Contract Manufacturing as a Business Model

Contract manufacturing is a business practice in which one business (let’s call it X) tasks another one (let’s call it Y) to produce parts or whole products for it. The two businesses may be located in the same or different countries or regions. It is a popular form of outsourcing among huge businesses the world over.

Company X is referred to as the client while company Y is referred to as the Contract manufacturer/Contract Manufacturing Organization (CMO).

  • Why would companies use contract manufacturing?

Business may decide to outsource their manufacturing to another company for a host of reasons, which may include:

  • The need to have high-quality products especially when the contract manufacturer has great expertise and experience in the area

 

  • Lowering production cost by engaging manufacturers who are near an emerging market e.g an American vehicle company may contract a Europen company to produce cars for its European market

 

  • To enable the client to focus on other aspects of business like sales, marketing, and brand building

 

  • How does contract manufacturing work?

Once a business settles on contract manufacturing as a mode of operation, it comes out with specifications of the product it wants to be manufactured. These include product design, color, and branding. It then sends out a partnership request notice to potential CMO’s and asks for quotations.

The CMOs hand in their quotations and contract expectations, which the client assesses and settles on the best CMO to partner with and goes ahead to enter a contractual agreement.

Depending on the agreement, the contractor may use its own raw materials or get them from the client. Contract manufacturers are oftentimes involved in the production of similar products for competing companies.

  • Which are the popular industries that use contract manufacturing?

The practice of contract manufacturing is popular among major industries like pharmaceutical, automotive, aerospace, packaging, and computer production among others.

Popular contract manufacturers include Flextronics Singapore (electronics), Celestica (Electronics), and jabil Circuit.

Leave a Reply