Contract Manufacturing

Meaning

Contract manufacturing is a form of international business in which a firm signs a contract with one or a few local manufacturers in a foreign country to get certain goods or components produced to its own specifications. It is also known as outsourcing.

Three major forms

1. Production of components — such as automobile components or shoe uppers, to be used later in final products like cars and shoes.
2. Assembly of components into final products — such as assembling a hard disk, motherboard, floppy disk drive and modem chip into a computer.
3. Complete manufacture of products — such as garments.

The goods are produced or assembled by the local manufacturer using the technology and management guidance supplied by the foreign company. They are then delivered to the international firm for use in its own products, or sold as finished goods under the international firm's brand name in the home, host and other countries. Many well-known international companies get their products or components made in developing countries this way.

Advantages

• The international firm can get goods produced on a large scale without investing in production facilities of its own, using facilities that already exist abroad.
• With little or no investment abroad, there is hardly any investment risk.
• Products can be manufactured at lower cost, especially where local producers enjoy lower material and labour costs.
• Local producers also gain: contract jobs give a ready market and help utilise idle capacity. (For example, an Indian group manufactures soaps under contract for several multinationals, making better use of its excess soap-making capacity.)
• Local manufacturers get a chance to participate in international business and avail any incentives available to export firms, if the goods are delivered to the international firm's home or other countries.

Limitations …