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Contract manufacturing is a popular type of outsourcing used by many U.S. companies. In this lesson, you'll learn what contract manufacturing is and some of its key concepts. Contract Manufacturing Defined
Contract manufacturing is the outsourcing of part of the manufacturing process of a product to a third-party. More specifically, contract manufacturing is an outsourcing of certain production activities that were previously performed by the manufacturer to a third-party. A company may outsource the manufacture of certain components for the product or outsource the assembly of the product. Nowadays, outsourcing companies have become specialists in a multitude of services for manufacturers including design, production, assembly, and distribution.
Advantages to Contract Manufacturing
Why would a company opt for contract manufacturing? Manufacturers can save significant money on labor, materials and other expenses related to production. Third-party contract manufacturers are usually in developing countries with an abundant supply of cheap labor and minimal regulations. So long as the company maintains appropriate oversight, contract manufacturing can permit a company to lower its production costs, maintain the quality of its production, and increase its profit margins.