Contract manufacturing has long been part of how companies operationalize their business.
Types of contract manufacturing include full machine assembly, sheet metal formation, forging metal, and more. This work is critical in product development, ensuring scalability and quality products for customers.
The first step of a partnership with a manufacturing company should start before you even reach out to candidates for the work. Setting up a budget should occur before any outreach, interviews, or production.
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What Goes into a Contract Manufacturing Budget?
Typically, companies will use a similar contract manufacturing pricing model called cost plus.
Cost plus involves companies estimating the cost of producing a given type and number of products. Along with this estimation, profit for the company itself is added in. Cost plus is one reason the cost of hiring contract manufacturing service will differ from provider to provider.
Given this knowledge, we can begin breaking down our budget based on four main sub-categories. Startups and larger companies can approach a contract manufacturing company with their needs across these categories and get a good idea of their budget.
- Manufacturing Costs: expenses associated with production costs (materials, machine operations), raw materials, labor costs, and any equipment maintenance that may be necessary.
- Supply Chain and Logistics: costs relating to inventory management, shipping and distribution, and supplier management.
- Quality Control and Compliance: any charges associated with regulatory compliance, quality assurance, inspections, documentation, reporting, and audits.
- Operational and Administrative Costs: involve overhead costs for maintaining manufacturing facilities, employee training, tools and technologies, and project management.
6 Steps to Creating a Contract Manufacturing Budget
Effective budgeting is a fundamental aspect of contract manufacturing projects. Whether you're a small business or a large corporation, partnering with a contract manufacturer requires careful financial planning to maintain a smooth and successful business relationship.
When planning out your budget in-house, follow these simple steps to set yourself up for cost savings.
- Define manufacturing goals
- Select manufacturing partner
- Estimate production costs
- Plan for supply chain and logistics
- Outline plans for QA and quality control
- Review and adjust budget over time
Define Your Manufacturing Goals
Before thinking about anything related to the production line, companies need to think through their objectives for engaging contract manufacturing help in the first place.
Defining goals is a great way to think through the specific projects you need to create, along with their must-have qualities and characteristics. Along with this, consider your ideal production volume and quality standards you’d like to implement across the board.
Knowledge of your needs in each of these areas is going to do a ton to shape your budget right from the start. Plus, you can begin conversations with potential service providers off the back of this exercise.
Select Your Contract Manufacturer
With your goals and standards for your service provider at the front of your mind, it’s time to engage with a contract manufacturer who can bring your plans to life.
It’s important that you locate companies with experience producing product designs, prototypes, and final products that are similar to yours. Of course, this is easier said than done.
Conduct research on reliable reviews sites, evaulate portfolios, and browsecompany websites to get a feel for their capabilities. Then, based on what you’ve learned, reach out with a request for proposal (RFP).
This will lead you into interview conversations with companies you like best. At this point, you can obtain quotes and talk more about your project scope.
With detailed cost estimates and proposals in hand, you’re equipped to choose a contract manufacturing company.
Estimate Manufacturing Costs
It’s worth it to collaborate closely with your chosen contract manufacturer to estimate the manufacturing production costs.
This should include the expenses for production, raw materials, labor, quality control, and any other manufacturing-related expenditures. All companies will offer different levels of service and capabilities. Be sure you fully understand what they’re offering as well as their differentiators before agreeing to a given price.
Plan for Supply Chain and Logistics
The supply chain and logistics portion of your manufacturing project is no doubt a huge contributor to your business model and the overall quality of the collaboration with your service provider.
Note down your needs for relevant inventory management, warehousing, shipping, and distribution. Not all of these will be important for your unique engagement, but all should be considered and accounted for if necessary.
When working through each of these costs, be sure to include charges in line with supplier management, import/export activities, and any logistical complexities. Having your needs straight in these areas will help your partner understand how best to achieve your objectives.
Outline Quality Assurance and Compliance Costs
Quality assurance is needed for operations to be consistent and up to the standards of the client.
It may be tempting to leave these activities out of your budget for the sake of lower costs, but these activities are paramount to the quality of your end product (and, indirectly, the satisfaction of your customers).
Compliance is also integral to contract manufacturing — abiding by regulations may require certain quality control processes, documentation, or even certifications to be done right. Additionally, you should set aside some budget for third-party audits that are necessary for compliance reasons.
Review and Adjust Based on New Product Requirements
A contract manufacturing budget should be considered a dynamic document. This means that regular review is expected for the budget to remain accurate to the scope of your work.
With that in mind, don’t change your budget constantly without your contract manufacturer in the loop. Remain in close communication with your partner to make sure everyone is aligned on the budget and adjust together as needed if scope accommodations are necessary.
Even the best-organized projects experience unforeseen circumstances, which cause unforeseen expenses. Remember that you can reallocate your budget as you encounter these.
Contract Manufacturing Budget Template
Major Factors Impacting Contract Manufacturing Budget
Creating an accurate budget for contract manufacturing involves considering various factors that can significantly affect the overall cost.
The biggest drivers of increased spending for clients in the contract manufacturing sectors come down to:
- Production Volume: Larger production volumes typically result in economies of scale, leading to reduced per-unit manufacturing costs. Smaller production runs may have higher costs per unit due to setup and handling expenses.
- Complexity of Products: More intricate and technically advanced products often require additional equipment, skilled labor, and quality control measures, which can increase manufacturing costs.
- Quality and Compliance Requirements: A manufacturing process should align with industry-specific regulations and quality control standards may require additional resources and expenses.
- Supply Chain and Logistics Considerations: Considerations like international shipping, customs, and supplier reliability can increase the budget.
Contract Manufacturing Budgets Facilitate Project Success
Mastering the art of budgeting is difficult — this is particularly true when drafting budgets involving intellectual property, technical processes, and niche specialized teams.
By following tried-and-true processes and keeping open communication with your manufacturer, it doesn’t need to be as hard as it looks.
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