What Is Contract Manufacturing?

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Companies, with a business model which involves selling a product under their own brand name, have two options – either to manufacture the product themselves or to get the product (or a part of it) manufactured by someone else.

When a company outsources the manufacturing of a product or a part of it to a third party, under a contract, the same is known as contract manufacturing.

The contract manufacturer manufactures the product to the specifications provided by the contracting company.

When do companies outsource manufacturing of their products to a third party?

Often companies, with an established brand name and a strong presence in a particular market segment, look to leverage their brand presence to diversify into other market segments or product types.

They may however lack the necessary skills, capabilities (capital, labour, machinery etc) or expertise to manufacture the new product lines.

It is then that they enter into contracts with a third party manufacturer to get the product manufactured on their behalf.

Similarly, a particular product might involve a highly specialised component requiring specialized capabilities to produce. In such situations, the original equipment manufacturer might choose not to invest resources into acquiring the necessary capabilities and instead outsource the manufacturing of the component to a specialised agency with the requisite skill sets and expertise.

For example, JHS Svendgaard is one such company which specialises in manufacturing oral care products under contract.

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Chartered Accountant with a passion for Blogging. You can reach out to me at ca.sandipan@gmail.com Twitter: @sanded28
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