What is contract manufacturing?

What is contract manufacturing? Contract manufacturing is defined as a company that is hired by another company to make parts or components for another company. Contract manufacturing is widely utilized in many different types of industries. Some of the different industries that use contract manufacturing are aerospace, defense, semiconductor, and even the medical fields. There are many companies that you can find that also specialize in contract manufacturing. What this means is that all the contract manufacturer does is to provide a part or a component for another manufacturing company for them to make a finished product. What is contract manufacturing and how it is used will be explained in the following paragraphs.

The way that contract manufacturing typically works is that the original equipment manufacturer will approach the contract manufacturer with a design for something that the original equipment manufacturer needs made. The contract manufacturer will give quotes on how much it will cost them to make the needed product or piece of product that the original equipment manufacturer had asked for. The contract manufacturer will also give quotes for how long of a time frame will be needed to get the product or piece finished. Original equipment manufacturers will most likely get quotes from more then one contract manufacturer in order to find the best price at the shortest turn around time. Once the original equipment manufacturer has all the quotes for making the product then the company will make a decision as to which contract manufacturer to do their business with to help make the finished product.

With all the contracts and prices agreed upon between the contract manufacturer and the original equipment manufacturer the contract manufacturer will then act as the original manufacturer's factory in making the needed part. The contract manufacturer will produce and ship units of the agreed upon design to the original equipment manufacturer for them to then use in the finished product. The contract manufacturer will then get paid from the original equipment manufacturer at the agreed upon price. This process is much like putting a puzzle together and getting separate pieces from other stores. In the end everything goes together to make one finished product.

Many manufacturing companies and even non-manufacturing companies use contract manufacturing instead of operating and maintaining their own factories for those needed products. This is because it can sometimes be more cost beneficial to outsource your components. Any company can use contract manufacturing for the full product or for smaller parts for the product. Some well known products that we use that are made with contract manufacturing include computers, cell phones, printers, televisions, and many of your personal care products.

Contract manufacturing also has many added benefits for the companies that use them. For example in an international company having a contract manufacturer in another country can give the parent company tax benefits that allow them to reduce their tax liability. The parent company that uses contract manufacturing can also increase their profits if they do not have to oversee the making of lots of different pieces for the full product. This is true in the production of computers where the memory and other components for the computer are made elsewhere and then put together at the parent company under their name.

Contract manufacturing is widely used in many industries. It can be economical for a lot of the companies that participate and use contract manufacturing. A contract manufacturer can make the same type of product for different companies which can also make it economical and profitable for the contract manufacturer. Sometimes a product can be made faster and even better when contract manufacturing is used.