Contract Machining

Contract Machining

Contract machining is performed by a firm that was hired to do the machining of another firm. It is a form of outsourcing because the work of one company gets hired out to a different company that ultimately does the machining. Many companies take part in contract machining because of reduced production costs through economies of scale. It is also easier to hire a machining company instead of building and operating a machining shop. Usually the two companies enter into a contract of three to five years, though other lengths are often arranged. For certain products, on-demand machining is more practical than producing parts in bulk. In that scenario, the hiring company takes in orders and subcontracts the work when necessary. Contract machining is widely used by many industries including the aerospace, automotive, construction, electronic, food and beverage, marine, medical and pharmaceutical.

Contract machining usually follows the general business model of contract manufacturing. The hiring firm contacts various machine shops and requests a quote regarding a specific design or part. If interested, the shops reply with an estimate based on the cost of labor, tooling, materials and other considerations. After the hiring firm has received the bids, it chooses one and the businesses enter into a contract exchanging goods and services for an agreed amount of money. Contract machining shares similarities with an OEM, an original equipment manufacturer. OEMs produce components, parts or products that are purchased by the hiring firm and sold under that company's identity. The business that actually made the part is not credited or marketed; they receive payment from the company that hired them in keeping with their contract agreements. Contract machining is comparable to hiring an OEM because in both situations, the company that works with the product is not company who also advertises it, sells it or benefits from it, although some companies have clauses stipulating otherwise. Companies on both sides of the outsourcing deal are attracted to contract machining. The manufacturer is guaranteed steady work for the duration of the contract, which creates financial stability and ease of mind while the hiring firm benefits by saving costs and avoiding the stresses associated with managing a production facility.