A contract manufacturer ("CM") is a manufacturer that contracts with a firm for components or products. It is a form of outsourcing. A contract manufacturer performing packaging operations is called copacker or a contract packager.
In a contract manufacturing business model, the hiring firm approaches the contract manufacturer with a design or formula. The contract manufacturer will quote the parts based on processes, labor, tooling, and material costs. Typically a hiring firm will request quotes from multiple CMs. After the bidding process is complete, the hiring firm will select a source, and then, for the agreed-upon price, the CM acts as the hiring firm's factory, producing and shipping units of the design on behalf of the hiring firm.
Job production is, in essence, manufacturing on a contract basis, and thus it forms a subset of the larger field of contract manufacturing. But the latter field also includes, in addition to jobbing, a higher level of outsourcing in which a product-line-owning company entrusts its entire production to a contractor, rather than just outsourcing parts of it.
Many industries use this process, especially the aerospace, defense, computer, semiconductor, energy, medical, food manufacturing, personal care, packaging, and automotive fields. Some types of contract manufacturing include CNC machining, complex assembly, aluminum die casting, grinding, broaching, gears, and forging. The pharmaceutical industry use this process with CMs called contract manufacturing organizations. In the semiconductor industry, this practice is called the foundry model.
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There are many benefits as well as risks to contract manufacturing. Companies are finding many reasons why they should outsource their production to other companies. However, production outside of the company has many risks attached. Companies must first identify their core competencies before deciding about contract manufacturers. A company's competencies are what make them competitive in the marketplace. If a company allows another company to take control of them, it loses that advantage.
When deciding about contract manufacture, the company should weigh the benefits and associated risks. For small companies, contract manufacturing may not be a good business strategy. For large companies that are trying to extend into new markets, contract manufacturing may be a good choice.
In an international context, establishing a foreign subsidiary as a contract manufacturer can have favorable tax benefits for the parent company, allowing them to reduce overall tax liabilities and increase profits, depending upon the activities of the contract manufacturer. This is a form of true protectionism.
The iPad and iPhone, which are products of Apple Inc., are manufactured in China by Foxconn. Hence, Foxconn is a contract manufacturer, and Apple benefits from a lower cost of manufacturing devices. Some devices may also be manufactured by Pegatron. Apple may move some fraction of iPhone assembly into the United States in the near future.
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