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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.
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
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,production
outside 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.
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.
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.
Advanced Skills – Companies can take advantage of skills that they may not possess, but the contract
manufacturer does. The contract manufacturer is likely to have relationships formed withraw material
suppliers or methods ofefficiencywithin theirproduction.
Quality– Contract Manufacturers are likely to have their own methods ofqualitycontrol in place
that helps them to detectcounterfeitor damaged materials early.
Focus – Companies can focus on theircore competenciesbetter if they can hand off baseproduction
to an outside company.
Economies of Scale– Contract Manufacturers have multiple customers that they produce for. Because
they are servicing multiple customers, they can offer reduced costs in acquiringraw materialsby
benefiting fromeconomies of scale. The more units there are in oneshipment, the less expensive
the price per unit will be.
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