The contract manufacturer ("CM") is the manufacturer that contracts with the company for components or products. This is a form of outsourcing. The contract manufacturer that performs the packing operation is called a copacker or contract contractager.
Video Contract manufacturer
Business model
In the contracting business model, the hiring company approaches the contract manufacturer with a design or formula. Contract manufacturers will cite parts based on processes, labor, equipment, and material costs. Usually the recruitment company will ask for quotes from some CM. After the bidding process is complete, the recruitment company will choose the source, and then, for an agreed price, CM acts as the manufacturer's factory, producing and delivering the design unit on behalf of the recruitment company.
Production work is essentially manufacturing under contract, and thus forms part of a larger contract manufacturing field. But the latter field also includes, in addition to jobbing, a higher level of outsourcing in which a company with a product line entrusts all of its production to a contractor, rather than simply outsourcing its parts.
Maps Contract manufacturer
Industry using practice
Many industries use this process, especially aerospace, defense, computers, semiconductors, energy, medical, food manufacturing, personal care, packaging, and automotive fields. Some types of contract manufacturing include CNC machines, complex assembly, aluminum die casting, grinding, broaching, gears, and forgings. The pharmaceutical industry uses this process with a CM called Contract manufacturing organization.
Goals, benefits, and risks
There are many benefits as well as risks to contract manufacturing. Companies find many reasons why they should divert their production to other companies. However, production outside the company has many risks. Companies must first identify their core competencies before deciding about contract manufacturers. Company competence is what makes them competitive in the market. If a company allows another company to control it, the company loses that profit.
When deciding about contracting, the company should consider the associated benefits and risks. For a small company, a manufacturing contract may not be a good business strategy. For large companies that are trying to expand into new markets, manufacturing contracts may be a good choice.
Benefits
- Cost savings - Companies save on their capital costs because they do not have to pay for facilities and equipment needed for production. They can also save on labor costs such as wages, training, and benefits. Some companies may look for manufacturing contracts in low-cost countries, such as India, to benefit from low labor costs.
- Reciprocal benefits to contract sites - Contracts between producers and companies they produce for a few years. The manufacturer will know that it will have a steady stream of business up to that point.
- Advanced skills - Companies can take advantage of skills they may not have, but contract manufacturers do. Contract manufacturers tend to have established relationships with raw material suppliers or methods of efficiency in their production.
- Quality - Contract makers tend to have their own quality control methods in place that help them detect counterfeit or damaged materials early.
- Focus - Companies can focus on their core competencies better if they can deliver basic production to an outside company.
- Economic scale - Contract manufacturers have many customers they produce. Because they serve many customers, they can offer cost reductions in obtaining raw materials by utilizing economies of scale. The more units in one shipment, the cheaper the price per unit.
Risk
- Less Control - When a company signs a contract allowing another company to produce their product, they lose a great deal of control over the product. They can only suggest strategies to contract manufacturers; they can not force them to apply it.
- Relationships - It is imperative that the company establishes a good relationship with its contract manufacturer. Companies must remember that manufacturers have other customers. They can not force them to manufacture their products before a competitor. Most companies reduce this risk by working closely with the manufacturer and delivering good performance with additional business.
- Quality concerns - When entering into a contract, the company must ensure that the manufacturer's standards are consistent with theirs. They should evaluate the methods in which they test the product to ensure they are of good quality. Companies must rely on contract manufacturers for having a good supplier that also meets this standard.
- The loss of intellectual property - When entering into a contract, a company leaks out their formula or technology. This is why it is important that the company does not provide one of its core competencies to contract producers. It's easy for employees to download such information from a computer and steal it.
- Outsourcing Risk - Although outsourcing to low cost countries has become very popular, it carries risks such as language barriers, cultural differences, and long periods of time. This can make the contract manufacturer's management more difficult, costly and time-consuming.
- Capacity constraints - If companies do not make the most of the contracting business, they may find that they are not prioritized above other companies during high production periods. Thus, they may not get the products they need when they need them.
- Loss of flexibility and responsiveness - Without direct control over manufacturing facilities, companies will lose some of their ability to respond to disruptions in the supply chain. It can also hurt their ability to respond to demand fluctuations, risking their level of customer service.
- Price - Addition of second company and second profit margin to be achieved, increase product cost. The impact is seen either in higher selling prices to customers or in reduced profit margins for the company.
Protectionism
In an international context, establishing a foreign subsidiary as a contract producer may have beneficial tax benefits for the parent company, allowing them to reduce overall tax liabilities and increase profits, depending on the activities of contract producers. This is a form of true protectionism.
The iPad and iPhone, which are Apple Inc.'s products, are manufactured in China by Foxconn. Therefore, Foxconn is a contract manufacturer, and Apple benefits from lower manufacturing device costs. Some devices can also be manufactured by Pegatron. Apple may move some of its iPhone assembly to the United States in the near future.
See also
- Subcontractor (SUB)
- Interactive Contract Creation (ICM)
- Electronic Contract Manufacturing (ECM)
- Electronic Manufacturing Services (EMS)
- Original Design Manufacturer (ODM)
- Joint Design of Manufacturing (JDM)
- Contract Manufacturing Organization (CMO)
- Private Labels or Parts List (PL)
- Bill of materials (BOM)
- Package contract
References
External links
- Manufacturing Error Contract and What Faulty Production System Can Burden You
- Important Role of the Manufacturing Contract in Supply Chain Management and Optimization
Source of the article : Wikipedia
0 Comments