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Contract Electronics Manufacturing Service
Jul 05, 2016

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 


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.