A contract manufacturer (CM) is a manufacturer that contracts with a firm for components or products (in which case it is a turnkey supplier). It is a form of
outsourcing
Outsourcing is an agreement in which one company hires another company to be responsible for a planned or existing activity which otherwise is or could be carried out internally, i.e. in-house, and sometimes involves transferring employees and ...
. A contract manufacturer performing packaging operations is called
copacker
A contract packager, or copacker, is a company that packages products for their clients. The packaging and labeling services can be used for many types of products including foods, pharmaceuticals, household products, and industrial products.
Fu ...
or a ''contract packager''. Brand name companies focus on
product innovation
Product innovation is the creation and subsequent introduction of a good or service that is either new, or an improved version of previous goods or services. This is broader than the normally accepted definition of innovation that includes the i ...
, design and sales, while the manufacturing takes place in independent factories (the turnkey suppliers).
Most turnkey suppliers specialize in simply manufacturing physical products, but some are also able to handle a significant part of the design and customization process if needed. Some turnkey suppliers specialize in one base component (ex.
memory chips) or a base process (e.g. plastic molding).
Business model
![Contract manufacturing advertisement in Popular Mechanics 1905 v7 n2](https://upload.wikimedia.org/wikipedia/commons/9/95/Contract_manufacturing_advertisement_in_Popular_Mechanics_1905_v7_n2.png)
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
Job production, sometimes called jobbing or one-off production, involves producing custom work, such as a one-off product for a specific customer or a small batch of work in quantities usually less than those of mass-market products. Job producti ...
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.
Industries that use the practice
![Berndes Solingen bread knive marking hand forged 4116 X 50 CR MOV 15](https://upload.wikimedia.org/wikipedia/commons/d/dc/Berndes_Solingen_bread_knive_marking_hand_forged_4116_X_50_CR_MOV_15.jpg)
Many industries use this process, especially the
aerospace
Aerospace is a term used to collectively refer to the atmosphere and outer space. Aerospace activity is very diverse, with a multitude of commercial, industrial and military applications. Aerospace engineering consists of aeronautics and astrona ...
,
defense
Defense or defence may refer to:
Tactical, martial, and political acts or groups
* Defense (military), forces primarily intended for warfare
* Civil defense, the organizing of civilians to deal with emergencies or enemy attacks
* Defense industr ...
,
computer
A computer is a machine that can be programmed to Execution (computing), carry out sequences of arithmetic or logical operations (computation) automatically. Modern digital electronic computers can perform generic sets of operations known as C ...
,
semiconductor
A semiconductor is a material which has an electrical resistivity and conductivity, electrical conductivity value falling between that of a electrical conductor, conductor, such as copper, and an insulator (electricity), insulator, such as glas ...
,
energy
In physics, energy (from Ancient Greek: ἐνέργεια, ''enérgeia'', “activity”) is the quantitative property that is transferred to a body or to a physical system, recognizable in the performance of work and in the form of heat a ...
,
medical
Medicine is the science and practice of caring for a patient, managing the diagnosis, prognosis, prevention, treatment, palliation of their injury or disease, and promoting their health. Medicine encompasses a variety of health care practic ...
,
food manufacturing
Food processing is the transformation of agricultural products into food, or of one form of food into other forms. Food processing includes many forms of processing foods, from grinding grain to make raw flour to home cooking to complex ind ...
,
personal care
Personal care or toiletries are consumer products used in personal hygiene, personal grooming or for beautification.
Products
Personal care includes products as diverse as cleansing pads, colognes, cotton swabs, cotton pads, deodorant, eye lin ...
,
packaging
Packaging is the science, art and technology of enclosing or protecting products for distribution, storage, sale, and use. Packaging also refers to the process of designing, evaluating, and producing packages. Packaging can be described as a co ...
, and
automotive fields. Some types of contract manufacturing include
CNC
Numerical control (also computer numerical control, and commonly called CNC) is the automated control of machining tools (such as drills, lathes, mills, grinders, routers and 3D printers) by means of a computer. A CNC machine processes a p ...
machining, complex assembly, aluminum die casting, grinding, broaching, gears, and forging. The
pharmaceutical
A medication (also called medicament, medicine, pharmaceutical drug, medicinal drug or simply drug) is a drug used to diagnose, cure, treat, or prevent disease. Drug therapy (pharmacotherapy) is an important part of the medical field and re ...
industry uses this process with CMs called
contract manufacturing organization
A contract manufacturing organization (CMO), more recently referred to (and more commonly used now) as a contract development and manufacturing organization (CDMO) to avoid the acronym confusion of Chief Medical Officer or Clinical Monitoring Organ ...
s, constituing a $14 billion business segment around 2022. In the semiconductor industry, this practice is called the
foundry model
The foundry model is a microelectronics engineering and manufacturing business model consisting of a semiconductor fabrication plant, or foundry, and an integrated circuit design operation, each belonging to separate companies or subsidiaries.
...
. Contract manufacturing is
specially prevalent in the electronics industry.
Purpose, benefits, and risks
There are many benefits as well as risks to contract manufacturing. Companies are finding many reasons why they should outsource their
production
Production may refer to:
Economics and business
* Production (economics)
* Production, the act of manufacturing goods
* Production, in the outline of industrial organization, the act of making products (goods and services)
* Production as a stati ...
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
A marketplace or market place is a location where people regularly gather for the purchase and sale of provisions, livestock, and other goods. In different parts of the world, a marketplace may be described as a '' souk'' (from the Arabic), ' ...
. 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
In the field of management, strategic management involves the formulation and implementation of the major goals and initiatives taken by an organization's managers on behalf of stakeholders, based on consideration of resources and an assessmen ...
. For large companies that are trying to extend into new markets, contract manufacturing may be a good choice.
Benefits
* Cost savings – Companies save on their
cost of capital
In economics and accounting, the cost of capital is the cost of a company's funds (both debt and equity), or from an investor's point of view is "the required rate of return on a portfolio company's existing securities". It is used to evaluate new ...
because they do not have to pay for a facility and the equipment needed for
production
Production may refer to:
Economics and business
* Production (economics)
* Production, the act of manufacturing goods
* Production, in the outline of industrial organization, the act of making products (goods and services)
* Production as a stati ...
. They can also save on labor costs such as wages, training and benefits. Some companies may look to contract manufacture in
low-cost countries, such as India, to benefit from the low cost of labor.
[Knowdell, Jenny.]
The Benefits and Disadvantages of Contract Manufacturing.
(dead link
21 April 2010 version archived
. IQS Newsroom. Industrial Quick Search, Inc, 16 April 2010. Web. 21 Feb 2011.
* Mutual benefit to contract site – A contract between the manufacturer and the company it’s producing for may last several years. The manufacturer will know that it will have a steady flow of business until then.
* Advanced skills – Companies can take advantage of skills that they may not possess, but the contract manufacturer does. The contract manufacturer is likely to have relationships formed with
raw material
A raw material, also known as a feedstock, unprocessed material, or primary commodity, is a basic material that is used to produce goods, finished goods, energy, or intermediate materials that are feedstock for future finished products. As feedst ...
suppliers or methods of
efficiency
Efficiency is the often measurable ability to avoid wasting materials, energy, efforts, money, and time in doing something or in producing a desired result. In a more general sense, it is the ability to do things well, successfully, and without ...
within their
production
Production may refer to:
Economics and business
* Production (economics)
* Production, the act of manufacturing goods
* Production, in the outline of industrial organization, the act of making products (goods and services)
* Production as a stati ...
.
[Cohen, Soshanah, and Joseph Roussel. Strategic Supply Chain Management: The Five Disciplines for Top Performance(via Internet Archive) . United States: The McGraw-Hill Companies, Inc, 2005. ISBN 0-07-143217-5 .]
*
Quality
Quality may refer to:
Concepts
*Quality (business), the ''non-inferiority'' or ''superiority'' of something
*Quality (philosophy), an attribute or a property
*Quality (physics), in response theory
*Energy quality, used in various science discipli ...
– Contract manufacturers are likely to have their own methods of
quality
Quality may refer to:
Concepts
*Quality (business), the ''non-inferiority'' or ''superiority'' of something
*Quality (philosophy), an attribute or a property
*Quality (physics), in response theory
*Energy quality, used in various science discipli ...
control in place that helps them to detect
counterfeit
To counterfeit means to imitate something authentic, with the intent to steal, destroy, or replace the original, for use in illegal transactions, or otherwise to deceive individuals into believing that the fake is of equal or greater value tha ...
or damaged materials early.
* Focus – Companies can focus on their
core competencies better if they can hand off base
production
Production may refer to:
Economics and business
* Production (economics)
* Production, the act of manufacturing goods
* Production, in the outline of industrial organization, the act of making products (goods and services)
* Production as a stati ...
to an outside company.
* Economies of scale – Contract manufacturers have multiple customers that they produce for. Because they are servicing multiple customers, they can offer reduced costs in acquiring
raw material
A raw material, also known as a feedstock, unprocessed material, or primary commodity, is a basic material that is used to produce goods, finished goods, energy, or intermediate materials that are feedstock for future finished products. As feedst ...
s by benefiting from
economies of scale
In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation, and are typically measured by the amount of output produced per unit of time. A decrease in cost per unit of output enables ...
. The more units there are in one
shipment
Freight transport, also referred as ''Freight Forwarding'', is the physical process of transporting commodities and merchandise goods and cargo. The term shipping originally referred to transport by sea but in American English, it has been ext ...
, the less expensive the price per unit will be.
Risks
* Lack of Control – When a company signs the contract allowing another company to produce their product, they lose a significant amount of control over that product. They can only suggest strategies to the contract manufacturer; they cannot force them to implement them.
* Relationships - It is imperative that the company forms a good relationship with its contract manufacturer. The company must keep in mind that the manufacturer has other customers. They cannot force them to produce their product before a competitor’s. Most companies mitigate this risk by working cohesively with the manufacturer and awarding good performance with additional business.
*
Quality
Quality may refer to:
Concepts
*Quality (business), the ''non-inferiority'' or ''superiority'' of something
*Quality (philosophy), an attribute or a property
*Quality (physics), in response theory
*Energy quality, used in various science discipli ...
concerns – When entering into a contract, companies must make sure that the manufacturer’s standards are congruent with their own. They should evaluate the methods in which they test products to make sure they are of good
quality
Quality may refer to:
Concepts
*Quality (business), the ''non-inferiority'' or ''superiority'' of something
*Quality (philosophy), an attribute or a property
*Quality (physics), in response theory
*Energy quality, used in various science discipli ...
. The company has to rely on the contract manufacturer for having good suppliers that also meet these standards.
*
Intellectual property
Intellectual property (IP) is a category of property that includes intangible creations of the human intellect. There are many types of intellectual property, and some countries recognize more than others. The best-known types are patents, cop ...
loss – When entering into a contract, a company is divulging their formulas or technologies. This is why it is important that a company not give out any of its
core competencies to contract manufacturers. It is very easy for an employee to download such information from a computer and steal it.
*
Outsourcing
Outsourcing is an agreement in which one company hires another company to be responsible for a planned or existing activity which otherwise is or could be carried out internally, i.e. in-house, and sometimes involves transferring employees and ...
risks – Although
outsourcing
Outsourcing is an agreement in which one company hires another company to be responsible for a planned or existing activity which otherwise is or could be carried out internally, i.e. in-house, and sometimes involves transferring employees and ...
to
low-cost countries has become very popular, it does bring along risks such as language barriers, cultural differences and long lead times.
This could make the management of contract manufacturers more difficult, expensive and time-consuming.
*
Capacity constraints – If a company does not make up a large portion of the contract manufacturer’s business, they may find that they are de-prioritized over other companies during high
production
Production may refer to:
Economics and business
* Production (economics)
* Production, the act of manufacturing goods
* Production, in the outline of industrial organization, the act of making products (goods and services)
* Production as a stati ...
periods. Thus, they may not obtain the product they need when they need it.
* Loss of flexibility and responsiveness – Without direct control over the manufacturing facility, the company will lose some of its ability to respond to disruptions in the supply chain. It may also hurt their ability to respond to demand fluctuations, risking their customer service levels.
* Pricing – This addition of a second company and second
profit margin
Profit margin is a measure of profitability. It is calculated by finding the profit as a percentage of the revenue.
\text = =
There are 3 types of profit margins: gross profit margin, operating profit margin and net profit margin.
* Gross Prof ...
to be achieved, adds in cost to the product. The impact is seen either in a higher selling price to the customer or in a reduced profit margin for the company.
Protectionism
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
Protectionism, sometimes referred to as trade protectionism, is the economic policy of restricting imports from other countries through methods such as tariffs on imported goods, import quotas, and a variety of other government regulations. ...
.
The
iPad
The iPad is a brand of iOS and iPadOS-based tablet computers that are developed by Apple Inc. The iPad was conceived before the related iPhone but the iPhone was developed and released first. Speculation about the development, operating s ...
and
iPhone, which are products of
Apple Inc.
Apple Inc. is an American multinational technology company headquartered in Cupertino, California, United States. Apple is the largest technology company by revenue (totaling in 2021) and, as of June 2022, is the world's biggest company ...
, are manufactured in China by
Foxconn
Hon Hai Precision Industry Co., Ltd., trading as Hon Hai Technology Group in China and Taiwan and Foxconn internationally, is a Taiwanese multinational electronics contract manufacturer established in 1974 with headquarters in Tucheng, New ...
. Some devices may also be manufactured by
Pegatron
Pegatron Corporation () is a Taiwanese electronics manufacturing company that mainly develops computing, communications and consumer electronics for branded vendors. It also develops, designs and manufactures computer peripherals and components. ...
. Apple may move some fraction of iPhone assembly into the
United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
in the near future.
See also
*
Subcontractor
A subcontractor is an individual or (in many cases) a business that signs a contract to perform part or all of the obligations of another's contract.
Put simply the role of a subcontractor is to execute the job they are hired by the contractor f ...
(SUB)
*
Interactive Contract Manufacturing (ICM)
*
Electronic Contract Manufacturing (ECM)
*
Electronics Manufacturing Services (EMS)
*
Original Design Manufacturer
An original design manufacturer is a company that designs and manufactures a product that is eventually rebranded by another firm for sale. Such companies allow the firm that owns or licenses the brand to produce products while having to engage in ...
(ODM)
*Joint Design Manufacturing (JDM)
*
Contract Manufacturing Organization
A contract manufacturing organization (CMO), more recently referred to (and more commonly used now) as a contract development and manufacturing organization (CDMO) to avoid the acronym confusion of Chief Medical Officer or Clinical Monitoring Organ ...
(CMO)
*
Private Label or Parts List (PL)
*
Bill of materials
A bill of materials or product structure (sometimes bill of material, BOM or associated list) is a list of the raw materials, sub-assemblies, intermediate assemblies, sub-components, parts, and the quantities of each needed to manufacture an end ...
(BOM)
*
Supplier evaluation
*
Contract packager
A contract packager, or copacker, is a company that packages products for their clients. The packaging and labeling services can be used for many types of products including foods, pharmaceuticals, household products, and industrial products.
Fu ...
*
Turnkey
A turnkey, a turnkey project, or a turnkey operation (also spelled turn-key) is a type of project that is constructed so that it can be sold to any buyer as a completed product. This is contrasted with build to order, where the constructor builds ...
References
External links
Contract Manufacturing Pitfalls and What the Wrong Production System Can Cost YouThe Vital Role of Contract Manufacturing in Supply Chain Management and Optimization
{{DEFAULTSORT:Contract Manufacturer
Manufacturing
Outsourcing