In the modern business world, efficiency and speed are key to success. One strategy widely used by entrepreneurs, particularly in the cosmetics, food, beverage, and pharmaceutical industries, is utilizing contract manufacturing services.
Contract manufacturing allows companies to produce products under their own brand without needing to own a factory or production facilities. This article will comprehensively discuss what contract manufacturing is, the roles of each party involved, the processes involved, and the tax aspects that need to be considered.
Definition of Contract Manufacturing
In general, contract manufacturing is a collaboration between two parties: the brand owner (company owning the brand) and the contract manufacturer (company providing the production service). The contract manufacturer is responsible for producing goods according to the specifications given by the brand owner. In English, this term is commonly referred to as "Contract Manufacturing.".
The brand owner does not need to own a factory, production equipment, or a production workforce. They only need to have a product concept and then entrust the production process to the contract manufacturer, who already has the facilities and expertise in that field.
Contract manufacturing is commonly used in the following industries:
- Cosmetics and skincare
- Supplements and traditional medicine
- Packaged food and beverages
- Household cleaning products
- Fashion and textiles (confection)
Term
To better understand contract manufacturing, it’s essential to recognize some common terms used:
- Contract Manufacturing / CMT (Cut, Make, Trim): This type of contract manufacturing includes only the processes of cutting materials, creating products, and finishing them.
- OEM (Original Equipment Manufacturer): A company that manufactures products to be sold by others under their brand name.
- ODM (Original Design Manufacturer): A company that not only manufactures but also designs products to be sold by others.
- MOQ (Minimum Order Quantity): The minimum number of units that must be ordered by the brand owner from the contract manufacturer.
- Private Label: Products manufactured by a contract manufacturer but sold in the market under a specific brand.
- White Label: Generic products without any brand label that can be sold by anyone with their own brand.
- Toll Manufacturing: The brand owner provides the raw materials, and the contract manufacturer only performs the production process.
Roles of the Brand Owner (User of Contract Manufacturing Services)
The brand owner plays an important role in ensuring the collaboration runs smoothly. Their responsibilities include:
- Defining Product Specifications: This includes active ingredients, packaging design, fragrance, color, and quality standards.
- Providing Raw Materials (Optional): In some types of contract manufacturing, such as toll manufacturing, the brand owner supplies the raw materials.
- Conducting Product Testing: This involves sample quality testing, laboratory tests, or market tests.
- Handling Legalities (BPOM, Halal Certification): Although the contract manufacturer can assist, the legal certifications are often handled under the brand owner's name.
- Perfume Contract Manufacturing: Perfume manufacturers help create fragrances with different scents, bottle designs, and packaging. Clients can create their own fragrance products without investing in expensive perfume production technology.
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Roles of the Contract Manufacturer
The contract manufacturer is the party that possesses the production facilities and technical expertise to manufacture products as per the brand owner's order. Their responsibilities include:
- Providing Facilities and Resources: This includes expert personnel, production machinery, laboratories, and storage facilities.
- Creating Formulas: For products like cosmetics, beverages, or supplements, contract manufacturers often help create formulas that comply with regulations.
- Mass Production: Once the sample is approved by the brand owner, the contract manufacturer proceeds with large-scale production.
- Quality Control: QC (Quality Control) is essential to ensure products meet the agreed standards.
- Packaging and Labeling: This includes printing labels and packaging according to the brand owner's instructions.
Advantages of Contract Manufacturing
For both startups and growing businesses, using contract manufacturing offers several strategic benefits:
1, Lower Initial Investment
Companies don’t need to purchase production machinery, rent factories, or hire a production team. This significantly lowers the barrier to entry.
2. High Scalability
Production can be increased according to market demand without additional operational investment.
3. Focus on Branding and Marketing
The brand owner can focus resources on building the brand, marketing, and distribution, without being burdened by production operations.
4. Faster Production
Contract manufacturers are generally experienced and have established systems, which speed up the production process.
5. Access to Technology and Innovation
Contract manufacturers often keep up with the latest trends and have access to materials or technology that may be out of reach for new brands.
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Contract Manufacturing Process
The process of contract manufacturing generally involves the following steps:
- Consultation between the brand owner and contract manufacturer regarding product needs, target market, and concept.
- The contract manufacturer creates an initial sample for the brand owner to test and evaluate.
- If necessary, revisions are made to the formula or product appearance.
- Once everything is agreed upon, a formal contract is made outlining the rights and obligations of both parties.
- The contract manufacturer produces goods in large quantities according to the agreed MOQ.
- The products are checked for quality, packaged, and prepared for shipment.
- The products are handed over to the brand owner for marketing and distribution.
Tax Aspects of Contract Manufacturing Services
Value Added Tax (VAT)
Contract manufacturing services are subject to Value Added Tax (VAT), as stipulated in:
- Article 4 (1) of Law No. 42/2009 on VAT
- PMK No. 83/PMK.03/2012 on the VAT Treatment of Contract Manufacturing Services
Contract manufacturers must charge VAT at a rate of 11% on the service fees. The contract manufacturer must issue a tax invoice to the brand owner, which is then reported in the VAT monthly tax return.
Example:
If the contract manufacturing service fee is IDR 100,000,000, the VAT charged would be IDR 11,000,000, making the total invoice amount IDR 111,000,000.
Income Tax (PPh)
- Article 23 Income Tax: Imposed on payments for contract manufacturing services to domestic taxpayers. The rate is 2% of the gross amount excluding VAT, if the service provider has a taxpayer identification number (NPWP).
- Article 21 Income Tax: If the service is provided by an individual (freelancer), it may be subject to PPh 21 withholding tax.
- Corporate Income Tax: The contract manufacturer, as a service provider, must report its income in its annual tax return and pay taxes according to applicable rates.
Cost of Contract Manufacturing
The cost of contract manufacturing services can vary depending on several factors. The type of product, such as cosmetics, food, or supplements, typically has different costs. Products with more complex formulas or using specialized active ingredients and technologies tend to be more expensive.
Additionally, the Minimum Order Quantity (MOQ) affects the cost, as higher order volumes usually result in a lower per-unit price. Premium packaging designs or custom packaging also add to production costs. Legal costs, such as BPOM registration, halal certification, or intellectual property rights, also contribute to the overall expense.
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Examples of Contract Manufacturing Services
Here are some real-life examples of contract manufacturing services in Indonesia:
- Cosmetics Contract Manufacturing
This service includes the production of various cosmetic products such as lipsticks, powders, mascara, and eyeshadows. Contract manufacturers often offer customization options for color, texture, and packaging. - Skincare Contract Manufacturing
This service focuses on skincare products like moisturizers, serums, and facial cleansers. Contract manufacturers in this field help new brands launch products without the need for heavy investment in laboratories. - Herbal Contract Manufacturing
Herbal contract manufacturers produce products made from natural ingredients, such as supplements and herbal teas. These manufacturers specialize in processing herbal materials to create effective health products. - Perfume Contract Manufacturing
Perfume manufacturers help create fragrances with different scents, bottle designs, and packaging. Clients can create their own fragrance products without investing in expensive perfume production technology.
After understanding the significant benefits of using contract manufacturing services for your products, the next step is to ensure that your payment system operates smoothly and efficiently. Ayolinx offers a payment solution that simplifies your business transactions.
With Ayolinx, you can easily send invoices via payment links and receive payments through various methods such as bank transfers, e-wallets, and more, with high security. Register your business with Ayolinx now and enjoy ease in financial management and efficient transactions. Don’t miss this opportunity to maximize your business potential!
