Contract Manufacturing

A contract manufacturer ("CM") is a manufacturer that contracts with a firm for components or products. It is a form of outsourcing.

Business model

In a contract manufacturing business model, the hiring firm approaches the contract manufacturer with a design or formula. The contract manufacturer will quote the parts based on processes, labor, tooling, and material costs. Typically a hiring firm will request quotes from multiple CMs. After the bidding process is complete, the hiring firm will select a source, and then, for the agreed-upon price, the CM acts as the hiring firm's factory, producing and shipping units of the design on behalf of the hiring firm.

Industries that utilize the practice

Many industries utilize this process, especially 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. The pharmaceutical industry utilizes this process with CMs called Contract manufacturing organizations.

Protectionism

In an international context, establishing a foreign subsidiary as a contract manufacturer can have favorable tax benefits for the parent company, allowing them to reduce overall tax liabilities and increase profits, depending upon the activities of the contract manufacturer. This is a form of protectionism.