Types of Contract Manufacturing: Everything You Need to Know
Several types of contract manufacturing exist to provide more opportunities to generate, review, and execute contractual agreements.3 min read
Several types of contract manufacturing exist to provide more opportunities to generate, review, and execute contractual agreements.
What is Contract Manufacturing?
Contract manufacturing is commonly used in international markets when one company arranges for a company located in a different country to handle the manufacturing process of its products. Other terms for contract manufacturing include international outsourcing and international subcontracting. The company that needs its products manufactured will provide the manufacturing company with the specifications for the product. This type of agreement may also require the company to provide all necessary materials for production.
A contract for manufacturing will outline certain terms, including:
- Product quality.
- Delivery dates.
This type of contract also outlines any guidelines for testing and inspecting the products as determined by the company needing products manufactured for its clients. Contract manufacturing outlines any order modification terms and compensation, or guarantees if either party breaches the terms of the contract.
This process basically involves outsourcing the production of certain goods to a foreign market through a partner that produces and brands the product privately. Many companies across a variety of industries can benefit from contract manufacturing. Since the process is essentially outsourcing production in foreign markets to a partner that privately brands the end product, there are a number of different companies and industries that can make use of this type of contract.
Model of International Contract Manufacturing
In most cases, contract manufacturing refers to the company that is manufacturing, building, or creating the product. However, this term can also be used to refer to firms offering specialized services for contracts related to manufacturing to multiple business organizations. The firm might have created its own concept or design, or it might be acting as the liaison between Company A, which came up with the concept, and Company B, which manufactures that product or its specific components.
This role involves serving as a bridge between two companies that can mutually benefit one another. The process of a standard contract manufacturing agreement includes several steps:
- Company A enters into an agreement with Company B for the manufacturing of Company A's product.
- Company A incorporates those products produced by Company B into its line of items being sold to customers.
- Company A uses its own distribution, sales, customer service, and marketing channels to put the product into the hands of its consumers or end-users.
What Are the Forms of Contract Manufacturing?
Another term for this process is “private label manufacturing,” which involves one company producing finished goods for another company. In one example, Foxconn Technology Group served as the contract manufacturing firm for several top electronics brands, managing contracts for the production of products like the iPhone (Apple), Xbox One (Microsoft), and Kindle Fire (Amazon).
If one company produces the components or parts used to complete products, this can also be part of the contract manufacturing process. This concept is especially common among electronic and technology companies when larger companies use smaller companies to manufacture certain components used in hardware or other electronic devices.
Deerfield Machine Parts is an example of this process. This contract manufacturer is based out of Deerfield, New Jersey, and specializes in the production of rubber, aluminum, plastic tubing, and other materials. These materials are especially critical in the marine and automotive industries, so companies in these industries enter into a contract for manufacturing with Deerfield. This agreement allows Deerfield to manufacture its parts and provide them to the automotive and marine companies, who will then incorporate those components into their final product.
Labor and Service Subcontracting
Hiring members of a labor or service force can also be a way to subcontract in your business. When a company doesn't have enough manpower to take care of producing goods in a quick and smooth manner, the labor can be outsourced.
Many large companies based in the United States will set up factories and production plants in other countries to manufacture their products. This process often involves subcontracting with human resources firms in the other countries to obtain the labor force needed for manufacturing. However, this process has come with some negative publicity, especially when looking at what these laborers are paid and their working conditions.
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