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A contract manufacturer("CM")is a manufacturer that contracts with a firm for components or products.
It is a form ofoutsourcing. In the food business a contract manufacturer is calledcopacker.
Business model An advertisement for contract manufacturing services, inPopular Mechanics,1905.
In a contract manufacturing business model, 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.Typically a 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.
Job productionis, in essence, manufacturing on a contract basis, and thus it forms a subset of the
larger field ofcontract manufacturing. But the latter field also includes, in addition to jobbing, a
higher level of outsourcing in which a product-line-owning company entrusts its entire production to
a contractor, rather than just outsourcing parts of it.
Industries that use the practice
Many industries use this process, especially theaerospace,defense,computer,semiconductor,energy,
medical,food manufacturing,personal care,and automotive fields.Some types of contract manufacturing
includeCNCmachining, complex assembly, aluminum die casting, grinding, broaching, gears, and
forging. Thepharmaceuticalindustry use this process with CMs calledContract manufacturing
organizations.Purpose, Benefits, and Risks There are many benefits as well as risks to contract manufacturing. Companies are finding many reasons why they should outsource theirproductionto other companies. However,productionoutside of the company has many risks attached. Companies must first identify theircore competencies before deciding about contract manufacturers. A company’score competenciesare what make them competitive in themarketplace. If a company allows another company to take control of them, it loses that advantage.
When deciding about contract manufacture, the company should weigh the benefits and associated risks.
For small companies, contract manufacturing may not be a goodbusiness strategy. For large companies
that are trying to extend into new markets, contract manufacturing may be a good choice.
Benefits Cost Savings – Companies save on theircost of capitalbecause they do not have to pay for a
facility and the equipment needed forproduction. They can also save on labor costs such as wages,
training and benefits. Some companies may look to contract manufacture inlow-costcountries,
such as India, to benefit from the low cost of labor.
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