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Contract Manufacturing on IndustryNet

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Contract Manufacturing

Contract manufacturing present a process between two companies that should determine a working agreement. Actually, there are two main definitions of contract manufacturing:

1. It is a business model where a firm hires another firm to produce components or products.

2. It is a business model in which one firm hires a contract manufacturer to produce components or final products based on the hiring firm's design.

No matter what definition you use, one thing is sure - It is a form of outsourcing. In a CM the hiring firm approaches the contract manufacturer with a design or formula.Then the contract manufacturer will quote the parts based on labor, material costs, processes and tooling. A hiring firm will, naturally, request quotes from multiple CM. After the biddings are done, the hiring firm will decide the source. The CM is in charge of delivering the right price for the hiring firm as well as for production and shipment of designing units.

Benefits of CM

There are a lot of benefits of contract manufacturing such as:

• Saving the cost – in most cases, companies want to save their labor and capital cost so they hire a contract manufacturer is countries that are low-cost, in that sense (China is a great example for a low cost).The catch is that they don’t have to pay for the equipment and facility that is necessary for production.

• Benefits for both sites – this type of contract between the company and the manufacturer can last a few years. For the manufacturer it is a safe zone for business for a couple of years, until the contract expires.

• Control of quality – contract manufacturers have their methods of quality control so they can recognize materials that are damaged.

• Good price – contract manufacturers produces for a lot of customers so they can offer lower costs. Actually, as they have more units in one shipment, the price will be less expensive per unit.

Risks of CM

There are also a lot of risks of CM such as:

• Shortage of control: the company that allows the other company to produce their products can only suggest strategies, they cannot force the contract manufacturer to implement it.

• Quality of standard: The company has to ensure the contract manufacturer has suppliers that meet their standards because a good quality must be kept.

• Loosing of intellectual property: every time a company start with a contract, it means that automatically must disclose its technologies and formulas. That is why security is very important – to stop stealing and selling the information.
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