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Outsourcing manufacturing processes to a foreign location such as Mexico can take various forms. There are several modes of entry into Mexican manufacturing, and contract manufacturing is a viable and profitable mode for many companies.

contract manufacturing

Indeed, some companies make it their sole method of manufacturing, while others incorporate it into their blended approach to manufacturing products. The reasons these companies favor contract manufacturing over any other exclusive method are myriad. 

However, contract manufacturing is not for everyone. Some business models are better suited to this form than others. Determining if the benefits of contract manufacturing apply to you and your situation requires a familiarity with what this manufacturing method is and what it can best accomplish.

What Is Contract Manufacturing?

Contract manufacturing (CM) is also known as private label manufacturing, and allows a company to contract with a factory for the production of a product or input components for the product. The factory charges a batch price or per-unit price and may provide small or large quantities. This allows the manufacturer to forego investing in new tools or machinery associated with that part. 

Private label manufacturing is the most popular form of contract manufacturing and refers to the production of a finished product that the client can then place their branding on and sell as their own or use in their own assembled product. But there are other forms of contract manufacturing.

Individual component contract manufacturing refers specifically to contracting out the production only of components of a finished product. This is sometimes referred to as subcontracting. Additionally, end-to-end contract manufacturing refers to a contracted factory performing the entire assembly process from components manufactured by their factory or others. This differs from private label in that it allows slightly more control to the client over the manufacturing process.

When to Choose Contract Manufacturing

In order to maximize the benefits of contract manufacturing in Mexico, it’s important to understand how this mode can benefit a company and whether or not subcontracting is right for your situation. Typically, this mode is best for:


  1. Small Companies

    Smaller companies tend to have more financial pressures with less equipment and capacity. A key benefit of contract manufacturing is in the ability to incrementally expand your output.


  1. Streamlining

    Companies who crave simplicity and want to streamline their operations can benefit from the consolidating all of their value chain into one outsource partner who oversees everything from raw materials to warehousing.


  1. Companies with Changing Demand

    Contract manufacturing provides the greatest level of flexibility for companies with significant demand shifts.


If in one or more of these categories, it might make sense to choose a contract manufacturing partner who can meet your needs while your company focuses on quality and design. When selecting an optimal partner, consider:

  • Qualifications
  • Capacity
  • Capabilities
  • Personnel Compatibility
  • Stability

Other Benefits of Contract Manufacturing

In deciding if contract manufacturing in Mexico is best for you, consider the following advantages.

Contract manufacturing typically allows companies greater economies of scale, resulting in more cost efficiency. Furthermore, a company can place very small batch orders if need be or contract with multiple partners should demand exceed their capacity. Thus, this option offers the greatest flexibility for changing market conditions or exploring a new niche.

It is also quick and easy to begin a contract manufacturing relationship. After selection of a provider, there is a very short startup process (typically days or weeks). And unlike opening a factory in Mexico, hiring a subcontractor there requires little to no knowledge of local regulations, import/export law, labor laws, etc.

While choosing this option does not allow for the hands-on control associated with owning the factory  and equipment, nor the long-term savings, the freedom and short-term savings are quite attractive for companies not in the position to open a foreign subsidiary or purchase a Mexican maquiladora operation

In this way, companies that might not otherwise be in a position to compete with much larger manufacturing leaders may still take advantage of outsourcing and all its benefits. 

It’s easier than you think.

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