Private Label vs. Contract Manufacturing: What’s the Difference?

Feb 23, 2024 | Contract Manufacturing, News

Staub Equipment | private label vs. contract manufacturing

There are several ways to describe how a manufacturer produces a product for another company that’s then branded and sold as its own. These include private label manufacturers, original equipment manufacturers (OEMs), and contract manufacturers. 

Previously, we’ve compared contract manufacturing vs. OEM manufacturing, contrasting these two approaches for outsourced product fabrication. Here, we will compare private label vs. contract manufacturing while touching on OEMs, as they share a great deal in their methodology with private label manufacturers. This post intends to clarify the differences between companies considering private label vs. contract manufacturing. In so doing, an informed understanding will help companies choose the most appropriate business partnership model for their product.

Considering Private Label vs. Contract Manufacturing

Certain business models choose to outsource elements of production to fulfill specific production assignments for which a business doesn’t have sufficient capacity or capability to perform. When comparing private label to contract manufacturing, both processes involve outsourcing production to another company. However, contract manufacturers neither own the product nor can they change specifications for the company that hires them. As such, most contract manufacturers simply act as the production arm of the entity that hires them. However, sometimes contract manufacturers offer design capabilities as well, including taking a DFMA (design for manufacture and assembly) approach regarding the design and production of a product.

Private label manufacturers provide products that are branded and labeled according to the instructions of the organization that partners with them. In private label manufacturing, the manufacturer controls the specifications and quality of the end product. One example of this could be a retail business offering their store brands of a popular branded product. Another could be when non-profit organizations hire private label manufacturers to make items with their names and logos on them.  

Creating partnerships with manufacturers enables these entities to more effectively produce their products, while outsourcing this work allows them to focus more on marketing, sales, and other elements. When considering private label vs. contract manufacturing, there is an array of pros and cons for each manufacturing style.  

Private Label Manufacturing 

Essentially, private labeling involves the branding of a company’s manufactured product based on a third party’s idea or design. For example, a company hires a private label manufacturer to make a product based on their partner’s concepts and specifications. Normally, the hiring entity won’t have to develop or tweak product designs. They are often even just putting their label on a product. Private labels are common in grocery and box stores that sell their brand of products, usually at prices that are lower than other similar products.

Private label manufacturing is about creating an ongoing relationship between the manufacturer and the entity that hires it. This manufacturing approach can be applied to just about any type of product, including machined components. Private labeling often, but not always, occurs for products that aren’t all that unique or innovative, with the sales and marketing completely controlled by the company that outsources the manufacturing. In these cases, the buyer of the private label manufacturer’s products supplies their own SKU codes, product descriptions, and branding, along with accompanying sales and marketing literature.

Advantages of private label manufacturing include:

  • Many private label manufacturers have storage facilities available, which reduces the cost of storing goods.
  • Not having to hire experienced product designers and developers, as private label manufacturers provide this service.
  • Product components have already been tested, eliminating the need for product testing expenditure.
  • Sourcing production facilities isn’t necessary.

All in all, private-label manufacturing is a cost-effective approach to manufacturing products. Yet it also has its downsides. Private label manufacturers require minimum orders, which can limit their use by smaller companies that can’t afford or have no need for larger orders. It also limits how much control a company has over its end product, though it takes less design control than an OEM.

How Private Label Differs from OEM

While a private label manufacturer and OEM are quite similar in their approaches, they do have differences. Both leave the sales and marketing to the company that hires them while remaining anonymous entities involved in the production, but the main aspect differentiating private label manufacturers from OEMs is who designs the product. While private label companies generally make items based on their customers’ designs, OEMs will often stipulate how the product is fabricated, including the materials and processes used.

Contract Manufacturing 

In general, contract manufacturing vendors participate more narrowly in the production process. These companies are often brought in as a partner due to their expertise in a specific manufacturing activity. It may be more of a labor-intensive part of production, a value-added process available to the manufacturer, or involve technology that the buyer doesn’t have in-house.

Cost is often the determining factor in these relationships. Contract manufacturers will already have the resources to perform a task effectively, including access to equipment and materials used in production. It enables a company to take advantage of the contract manufacturing vendor’s capabilities, while also reducing the need to invest in expensive equipment and facilities. This allows a company to concentrate on what it does best, whether this be research and development, sales and marketing, or other pursuits that bring value to a business.

Advantages of contract manufacturing include: 

  • Flexibility: As the company retains ownership of the product’s design, it allows companies to focus on other areas of production.
  • Knowledge: Drawing on a contract manufacturer’s knowledge base can be invaluable, as some manufacturers have considerable experience that can reject flawed designs before they’re built and otherwise help perfect a product.
  • Reduce overheads: By transferring production to a contract manufacturer, companies can often increase profits by negotiating lower pricing for finished products than with private label manufacturers.
  • Scalability: With already existing networks of suppliers, contract manufacturers can scale production without the need for capital investment.

When considering private label vs. contract manufacturing, the latter also has its drawbacks. For one, both parties must communicate well with each other to avoid expensive errors that can lead to longer production times. Vendors should be carefully vetted as well, as a dishonest contract manufacturer will have proprietary details for a product, which could potentially be sold to a competitor. As with any partnership, reliability also may be a factor that should be evaluated before any contracts are signed.

Yet the right contract manufacturer can help companies produce goods that meet their exact specifications and quality goals while also saving on operating costs. It costs significantly less than fabricating a product in-house while harnessing the vendor’s experience and specialized equipment to do the job. Some of the better contract manufacturers can even guide product development, allowing companies to reduce the time it takes to bring a product to market.

The Staub Difference for Contract Manufacturing 

For companies considering the variances between private label vs. contract manufacturing and which would best suit their needs, certain manufacturers can offer more. Staub Precision Machine Inc. has cutting-edge automated technology and manufacturing know-how to provide its clients with the production capabilities they require. Collaborating with Staub as a contract manufacturer will allow your company or organization to produce precision components quickly and with greater accuracy. To learn more about the difference Staub can make, contact one of our friendly customer service representatives today.