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Contract Manufacturing

Contract manufacturing, put in simple terms, is a company contracting with a manufacturing firm for the production of components or products. Many industries use this process, including the aerospace, defense, computer, semiconductor, energy, medical, food manufacturing, personal care, and automotive fields. Some types of contract manufacturing include CNC machining, complex assembly, aluminum die casting, grinding, broaching, gears and forging.

Author: Alison Hicks
Date: Aug 8, 2011 - 12:44:55 PM

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Contract manufacturing, put in simple terms, is a company contracting with a manufacturing firm for the production of components or products. Many industries use this process, including the aerospace, defense, computer, semiconductor, energy, medical, food manufacturing, personal care, and automotive fields. Some types of contract manufacturing include CNC machining, complex assembly, aluminum die casting, grinding, broaching, gears and forging.

In contract manufacturing, the hiring firm approaches the contract manufacturer with a design or formula. The contract manufacturer then quotes the cost of production based on processes, labor, tooling, material costs and the quantity required. Typically a hiring firm will request quotes from multiple contract manufacturers. Visits to the manufacturing facilities are also common before a contract manufacturing deal is signed. After the bidding process is complete, the hiring firm will select a source, and then, for the agreed-upon price, the contract manufacturer acts as the hiring firm's factory, producing and shipping units of the design on behalf of the hiring firm.

There are many benefits to contract manufacturing. Companies are finding many reasons why they should be outsourcing their production to contract manufacturers. However, production outside of the company can come with risks attached. Companies should identify how they will benefit from a partnership before deciding whether or not they should contract manufacture.

A primary benefit to contract manufacturing is cost savings. Companies save on their cost of capital because they do not have to pay for a facility and the equipment needed for production. They can also save on labor costs such as wages, training and benefits.
 
There are mutual benefits to both the hiring firm and contract manufacturer. A contract between the manufacturer and the company it’s producing for may last several years. The manufacturer benefits from knowing that it will have a steady flow of business during the contract period. The hiring firm benefits from skills that they may not possess, but the contract manufacturer does. Additionally the contract manufacturer is likely to have relationships formed with raw material suppliers or methods of efficiency within their production that are of benefit to the hiring firm.

Contract manufacturers are likely to have their own methods of quality control in place. This can help insure quality that is of benefit to the hiring firm. Contracting out the manufacture of components or complete products can also allow hiring companies to focus on their main business and sales. Since contract manufacturers have multiple customers that they produce for they, and their customers, may benefit from reduced costs in acquiring raw materials due to economies of scale.

All of this together makes contract manufacturers an appealing solution for many companies.  Although there are risks as well as benefits, almost all the risks are based on the integrity of the contract manufacturer. If companies are smart and careful about what contract manufacturer they go into business with the union is usually beneficial to both businesses.

Domaille Engineering specializes in contract manufacturing from their office in Rochester MN. As one of the world's foremost contract manufacturing companies, Domaille is now providing the engineering and manufacturing expertise to a broad range of industries.

View all articles by Alison Hicks

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