Contract manufacturing is not a term most commonly used in mainstream society. But for businesses, this manufacturing concept plays an integral role in the success of their respective enterprises. This article explains in more detail the fundamentals of contract manufacturing.
What is meant by contract manufacturing?
Contract manufacturing is an outsourcing solution, a business practice that involves the delegation of production work to external or third-party manufacturing companies. A portion of work is completed by another company thus lowering overall expenses or capital investments.
In a contract manufacturing setup, manufacturing company A enters a “contract” or arrangement with another manufacturing company B for their products, components, or parts in order to complete the manufacturing process. Also known as subcontracting, this business process is becoming more popular to reduce cost and speed up production altogether.
What is a contract manufacturing company?
In essence, a contract manufacturing company focuses solely on rendering contract manufacturing services to multiple companies. There are two ways contract manufacturing operate:
- A contract manufacturer may produce a product for a client company. In this case, the entire process is facilitated by a contract manufacturing company. The finished product will be distributed under the client company’s brand or label.
- A contract manufacturer produces some of the parts and components needed to complete a client’s product offerings.
The most common strategy of companies that employ contract manufacturing is to buy components and goods from a contract manufacturing outfit and then integrate them into their offerings. The channels of distribution, marketing and customer service are facilitated by the client company themselves, with no involvement on the part of the contract manufacturing firm.
The following are different types of contract manufacturing processes:
- The complete delegation of the manufacturing process of goods to a contract manufacturing agency.
- The purchase of parts and components from a subcontracting company to complete the production of another company’s goods.
- Obtaining service expertise and labour services for manufacturing from a subcontractor.
- Utilisation of a contract manufacturing company’s facilities, tools and equipment for manufacturing.
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