What is Contract Manufacturing?
Contract manufacturing is a type of outsourcing in which a firm is enlisted
to produce components or entire products. Typically, a design or formula is presented
to the contract manufacturer and then a quote is given based on labor, processes,
material costs, and tooling. When a contract manufacturing firm is selected,
they become the acting factory for the hiring firm.
What are the benefits of Contract Manufacturing?
Contract manufacturing presents countless benefits for the hiring firm. One
benefit is the expansion of the core skills and competencies of the main company.
Functions and services that may not be possible entirely, or in the quantity needed
can be achieved via contract manufacturing.
Cost saving is another notable benefit of contract manufacturing. Cost of
capital can be reduced due to the removal of the need for equipment and facilities
required to manufacture parts and products.
A contract can be mutually beneficial both to the company hiring the contract manufacturing
firm and to the contractor. Both can depend on a steady flow of work. The employer
can also depend on consistent quality control when contract manufacturing
The base production can be handled through contract manufacturing while the
main company focuses more closely on matters that cannot be outsourced. From a microeconomics
standpoint, contract manufacturing plays a major role in economies of scale
(cost advantages associated with company expansion). When scale of output is greatly
increased, manufacturing costs are consequently greatly reduced as well.
What are the Applications of Contract Manufacturing?
Contract manufacturing has applications that span a wide range of industries,
including energy, semiconductor, computer, automotive, personal care products, food
manufacturing, medical, defense and aerospace. Larger companies that are attempting
to expand and grow in new markets can benefit greatly from integrating contract manufacturing
as part of their strategy.
The types of work which may be executed via contract manufacturing include
printed circuit board assembly, forging, gears, broaching, grinding, aluminum die
casting, complex assembly, and CNC machining.