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.

Production Industry

smith-production-industry

Production industry is the definition of the production of goods for use or sale. This refers to a wide range of human activity, from controlling high-tech machines to handicraft, but its most commonly applied to industrial production. It is where raw materials are processed into finished goods, usually on a large scale. It is common that the whole process from raw materials to the finished product involves several different manufacturing processes. For example, when it comes to the manufacturing of a sofa, there are numerous processes involved. One process is for turning iron into screws, one for turning wood into planks, one for turning silk or plastic into textile and stuffing and finally one manufacturing process for putting the sofa together.

The history of the production industry

In the beginning, production industry was usually carried out single-handedly. You had one “artisan” carrying out the whole process. For example, in the medieval age, you had smiths who turned iron ore into iron and iron into weapons or tools. This was commonly the process until the Industrial Revolution

The industrial revolution is sort of the transition from these single-handed processes to the large-scale manufacturing processes as seen today. The revolution began in Great Britain, where many of the technological innovations were found. Britain was in the mid-18th century world leading in the commercial industry. At this time Britain was controlling a global trading empire, with its colonies in Africa and North America. The country also had some political influence on the Indian subcontinent. This was due to the activities of the East India Company.

The production industry has changed since the industrial revolution, but its general structure is directly based on the process found this time. Our next step or revolution is debated to be the rise of automated robots or AIs.