of 8.77%.

Evaluation Criteria for a Contract Manufacturing Partner

Working with a contract manufacturer is more than a cost-cutting tactic: It’s a way to build a strategic partnership that helps a business stay agile, innovative, and focused on what it does best. Achieving those goals hinges on finding the right partner. Factors such as available production resources, technical capabilities, and quality standards all play a role in how well a contract manufacturer can meet customer needs. Businesses should consider the following criteria as they evaluate potential partners.

Capacity

The right contract manufacturing partner needs enough scheduling flexibility and dedicated personnel for production to run smoothly and on time. Ask about typical lead times and what kind of track record the manufacturer has for meeting deadlines, particularly during busy periods. Find out how far in advance production slots need to be booked and if the manufacturer can accommodate last-minute changes or rush orders. Additionally, ask how the company handles overlapping projects with multiple clients. It also may make sense to get a feel for how the contracted production volume compares to the rest of the manufacturer’s customer volumes. Being the largest or the smallest customer could lead to strained resources on one hand or reduced priority on the other.

Location

The location of a contract manufacturer’s production and storage facilities is a key consideration because it will directly impact costs, supply chain resilience, and compliance. Contract manufacturers in regions with lower labor and operational expenses will offer more competitive pricing. But distance can increase shipping times and potentially expose the supply chain to disruptions caused by geopolitical events or logistical complexities. If possible, choose a manufacturer closer to existing operations or target market for easier inventory management and delivery schedule monitoring. Location can also affect exposure to costs and risks related to tariffs, regulatory standards, and legal obligations.

Equipment

When evaluating potential manufacturing partners, review their equipment through the dual lenses of capability and reliability. The most obvious first order of business is to check whether the manufacturer’s infrastructure can handle the volume and complexity of expected orders. But dig deeper to decipher the age and maintenance routines of equipment involved in production. Modern, well-maintained equipment is less likely to break down, reducing the risk of running into delays or quality issues. Remember to ask about the potential partner’s history of equipment maintenance and how often it upgrades or services its machinery.

Scalability

The best contract manufacturing partners are able to ramp production up or down quickly, without experiencing delays or quality issues. Check to see if the manufacturer has a proven record of adapting to changing requirements while still meeting tight deadlines. One telling scalability clue will be to check that the company has a flexible scheduling system that easily accommodates shifting demands. If you’re considering a long-term engagement, ask about the manufacturer’s ability to sustain larger volumes as time goes on.

Quality

No evaluation of a potential partner would be complete without taking a close look at how it approaches quality throughout the entire production process. Inquire about quality control procedures, inspection protocols, and processes for timely corrective actions. Also ask potential partners if they follow lean manufacturing or Six Sigma practices and to provide examples of quality control documentation, such as defect tracking logs. Requesting references or case studies can validate claims through proven client results.

Certifications

Certifications are one of the most reliable methods of gathering demonstrable evidence of a manufacturer’s commitment to quality, safety, and industry-specific best practices. Certified adherence to such standards as the Food and Drug Administration’s Current Good Manufacturing Practices and ISO 9001 for quality management can tell businesses a lot about a contract manufacturer’s ability to follow rigorous, repeatable processes. This, in turn, provides assurance regarding a partner’s ability to consistently deliver quality products on time. Industry-specific certifications, such as the global Safe Quality Food program for food safety, are also nonnegotiable checkbox items for companies operating in highly regulated sectors, where products must meet strict quality and safety standards.

Compliance

Manufacturing partners should be able to satisfy the regulatory standards of both their home country and a customer’s target markets and industry. Work with partners that can meet these requirements to avoid costly regulatory or legal issues. Ask about the systems the manufacturer has in place for documentation and change management and request evidence of their experience in passing relevant regulatory inspections. Include this due diligence in any eventual outsourcing agreement, which should clearly stipulate all of the contract manufacturer’s regulatory obligations, along with related monitoring protocols and equipment.

Technology

A contract manufacturer’s technology ecosystem plays an outsized role in the success or failure of the partnership. Not only must the manufacturer possess advanced manufacturing technology, but it also needs the processes and expert personnel to run it effectively. Equally important is that the contract manufacturer run the application integration points and data-sharing capabilities necessary to seamlessly integrate with a customer’s operational and business systems, such as an ERP system. As such, be sure to evaluate the ease of sharing inventory data and documentation, processing orders, handling logistics, managing supply chains, and overseeing other business systems that track and manage ordering and production flows between the two companies. The best partners will have systems that enable, rather than hinder, their customers’ automation and workflow tools.

8-Step Process for Choosing a Contract Manufacturing Partner

Following a structured method for choosing a contract manufacturer—one that’s led by procurement professionals and operational stakeholders—can go a long way toward cultivating a valued partnership. Here are eight steps to help guide the process.

  1. Gather Evaluation Criteria

    Start by figuring out the essential requirements that your project or product will demand of a contract manufacturing partner, such as technical expertise, ability to meet capacity and timeline needs, and industry experience. Then determine an acceptable budget or cost envelope for the project or product. With requirements and costs in mind, layer in the most important evaluation criteria for your business, including common factors like location, quality, scalability, and equipment. Once those details are in hand, create a formal checklist or framework that can be used to evaluate each potential partner.

  2. Research Potential Contract Manufacturers

    Begin building a list of potential contract manufacturers by tapping into references from professional networks, gathering information at trade shows and industry events, and seeking input from industry directories and trade associations. Available marketing and technical materials can provide early insight into how closely aligned they are with your project’s requirements. Read customer testimonials to get a feel for manufacturers’ reputations, and check for any history of quality or compliance issues, financial instability, or supply chain concerns. Use this research to pull together a viable shortlist of potential partners.

  3. Evaluate Contract Manufacturers’ Capabilities

    Use the work done in steps one and two to develop a detailed request for proposal (RFP) to extend to your shortlisted manufacturers. The RFP should streamline and standardize how evaluations are conducted and outline technical requirements, timelines, necessary certifications, quality and scalability expectations, and any additional evaluation criteria previously identified. Start evaluations by reviewing the information collected from RFP responses and initial research. Then dive deeper by assessing each manufacturer’s experience with similar products, examining their quality management systems, and asking probing questions about their cost structures.

  4. Perform Due Diligence

    Due diligence should include a thorough, multidimensional review of the potential manufacturing partners’ claims, financial health, and operational resilience. Request factory tours and product samples to verify product performance, capacity, and consistency. Interview key staff and conduct reference checks. Then dig into financial health by poring through audited financial statements and credit checks—this is essential to make sure the companies are stable and won’t expose your supply chain to future disruptions.

    It’s also important to assess the legal standing of partners by reviewing their corporate structure and ownership details and by checking for any past or pending litigation. Similarly, examine regulatory filings, permits, and history of compliance with industry standards, including validating any compliance credentials and certifications. Finally, investigate environmental and sustainability practices, as well as labor standards and ethical conduct. These factors have an impact on compliance and business viability and could also affect brand reputation and product marketability among eco-conscious consumers.

  5. Compare Proposals

    Start comparing proposals by reviewing each one in light of the evaluation criteria established in the RFP and at the beginning of this process. The framework or checklist developed during step one will help for this step. Consider developing a scoring system or ranking method to document relative strengths and weaknesses for each criterion, as well as to weight the most important ones. This helps establish a consistent and fair assessment that offers a clearer picture of trade-offs. Also assess how well each manufacturer grasps the requirements and how realistic it seems for them to meet RFP objectives. After this process is completed for each potential partner, compare the results to identify which contract manufacturer tops the best-fit list.

  6. Negotiate Agreement

    After selecting a partner, start building the legal and contractual framework for how the partnership will be conducted. Procurement professionals should lead the negotiations for the terms that will govern the outsourcing contract, including pricing, payment schedules, minimum order quantities, delivery timelines, and change management provisions. Procurement expertise is invaluable when it comes to securing favorable terms while maintaining a spirit of partnership and collaboration. A big part of the negotiation process is hammering out a detailed quality agreement, which sets clear standards for product quality, inspection protocols, and processes for addressing defects. Negotiations should also aim to solidify an understanding about compliance and legal obligations, including details on dispute resolution mechanisms and intellectual property rights.

  7. Sign Contracts

    Agreement negotiations should culminate in a well-constructed contract that will mark the official start of the partnership. Before signing, a full range of business stakeholders should review the contract to verify that all business, legal, and operational requirements are covered and that pricing, payment terms, and supply chain obligations line up with company objectives and market standards. In the meantime, quality assurance and technical teams should also confirm that product specifications, quality standards, inspection rights, and remediation processes are clearly defined. And, of course, legal counsel must review the contract for enforceability, regulatory compliance, dispute resolution mechanisms, intellectual property rights, and confidentiality of company and customer information.

  8. Establish Relationship

    Once the contract is signed, the real work of collaborative manufacturing begins. Set up the partnership for success by establishing solid lines of communication and processes that enable teams to work together. Define roles and responsibilities for both parties and document responsible parties for every stage of the manufacturing process. Identify clear points of contact on both sides, and assign primary and secondary contacts for day-to-day communications and for escalating issues. Schedule regular meetings to confirm that everyone remains on the same page with regard to goals, expectations, and milestones. Teams from both partner companies should collaborate to develop any extra outsourcing key performance indicators not already stipulated in the agreement for measuring progress and identifying areas for improvement.

Tips for Choosing the Right Contract Manufacturing Partner

As companies progress through the steps for choosing a contract manufacturer, certain actions can play a sizable role in helping to pick the right partner. Below are a few tips to keep in mind.

Tour Work Sites and Interview Partners

Touring factory facilities and interviewing a potential partner’s employees can help a company level up its understanding of a contract manufacturer beyond the theoretical world of RFP responses. Tours shine a light on the cleanliness of facilities, as well as the organization and flow of the production floor. They’re essential for getting a visual verification of the condition and sophistication of equipment. Plus, visiting worksites provides an opportunity to assess the quality control processes in action and to watch how effectively and harmoniously employees work with one another. In-depth interviews with key team members—especially those who are likely to be points of contact—can help gauge the expertise and cultural fit of those employees.

Collect Reviews and References

Seeking out reviews and references is a nonnegotiable part of the contract manufacturing selection process. Product and company reviews can help a business in the earliest stages of research start establishing a viable shortlist of potential partners worthy of deeper evaluation. References can add valuable third-party validation of marketing claims, providing temperature checks on how well a manufacturing partner works to meet client needs. Companies should request references relevant to their industry, the scale of their projects, and the specific services they’re planning to engage the partner to fulfill. Unofficial feedback can also come from independent reviews and word-of-mouth assessments from current or former clients.

Consider a Small Batch Test or Prototype

The proof is in the pudding—or the prototype, as it were. Asking for a small batch test or prototype run can provide a trial run to assess the quality of a potential partnership. Small batch tests offer companies a way to evaluate how well a manufacturer meets quality standards, adheres to specifications, and manages timelines before cementing a long-term contractual relationship. This provides an opportunity to observe how the manufacturer handles attention to detail, how flexible it is when asked to make changes, and how responsive it is to feedback.

Gather Feedback

The procurement and operational leads in charge of building the outsourcing partnership should actively seek feedback from relevant business stakeholders. Engineering, quality control, and executive teams should provide their perspectives on how they think a particular manufacturer stacks up in terms of communication, responsiveness, expertise, and cultural fit. The ensuing discussions can help uncover concerns that might not initially bubble up from dry technical documents or proposal scoring, and procurement leads should endeavor to integrate or reconcile this feedback with the formal evaluation scoring system.

Gauge Collaboration Capacities

A true partnership with a contract manufacturer demands tight collaboration, so it follows that businesses should look closely into how a prospective partner communicates and transacts on the daily. This includes evaluating protocols for meeting scheduling, shared project management tools, and escalation pathways for issue resolution. It’s also important to check the business communication and technology platforms used by the manufacturer. For example, does it use cloud-based supply chain management systems, or does it conduct business solely via email and archaic instant messaging tools? Does it include real-time visibility and have the ability to exchange information easily? And, most important, do its systems seamlessly integrate with other platforms in existing workflows?

Get a Unified View of Operations With NetSuite ERP

NetSuite ERP is a cloud-based platform providing real-time visibility into inventory management, production capacity, order backlogs, and cost structures for assessing potential contract manufacturing partners. During the evaluation process, NetSuite’s integrated platform offers detailed tracking and comparison of vendor performance, costs, lead times, and compliance with quality standards for RFP management and analysis during proposal comparisons. Once a relationship is established, NetSuite ERP can facilitate disciplined collaboration by automating and centralizing processes, such as work order creation, component tracking, and data sharing for alignment across the entire production lifecycle.

Working with the right contract manufacturing partner can help businesses significantly boost operational efficiency, time to market, and responsiveness to market conditions. But establishing a successful outsourced relationship takes careful planning and consideration. Companies need to take measured steps when researching and vetting prospective partners, delving into their technical expertise, manufacturing capacity, commitment to quality, and ability to collaborate with customers. Investing in the process of choosing and signing with a partner can lead to a resilient relationship that outsources production so the business can then focus on what it does best.

Contract Manufacturing Partner FAQs

Is contract manufacturing the same as private labeling?

No. Contract manufacturing involves outsourcing production of a business’s custom product, while private labeling means branding and selling a pre-existing product made by a manufacturer under a business’s own brand.

What is an example of contract manufacturing?

An example of contract manufacturing is a company that outsources the production of specific components, such as metal parts or electronic assemblies, to a specialized manufacturer that produces them according to the company’s specifications for later use in its final products.

What are the benefits of contract manufacturing?

Contract manufacturing allows companies to increase manufacturing capacity and product diversity without making a significant capital investment in its own manufacturing facilities. This lets them focus on their core strengths, such as R&D, product design, customer service, marketing, or sales.