Contract Manufacturing Services

Contract Manufacturing Services

Contract manufacturing services are performed by businesses that are hired as external service providers. Contract manufacturing is also known as outsourcing, offshoring or subcontracting; while exact definitions of those terms have yet to be universally agreed upon, they are commonly used interchangeably. Offshoring generally refers to services that take place internationally. New terms such as nearshoring or vertical disintegration add to the vocabulary but also complicate definitions. Nearshoring is outsourcing work to a domestic firm or a firm in a country that boarders the hiring firm. Vertical disintegration is an organizational form of industrial production where a product might be designed at one firm, manufactured at another with parts from another firm. Regardless of the title given, contract manufacturing is when one firm hires another to provide certain services in exchange for compensation. The businesses involved enter into a contract for a predetermined length of time which is typically one to five years. Contract manufacturing services are sought after by many industries, including but not limited to the aerospace, automotive, construction, chemical, electronics, food and beverage, marine, medical and pharmaceutical industries.

Contract manufacturing services are usually performed in keeping with a general business model that has developed alongside the process. A firm decides that it is going to hire an outside company to provide certain manufacturing services. It solicits bids or job estimates from various companies in that business. These companies are frequently dedicated to only being subcontractors instead of making their own products or parts. The hiring firm is provided with quotes based on the labor, tooling and material costs and makes a selection based on what they interpret is the best service and the most cost effective. The two companies discuss details such as the length of the contract, the amount paid and the specific manufacturing services to be provided and, once in agreement, sign a contract. Other options beyond outsource manufacturing includes subcontract machining, contract assembly or manufacturing for a specific industry, such as aerospace, chemical or pharmaceutical plants. Hiring manufacturing services are also similar to working with an OEM, an original equipment manufacturer. OEMs manufacture or fabricate products that are purchased by the hiring firm and sold under the branding of that company. In both situations, the firm that is hired to do the actual work is not the same firm who designs, advertises, retails and profits from the services.