What Is Contract Manufacturing? - Definition & Explanation

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  • 0:01 Contract Manufacturing Defined
  • 0:32 Advantages to Contract…
  • 1:00 Disadvantages to…
  • 1:45 Example
  • 2:23 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley
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.

Disadvantages to Contract Manufacturing

Contract manufacturing does have disadvantages for the company, the foreign employees, and the company's domestic economy. Since 2001, the United States has outsourced millions of manufacturing jobs, which has resulted in a great deal of job displacement for many Americans, who may never find a replacement job with similar wages and benefits.

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