Contract manufacturing, assembly services and packaging is a process whereby an agreement is entered into between two companies where one company supplies to the other company certain products and services as defined by the contract. In many cases the supplier in the contract is responsible for procuring material, packing and shipping the goods on behalf of the client. The result is that the client eliminates the need to maintain any facility that otherwise would be needed to provide assembly services and packaging.
The basic business model can translate into many different industries. The arrangement at its core is no more than outsourcing a certain part of the business to an outside contractor. This arrangement is very popular in the areas of consumer electronics, food, pharmaceuticals and even personal care products, auto parts and medical supplies. Even the US military sub out their component sourcing and packing to outside military contractors.
It is up to the manufacturing or production contractor to initiate contact with the client. The contractor must convince the client that he has the skills, people, equipment and facility to perform the task and to provide the goods and services that meet at minimum or exceed if at all possible, the quality expectations of the client. As well as meeting quality goals, the contractor must prove to the client that production can be done to a forward schedule and that the overall cost to the client will be less than it would be should the client produce the goods or services himself.
Contract manufacturing, assembly services and packaging have several advantages for both parties. For the manufacturing side the promise of long term work is a key attraction. With contracts going out in some cases five years, the contract gives the manufacturer the guaranteed cash flow that is necessary for him to make certain commitments that are necessary to do the work, such as investing in sophisticated tooling. From the clients point of view he can feel comfortable that the service is in the hands of a company that knows what they are doing, plus the client has no reason to maintain manufacturing, warehousing or distribution since this is usually part of the outsourcing contract. The clients overhead with this arrangement may be to have on-site QC to assure the on-going quality.
