Contract manufacturing is when one company manufactures parts or materials for another company, handling ordering and shipping. This model can be used in various industries, with the manufacturer convincing the customer of quality and cost savings. Advantages include stable jobs and no need for the customer to purchase facilities or hire employees. Contract manufacturing can also be used for services like telecommunications.
Contract manufacturing is a process that establishes a working agreement between two companies. As part of the deal, a company manufactures parts or other materials on behalf of its customer. In most cases, the manufacturer also handles the ordering and shipping processes for the customer. As a result, the customer does not have to maintain manufacturing facilities, purchase raw materials, or hire labor to produce finished products.
The basic working model used by contract manufacturers translates well across many different industries. Since the process is essentially outsourcing manufacturing to a partner who privately brands the final product, there are a number of different business ventures that can take advantage of this arrangement. There are many pharmaceutical contract manufacturing currently in operation, as well as similar deals in food manufacturing, the creation of computer components and other forms of electronics. Industries such as personal care and hygiene products, automotive parts, and medical supplies are also often created under the terms of such an agreement.
In order to secure jobs, the contract manufacturer usually initiates discussions with the potential customer. The task is to convince the potential customer that the manufacturer can use its facilities to produce quality goods that meet or exceed his expectations. At the same time, the manufacturer demonstrates how the overall per-unit cost of production to the customer will be lower than any current manufacturing strategy in use, increasing the amount of profit that will be earned from each unit sold.
There are several advantages to this type of arrangement. For the producer there is the guarantee of a stable job since having contracts in place that commit certain levels of production for periods of one, two and even five years makes it much easier to predict the future financial stability of the company. It is not necessary for the customer to purchase or lease manufacturing facilities, purchase equipment, purchase raw materials, or hire and train employees to produce the goods. Plus, there’s no headache dealing with employees not showing up for work, equipment going down, or other minor details that any manufacturing company faces on a daily basis. All the customer needs to do is generate sales, place orders with the manufacturer, and keep accurate records of all income and expenses associated with the business venture.
The general concept of contract manufacturing is not limited to the production of goods. Services such as telecommunications, Internet access, and cellular service may also be provided by a central provider and privately branded for other customers who wish to sell those services. This allows the customer to set a buying rate from the seller, then resell the services at a profit to their customer base.
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