Answer to Question #134729 in Finance for Management

Question

what are the Pros and Cons of contracts on behalf of manufacturers & contracts on behalf of contractees?

Answer 1

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Production by contract allows businesses without a full-service in-house manufacturing team to manufacture products. The creation of contracts includes the outsourcing of a product to a reputable manufacturer. Below are the pros for contracts on behalf of manufactures and also on behalf of contractors

• Cost saving and profit maximization-You would not need to commit precious internal resources to manufacturing by outsourcing the product production. Working with a CM reduces the need to juggle amongst suppliers and helps prevent unexpected costs. Therefore this  can dramatically lower labor costs.
• Scalability-It is hard to scale the product with limited capital as a small company or start-up. Since contract manufacturers have far more leverage, they can scale the product more.
• Improved Technical insight-Contract manufacturers(CMs) often provide organizations with other technological insight. Since CMs produce products for the diverse range of companies, the products for different niches are designed with valuable in-depth knowledge. CMs are also able to recognize possible hazards and defects in the early stages of the design. This will avoid fatal errors inside a product that can cost owners substantial capital over the long term.
• More flexibility within the organization-Because a contractor takes over your production process entirely, you can create more opportunities for your business. This will allow your workers time to produce more creative prototypes and develop more revolutionary products when you chose to outsource the development process. Your workers will be flexible to concentrate on what is really relevant.

Below are the cons/disadvantages for contract manufacturing on behalf of manufactures and those contracted.

• Communication gap-An organization can encounter a coordination gap in the use of a contract manufacturing service that can pose various production process problems, such as: Unrealistic timelines, lack of a transition plan, erroneous internal communication and also ambiguity of capacity qualifications. 
• Intellectual property risks- This is a major problem encountered by manufactures since their intellectual property rights can be stolen. There is also the possibility that your intellectual property can be misused to the benefit of your suppliers, so that they may become your own competitor.
• Difficulty in finding a high quality provider of service- Like any business contract, you might end up outsourcing to the wrong company without sufficient analysis. You need your team to evaluate a partner who meets your exact needs to find the right CM.
• Insufficient control-The manufacturing processes must be abandoned with the CM. You risk losing vital knowledge and skills in the field of production techniques by giving up this power. The organization  will not be able to identify problems in production without constant supervision.