Question

7. What is contract manufacturing? Why is it important?

Answer 1

Contract manufacturing is an arrangement in which one firm contracts with another to produce products to its specifications but assumes responsibility for marketing. International firms employ contract manufacturing in two ways. One way is as a means of entering a foreign market without investing in plant facilities. The firm contracts with a local manufacturer to produce products for it, according to its specifications. The firm's sales organization markets the products under its own brand. The second way is to subcontract assembly work or the production of parts to independent companies overseas. Although the international firm has no equity in the subcontractor, this practice does resemble foreign direct investment. When the international firm is the largest or only customer of the subcontractors, it has in effect created in another country a new company that generates employment and foreign exchange for the host nation.

Contract manufacturers play a very important role when it comes to the manufacturing of certain products in the market. Many companies and industries rely on their expertise and efficiency to produce and deliver what is expected of them. Contract manufacturing is all about taking a task on contract and then supplying the finished product as discussed at the time of closing the deal. There are many benefits of hiring a contractor to do the production for you, as it involves a huge capital investment to set up manufacturing of your own. You can not only take a non-core task off your hands but also save huge additional costs in labor and infrastructure.

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