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Management Notes

Reference Notes for Management
Outsourcing manufacturing is also known as 

Outsourcing manufacturing is also known as 

by

Outsourcing manufacturing is also known as 

A. license manufacturing.
B. sublease manufacturing.
C. concurrent manufacturing.
D. hollow manufacturing.
E. contract manufacturing.

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The Correct Answer for the given question is Option E. contract manufacturing.

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Contract Manufacturing

Contract manufacturing is a form of outsourcing. Outsourcing is a broader term for services currently done in-house, but are moved to a third party. The term contract manufacturing refers to having a third party make a part or all of your product for you. Small businesses use contract manufacturing to produce their products. The system allows small businesses to start selling their products without acquiring large amounts of capital to set up and run a factory. Companies without in-house manufacturing teams can manufacture products through contract manufacturing. Outsourcing the manufacturing process of a product to a trusted manufacturer is called contract manufacturing.

By providing the company seeking service with complete drawings and documentation, the CM will manufacture the product from start to finish, removing the production burden from the company.  Contracted manufacturing is a vital part of the manufacturing industry. It is sometimes referred to as “build-to-print” as opposed to “build-to-spec” in which the company outsources the design and manufacturing to a trusted partner. CMs make it possible to manufacture products with limited resources. Furthermore, they offer in-depth manufacturing expertise that can’t be matched by an in-house team.

Benefits of Contract Manufacturing

  • Reduced Costs: Since no facility and equipment are needed for production, companies save on capital costs. In addition, wage, training, and benefits costs can be reduced. Contract manufacturing in countries with low labor costs, such as China, may be of interest to some companies.
  • Mutual Benefits: It is possible for the manufacturer and the company it is manufacturing for to have a long-term contract. At least until that contract expires, the manufacturer will have a steady flow of business.
  • Advanced Skills: The contract manufacturer can offer skills that the company lacks, but the company does. In addition to relationships with raw material suppliers, the contract manufacturer may also have established an efficient way to manufacture their products.
  • Quality: It is very likely that Contract Manufacturers have their own procedures for monitoring quality control that help them catch counterfeits and damaged materials at an early stage.
  • Focus: If companies can delegate base production to an outside company, they can focus on their core competencies.
  • Economic of scale: Contract Manufacturers have multiple customers for whom they produce. Economies of scale allow them to offer lower raw material costs by serving multiple customers. The lower the price per unit is when there are more units in one shipment.

Risks Involved in Contract Manufacturing

  • No control: By signing a contract to allow another company to produce their product, a company loses significant control over it. The contract manufacturer may only suggest strategies; it cannot force the manufacturer to follow those strategies.
  • Relationships: A good relationship between the company and its contract manufacturer is essential. It is important that the company not forget that the manufacturer also has other customers. They cannot make the manufacturer produce their product first. By working closely with the manufacturer and rewarding good performance with additional business, most companies minimize this risk.
  • Quality: When companies enter into contracts, they must ensure that the manufacturer’s standards are compatible with their own. In order to make sure their products are of high quality, they should evaluate the methods they use to test them. Suppliers must also meet these standards for the contract manufacturer.
  • Loss of Intellectual Property: The company divulges their formulas or technologies when they enter into a contract. The reason why it’s important not to outsource a company’s core competency to a contract manufacturer is because it will seriously hurt its business. The information is very easy to steal from computers if an employee has access to them. Corporate and government officials are struggling to improve security following the recent increase in intellectual property loss. Employee integrity usually plays a role in this issue.
  • Risks associated with outsourcing: The rising popularity of outsourcing to low-cost countries comes with a number of risks, including language barriers, cultural differences, and long lead times. In turn, this could complicate, increase the cost, and take more time to manage contract manufacturers.
  • Capacity Constraints: During periods of high production, a company may find that they are not given the priority over other companies if they are not a major part of the contract manufacturer’s business. This will result in them not being able to obtain the product they need on time.
  • Loss of Flexibility and Responsiveness: The company will be unable to respond to disruptions in the supply chain without direct control over the manufacturing facility. Additionally, they may be less able to respond to fluctuations in demand, endangering customer service levels.

Advantages and Disadvantages of Outsourcing – Outsourcing | Operations Management

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