The establishment of a working agreement between two companies by a process is Contract manufacturing. By this agreement, one company produces parts or other materials on behalf of their client i.e, the other company. In a way the other company does not have to maintain manufacturing facilities, purchase raw materials, or hire labor in order to produce the final goods.
The industries which use such processes are Defense, Semiconductor, Medical, Automotive, Personal care, Energy, Computer, and Aerospace fields.
You may have a client who needs specialized services to accomplish a certain task. Instead of losing the client, you simply go into contract with another contractor; in this case a subcontractor, and allow that person to fulfill that part of the contract. You get paid, and you in turn forward your subcontractor his part.
The need arises depending on the benefits and the risks associated with contract manufacturing. Companies are finding many reasons for outsourcing the production work to other companies. However, production outside of the company does come with many risks attached.
The business model in a contract manufacturing [CM] is that the hiring firm approaches the contract manufacturer with a design or formula. The contract manufacturer will quote the parts based on processes, labor, tooling, and material costs. Later on the hiring firm will request quotes from multiple CMs. After the bidding process is complete, the hiring firm will select a source, and then, for the agreed-upon price, the CM acts as the hiring firm's factory, producing and shipping units of the design on behalf of the hiring firm.
Contract Assembly: Involves one company sending loose or modifiable components to a contract assembler. The business that receives the separate parts assembles or changes them and makes a profit once the final products are sold back to the business.
Contract Electronic Assembly: Involves assembling an electronic product. Another company, who sells the good under their name, then purchases the completed product.
Contract Manufacturers: Produces products for another company, whose name appears on the finished product when it is sold.
Electronic Contract Manufacturing: An agreement by which one company manufactures electronic goods for a different company, which sells the product as their own.
Encapsulation: A process for circuits, resulting in shock resistance, good thermal properties and increased protection from harsher environments.
General Machining: A service offered by many contract manufacturers, including such processes as milling, wire eroding, punch press and laser cutting.
Manufacturing Services: Involves any procedural/beneficial actions performed by a contract manufacturer to meet the needs of a buying company. These services include but are not limited to product design and validation, rapid prototyping, assembly, testing, and sustained engineering.
Medical Device Contract Manufacturing: An agreement by which one company manufactures medical devices for another company.
Pharmaceutical Contract Manufacturing: The services provided by an outside company for a pharmaceutical company such a packaging and labeling.
A. Cost Factor: The capital costs of the Companies will be saved because they do not have to pay for a facility and the equipment needed for producing goods. The companies can also save on labor costs in terms of wages, training and benefits.
B. Mutual Benefit to Contract Site: A contract between the manufacturer and the company it’s producing for may last several years. The manufacturer will know that it will have a steady flow of business until then.
C. Advanced Skills – Companies can take advantage of skills that they may not possess, but the contract manufacturer does.
D. Quality: Contract Manufacturers are likely to have their own methods of quality control in place that helps them to detect counterfeit or damaged materials early on.
A. Lack of Control: When one company signs the contract allowing another company to produce their product, they lose a significant amount of control over that product.
B. Quality Factor: One company when entering into a contract must make sure that the manufacturer’s standards are in line with their own. They should also evaluate the methods in which they test product to make sure the products being produced are of good quality.
C. Misuse of Intellectual Property: By outsourcing one company is parting/sharing information on their formulas or prototypes, there is likely of misuse .
D. Capacity Constraints: When the outsourced company does not make up a large portion of the contract manufacturer’s business, they may find that they are de-prioritized over other companies during high productions periods. Thus, they may not be able to get the product they need when they need it.
E. Loss of Flexibility and Responsiveness: When there is no direct control over the manufacturing facility, the company will lose some of its ability to respond to disruptions in the supply chain. It may also hurt their ability to respond to demand fluctuations, risking their customer service levels.