What Is Contract Manufacturing?

Contract manufacturing is when an original equipment manufacturer (OEM) hires a specialized manufacturer to produce custom parts or products. This guide covers how contract manufacturing works, its benefits and how to select a manufacturer to meet ITAR and ISO standards.

Contract Manufacturing Definition

In contract manufacturing, the OEM provides the design in the form of CAD drawings and specs. The contract manufacturers are responsible for the factory, labor and machinery to create the products.

Rather than buying off-the-shelf components, contract manufacturing involves custom fabrication such as cutting, machining and molding to fit the client’s design.

The key characteristics of contract manufacturing include:

• Design ownership: The client retains ownership of the IP and design rights.
• Production flexibility: OEMs can scale from prototype to production.
• Material sourcing: The contract manufacturer often handles raw material procurement.

How Contract Manufacturing Works

Let’s walk through a complete end-to-end contract manufacturing process.

1. Consultation and design: The client submits their drawing, which can be in various forms, including CAD. The contract manufacturer then reviews the drawing for Design for Manufacturing (DFM), which assesses the manufacturability of the product or part. During this stage, the contract manufacturer looks for ways to optimize the drawing for the most efficient and cost-effective results.
2. Prototyping: The contract manufacturer then creates an initial piece to send to the client for sign-off. This is known as the first article inspection (FAI). The manufacturer measures the prototype against the drawing to ensure full compliance. The client either approves it or sends it back for rework to match their design.
3. Production: Once the client approves the prototype, the fabrication begins. Whether it is machining, cutting or molding, quality contract manufacturers adhere to strict standards, checking for absolute precision and quality.
4. Delivery: The contract manufacturer then packages the parts and ships them.

Types of Contract Manufacturing

Contract manufacturing involves different production models depending on the level of customization and the required scope. Understanding these differences helps you select the right partner for your job. Private label manufacturing adds branding to generic products, whereas other models create custom components from specific designs. Some contract manufacturers offer a full end-to-end service from design to delivery, handling the entire life cycle of a custom part.

There is also labor or service subcontracting, where you hire specific labor or skills, such as specialized assembly. This helps you tackle high-skilled tasks rather than full production runs, supplementing your internal team. For example, a company might machine its own metal housing but use a contract manufacturer for secondary operations, such as complex hand assembly or kitting.

Benefits of Contract Manufacturing

There are many benefits to working with a contract manufacturer, including:

• Cost reduction: Using a contract manufacturer eliminates the need for capital expenditure. Buying CNC machines plus paying for overhead is a significant investment. Instead, the client can access the same machining by hiring a contract manufacturer.
• Access to expertise: You can leverage a contract manufacturer’s knowledge of materials and processes. This helps you create quality products efficiently with ready-to-hire experience and expertise.
• Scalability and flexibility: With contract manufacturing, you can ramp up or down production without staff turnover. If an OEM sells 10 or 1,000 units, the contract manufacturer can adjust. This means the client doesn’t have an empty factory.
• Focus on core business: Partnering with a contract manufacturer can free up your staff to focus on designing your next product rather than managing a machine shop.

Challenges in Contract Manufacturing

Choosing a reliable partner for your contract manufacturing is crucial. The first challenge is ensuring proper quality control. Poorly made parts won’t be fit for purpose, increasing rejection and return rates. This wastes materials and time.

For aerospace or military applications, parts have a particularly strict tolerance. To address this, it’s essential to partner with a manufacturer that demonstrates a robust quality management system, such as one certified to ISO 9001, and has a proven track record of adherence to strict quality protocols. For defense-related components, ITAR registration (or equivalent national defense regulations) is vital for ensuring compliance with regulatory requirements.

Another challenge is intellectual property (IP) protection. It’s important to establish clear, comprehensive non-disclosure agreements (NDAs) and a thorough manufacturing agreement that explicitly defines IP ownership and protection.

Industries That Use Contract Manufacturing

Many industries use contract manufacturing. Here are some examples:

• Aerospace and defense: The aerospace and defense industry needs high-precision, compliant parts. For example, a global leader in precision motion control trusts the contract manufacturer to make critical insulators for flight hardware. Failure risks are high, so they prioritize partnering with manufacturers that are AS9100 and ITAR-certified.
• Medical devices: The medical industry also requires precision and cleanliness. Breathalyzer insulators, for instance, need to be inert, clean and precise for handheld or implantable devices.
• Electronics: Modern electronics get hot and are sensitive to electrical interference. Contract manufacturers can help design and fabricate G10/FR4 and phenolic insulators and shielding to manage these issues.
• Automotive: The automotive and transport industries need robust and durable parts that often need rapid replacement. For older models, the original part may be obsolete. Using a contract manufacturer allows the client to create a like-for-like replacement that meets the OEM specs and performance requirements, without the need for expensive new tooling.

Contract Manufacturing vs. Other Manufacturing Models

Contract manufacturing is sometimes confused with other manufacturing models, such as original equipment manufacturers. Contract manufacturing differs from OEMs — the OEM owns the brand, while contract manufacturers produce the goods.

When the OEM works with a contract manufacturer, they still own the design, intellectual property and brand. They tell the contract manufacturer what to make. The contract manufacturer owns the machines, process and labor. Their task is to figure out how to make the product efficiently.

To understand what we mean by contract manufacturing, think of it as a strategic partnership, not a simple transaction. The contract manufacturer needs to understand the intent of the part and perform DFM reviews to ensure it meets the specs.

How to Choose the Right Contract Manufacturer

The right contract manufacturer for your business depends on a few factors, including:

• Capabilities check: Ensure your partner has the right machines and quality control methods.
• Certifications: Choosing a certified manufacturer gives you the peace of mind that your partner has a framework for reliably manufacturing products to spec. For some standards, this is a legal requirement.
• Flexibility: Some contract manufacturers have a minimum order quantity. For start-ups or smaller projects, it’s generally better to find a contract manufacturer with lower minimum order requirements to reduce costs and waste.

Partner with American Micro Industries for Endless Contract Manufacturing Capabilities

Contract manufacturing is an efficient way of producing the quality parts you need without the need for capital spending. The right partner can help your parts be fully compliant with standards.

Since 1995, American Micro Industries has supported defense, aerospace, and medical clients as a contract manufacturer. We’re a veteran-owned and operated leading manufacturer of custom parts and components. Based in Chambersburg, PA, we specialize in CNC machining, electrical insulation materials, laser cutting and more. Request a free quote today to get started.