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What Is a Contract Manufacturer?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 20 November 2016
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    2003-2016
    Conjecture Corporation
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A contract manufacturer (CM) is a type of manufacturing business that specializes in producing goods for a client, based on specific criteria that is provided by that client. In most cases, the goods that are produced are created as private label products, meaning they are presented to the general public as goods that were manufactured by the client rather than the contract manufacturer. This approach provides benefits to both parties, with clients saving a great deal of money on production and operational expenses, while the manufacturer enjoys a steady flow of work orders to keep the operation viable.

As part of this type of outsourcing arrangement, the contract manufacturer provides the production facilities, equipment, materials, and labor necessary to produce a line of goods for a client. In turn, the client provides the design or formula that must be used in the manufacturing process. The working relationship between the contract manufacturer and the client provides the structure for how the costs of production are assessed and how those charges are invoiced to the client. Most contractual agreements for this type of production and manufacturing arrangement will also include terms that provide volume discounts based on business volume, as well as pricing that allows the client to sell the produced goods at a competitive price, increasing the chances of earning a profit.

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For clients, working with a contract manufacturer means saving all the expenses associated with establishing their own manufacturing facilities, hiring and maintaining employees, evaluating and contracting with vendors for raw materials, and a number of other costs that are related to the operation of manufacturing plants. All worries about downtime due to equipment failure, employee shortages, and shifts in the costs of raw materials are left to the CM. Clients can focus on sales and marketing efforts that ultimately generate orders that are then filled with the goods produced by the manufacturer.

The contract manufacturer also benefits in terms of maintaining a steady flow of business from the client base. Since the contracts usually commit those clients to a volume commitment, the manufacturer can usually utilize that volume to negotiate lower prices for raw materials and schedule plant operations to best advantage. This in turn allows the CM to generate a steady flow of revenue, earning profits that help to keep the operation financially healthy. Provided that the goods manufactured for the client are high in quality, and the demand for those goods remains constant, the working relationship between a contract manufacturer and a client can continue for decades.

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