Contract Manufacturing

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Contract manufacturing is a service provided by a manufacturing company that is hired by an original equipment manufacturer (OEM). The contract manufacturing relationship consists of an agreement between the contracted company and the OEM to perform a certain job in a certain amount of time for a pre-determined amount of money. This type of agreement can be beneficial for both parties involved. Contract manufacturing can also be called outsource manufacturing, although the word outsourcing typically refers to manufacturing that takes place outside of North America it can refer to any type of manufacturing done outside of the OEM. Nearshoring is a new term associated with contract manufacturing in reference to contracting work in the same country as the hiring company or a country that borders it. Nearshoring cuts down on project and product lead times. Contract manufacturing services encompass contract machining, subcontract machining and contract assembly. Contract manufacturers provide a range of manufacturing processes including turning, boring, drilling, milling, sawing, shaping, planning, tapping or grinding as well as new technologies like electrical discharge, electrochemical or ultrasonic machining among others. These types of contracts are utilized by many industries including the chemical, automotive, construction, food and beverage, marine, pharmaceutical, medical device, military, electronic and aerospace.

There are many benefits of the contract manufacturing agreement. The contract manufacturers are guaranteed steady work for the duration of the contract, which creates a sense of financial stability and security. The OEM benefits by saving costs and avoiding the stresses associated with managing a production facility and managing and training a labor force. The involved businesses enter into a contract for a predetermined length of time or until a certain number of units are manufactured. The average length of the contract is between three and five years, although they can be shorter or longer depending on the product. The OEM also benefits from the expertise and quality of the contracted company that most likely already has its own quality control and quality assurance processes. Another benefit is that both companies are able to focus on their core competencies; this allows for maximum use of resources and is therefore more cost-effective. Contracts come with disadvantages, too. Lack of control over manufacturing and quality is problematic, especially when the name of the OEM is going on the product, not the company that manufactured it. There is also the possibility of intellectual property loss of the OEM because they have to share their formulas and technologies for production. If the contract is with a foreign manufacturer, the OEM will have lingual and cultural barriers as well as longer lead times. Keeping these disadvantages in mind, it is extremely important for the two companies involved to have a good relationship in order to make it and keep it mutually beneficial.

Multiple terms are used interchangeably for contract manufacturing. Contract manufacturers are companies that are hired to complete manufacturing for an OEM. This is usually their sole form of business. There are many different kinds of manufacturing processes including contract machining and contract assembly. Contract assembly is when one company assembles parts to create a finished product for another. This normally happens with the use of an assembly line. Electronic contract manufacturing produces complicated electronic products. These companies often specialize in certain products. Medical device contract manufacturing is the system by which a manufacturing company makes medical devices or components that are later sold by another company. Pharmaceutical contract manufacturing produces goods or services for a pharmaceutical company such as pills, capsules, lotions, liquids and other items in addition to containers or packaging. Military contract manufacturing is completed by a company that produces military products including aircrafts, weapons, shelters, body armor and other equipment. This type of manufacturing is only done by specially approved companies. Chemical contract manufacturing is a company that performs chemical manufacturing and synthesis on behalf of another obtaining the necessary starting materials, compounds and equipment in order to fulfill their end of the contract. Aerospace contract manufacturing produces components related to the aerospace field: airplanes, helicopters, unmanned aircraft and military jets.

The widespread usage of contract manufacturing is made possible by improvements in transportation, communication technology and globalization. To some extent, this type of manufacturing has been used for centuries in the sense that multiple skilled tradesmen would have been necessary to create certain products such as a carpenter, upholsterer or blacksmith. Contract manufacturing still requires special skills and technology but now the product might be shipped all over the world for various processes. A part might be designed in Germany and assembled in the Philippines from materials that were produced in China before it is finally sold in the United States. This globalization could not have happened without fast and reliable methods of transportation. Companies are usually tied to deadlines and production dates; if the contract manufacturer can produce the part but cannot ship it quickly and safely then they will probably not get the job. Improved communications have also contributed to the rise of contract manufacturing because now companies and firms all over the world are able to effectively communicate with each other, giving bids, taking orders and overseeing production. Contract manufacturing is no longer limited by borders but is open to firms who can meet the demands of interested companies.

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Contract Manufacturing Types

• Aerospace contract manufacturing is used to produce parts and components of aircrafts and spacecrafts.
• Chemical contract manufacturing is used to mix, create and synthesize liquids and solid chemicals.
• Contract assembly refers to a process that involves one company sending loose or modifiable components to a contract assembler. The business that receives the separate parts assembles or changes them and makes a profit once the final products are sold back to the business.
• Contract machining is a service offered by many contract manufacturers that includes such processes as milling, wire eroding, punch press and laser cutting.
• Contract manufacturers produce products for another company, The contract manufacturer's name does not appear on the finished product when it is sold, only the name of the hiring company appears on the finished product.
• Contract manufacturing services involve any procedural actions performed by a contract manufacturer to meet the needs of a buying company. These services include but are not limited to product design and validation, rapid prototyping, assembly, testing, and sustained engineering.
• Electronic contract manufacturing is the agreement by which one company manufactures electronic goods for a different company, which sells the product as their own.
  
• Medical device contract manufacturing is the process through which one company manufactures medical devices for another company.
• Military contract manufacturing produces vehicles, weapons, body armor, structures and other items that are used by the military. 
• Outsource manufacturing is an alternate name given to contract manufacturing that frequently used when a company contracts a foreign company for manufacturing.
• Pharmaceutical contract manufacturing refers to the services provided by an outside company for a pharmaceutical company; this often includes packaging and labeling.
  
• Subcontract machining is another name for contract machining and is any one of many mechanical processes involving a cutting tool.

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Contract Manufacturing Terms Bill of Materials (BOM) - a list which includes all subassemblies and components that go into a certain product. The BOM also shows quantities of each material used. Box-Built - refers to any assembly work that does not involve printed circuit board production. Core Competencies - procedures or actions that are essential to a company's long -term growth and success. Core competencies tend to be skills and knowledge rather than company functions or products. Corrective Action Request (CAR) - an action request usually filed by an OEM that asks the responsible business to conduct a cause analysis regarding the error and to resolve the issue at hand. Engineering Change Order (ECO) - an alteration to a bill of materials (BOM) such as the replacement of a specified component by a substitute for it. ECOs commonly contain a reason and description for the change, and the date for implementation of the change. High-Mix, Low-Volume - a production where low quantity products assembled vary in design and process. Intellectual Property (IP) - any unique product developed by human intellect. IPs include inventions, ideas and business methods. Joint Service Agreement (JSA) - A contract and document used to define processes, performance estimations, and expectations for the contract manufacturer and the OEM. It also serves to reduce misunderstandings which sometimes occur. Low-Mix, High-Volume - a production that includes one or few variations of a high quantity good. Manufacturing and Supply Agreement (MSA) - a contract designed to outline responsibilities between a contract manufacturer and the OEM which purchases the product(s). MSAs describe what the manufacturer is to provide for the OEM and at what cost. New Product Introduction (NPI) - a set of procedures used to turn a product design into a product ready for manufacturing. The product must also meet quality, cost, and time-to-market requirements. Nonrecurring Expense (NRE) - one or more activities/items required by a contract manufacturer that are specific to a single OEM's product program. Some NREs include special tooling, programming and setup. Original Design Manufacturer (ODM) - any company that manufactures its own unique product. From the ODM, the product is commonly sold to an OEM. ODM designs are based on their own intellectual property. Original Equipment Manufacturer (OEM) - a business that specifies and designs products under its own name. With outsourcing, many OEMs obtain "their" products from another source. Outsourcing - the procedure used to subcontract a process. Product designs and manufacturing techniques are commonly outsourced by a third -party company such as a contract manufacturer. Prototype - an original model or mock-up of a technological process or device. They are used to generate criticisms and other information that will help the final design before production takes place. Request for Quote (RFQ) - a document prepared by an OEM and submitted to a contract manufacturer. The RFQ contains product quantities and specifications, as well as a BOM. Time to Market - the time required to bring a quality product into the market. Time to Volume - length of time necessary to turn a prototype into a high-volume production good. Volume Price Agreement (VPA) - a contract service agreement that contains deliverables, pricing, and cost reductions based on volume production.

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