What is Contract Manufacturing?

March 19, 2020 | Lean Manufacturing, American Manufacturing

Marlin Steel contract manufacturingNot every firm or agency has the resources, funds, or time to produce everything in-house, regardless of how idyllic it sounds—especially in the manufacturing industry. Investing in equipment, machinery, and expertise can be costly. For these reasons, contract manufacturing is a pretty common practice. 

What is contract manufacturing? How does it work? Here’s a quick explanation of the definition of contract manufacturing.

Definition of Contract Manufacturing

Contract manufacturing is when a contract manufacturer enters an agreement with another company to make certain components or products over a specified period of time.

Recognized as a form of outsourcing, a contract manufacturer may enter a business agreement with a company to produce parts, components, or whole products for the company to their specifications. The manufactured products are then used by the company in its own manufacturing process or to complete their own products.

Contract manufacturers are often third-party organizations that work exclusively in subcontracting or sell their products to other firms or agencies.

A global supplier in the corrugated box and paper industry contracted with Marlin Steel Wire Products, for example, to fabricate sheet metal parts on a contract basis for its container machines. Marlin Steel was able to serve the client’s "Just in Time" needs with speed, engineering expertise and automation capacity.

Tight fit and tight tolerance requirements are Marlin strengths. Degreed mechanical engineers use state-of-the-art software to design steel wire and sheet metal solutions. Skilled machinists carry out those designs. Min/Max quantities help Marlin Steel customers hold down inventory costs and get parts as soon as they need them.

Contract Manufacturing Examples

Marlin-Steel-Wire-Mesh-BasketOne example would be when a global supplier in the corrugated box and paper industry contracted with Marlin Steel Wire Products. Marlin agreed to fabricate sheet metal parts on a contract basis for the supplier’s container machines.

Marlin Steel was able to serve the client’s "Just in Time" needs with speed, engineering expertise, and automation capacity. This provided business for Marlin and maintained the standards and reputation of the client.

Benefits of Contract Manufacturing

The contract manufacturing business comes with several benefits.

Cost Reduction

By hiring a contract manufacturer, the hiring company is able to save on the cost of equipment. Fewer resources have to be expended on investing in purchasing large machinery and maintaining, repairing, or replacing it.

The need to hire labor to manufacture parts or products in-house is eliminated also. At times, entire teams of manufacturers, experts, and researchers have to be hired with full salaries and benefits, which all adds up.

Contract manufacturers have their own staff and equipment that a client won’t be financially responsible for. They only need to pay the agreed upon contract amount along with any additional fees or charges.

Prioritization of Resources

All of the money and resources that a company is able to save through contract manufacturing can be redirected towards other operations. For example, a business can bolster its marketing strategies, hire staff for other departments, and/or reinforce sales efforts using the saved capital.

A company is able to focus on its core values and competencies when a contract manufacturer takes on the load of manufacturing products for them.

Improved Manufacturing Time

When a company hires a contract manufacturer for only specific parts or components to supplement their own production line, they are able to cut their own manufacturing time. This leads to increased speed to market, improving delivery time and service to customers. As we say here at Marlin Steel, Quality Engineered Quick

Easier Market Entry

With the help of contract manufacturing, companies are able to maintain consistent production of high-quality products. Setting that standard will raise brand awareness and ensure market recognition as a reliable distributor. This can also lead to better business relationships with potential partners and future contractors.

Risks of Contract Manufacturing

As beneficial as contract manufacturing can be, there are some obstacles that can come up from hiring another company to produce your parts and products.

Limited Control

For the hiring company, there are certain specifications and properties that are desired for the product. Once those desires are communicated, there is very little that the company has control over until the product is presented for review. The client has very little control over the manufacturing and production of the product.

Conversely, the contract manufacturer generally has little to no say in the design of the product. The contractor is able to make suggestions, but there’s no guarantee that they will be approved.

Low-Quality Products

Hiring another company to produce products for you incurs the risk of hiring the wrong contractor. When this happens, product quality has a tendency to suffer. Low-quality products can be a result of miscommunication, misalignment between companies, or a difference in opinion for the design of the part or product.

Regardless of the reason why, low-quality products can result in a negative impact on the client’s reputation.

Job Displacement

When a company transitions from in-house manufacturing to outsourcing, one of the subsequent consequences is laying off the internal team. The displacement of employees can lead to more issues and potential expenses.

How to Choose the Right Contract Manufacturer

There are some very important characteristics that you should always look for in a contract manufacturer. Knowing the risks and benefits that come with outsourcing, finding the right fit can make all the difference for a company’s business and reputation.

Quality Facilities

When touring a contract manufacturer’s facilities, the location should be well-managed and clean. All machines and equipment should be obviously well-maintained, the staff should be experienced and knowledgeable, and an organized, structured production process.


Look for contract manufacturers that maintain ISO-certified manufacturing quality standards. The ISO 9001:2015 standard is specifically meant to establish the criteria needed for a company’s quality management system. Certified contractors generally provide higher quality parts, components, and products to their clients.


Having open communication between both parties is critical to the success of any business agreement. More reputable contractors are experienced in maintaining communication with their clients about the design, manufacturing process, and properties of the products they were hired to produce. They are able to quickly react and respond to production demands with little friction or slowdown.

Aware of the Market

Reputable contract manufacturers are tuned into trends and current events in the market. They respond to market changes and adapt when necessary. Their presence and involvement in the industry generally establishes their brand in the market, creating a reputation that companies can feel confident in investing in.

Contact Marlin Steel for Your Contract Manufacturing Needs

Marlin Steel has established itself as a reputable and recognized contract manufacturer. Customers are able to hold down inventory costs and get parts as soon as they need them because of Marlin’s degreed mechanical engineers, state-of-the-art software to design steel wire and sheet metal solutions, and skilled machinists.

Do you need custom stainless steel products? Contact the Marlin Steel team today for a quote.

Contact Marlin Steel