A contract manufacturing company is engaged by another independent party to perform a specific process for the client company. As far as manufacturing is concerned, contract refers to an arrangement with another party to perform a job as specified in the contract. There are many valid reasons to become involved in this type of arrangement, all of which are oriented to maximization of profits. There are also some negative points associated with contract manufacturing, these include the risk that the client has little control over the process and as a result there is a risk of uncertainly.
All companies are aware that the best way to maximize profits is for them to do what they do best and to avoid areas where they have an inherent weakness. Within business this fact is known as a “comparative advantage.” This simply means that although there are two companies that are in a position to produce the same thing, there is one company that is positioned to do it more efficiently, with better quality and for less. This is what drives a contract manufacturing company, they are fully aware that they are better positioned to handle a component of the production process or in the case of pharmaceuticals for example, the entire process including packaging.
A Contract Manufacturing Company is well positioned to save their clients money as they are set up to manufacture the item in question at a cheaper cost than the client company could do in house. As well as saving the client money, the contractor manufacturer can also shave precious time off the production process as they maintain extensive inventories of the various raw materials needed and do not have to start from scratch. By outsourcing the manufacturing, the client company is left free to pursue that segment of the business that they best which is often research and development as well as sales and marketing.
The downside of outsourcing manufacturing is in selecting the wrong company to do the manufacturing. It is important that the potential client partner does in depth analysis of the proposed manufacturing partner, if the relationship fails the end result can end up costing more rather than less which is the expectation.
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