To reduce their overhead costs, many types of organizations will offload the machining of various components to other companies in a process called contract manufacturing. This method benefits both companies as the outsourcing company employs less labor, uses fewer raw materials, saves on space, and receives finished or semi finished components that can be processed further or directly used.
Mutual trust needs to be established with clear terms and conditions put in place. The outsourcing company provides the required drawings and lays down the process to be followed. It may even offer special tools, tooling, jigs/fixtures, machinery, and skilled personnel to help and monitor the process.
The outsourcing company usually offers a machining rate based on the machine hour rate, complexity of the operation, etc. A delivery schedule is given and the contract manufacturer can procure the raw material on its own or can take it from the outsourcing company. Depending on the skill of the contract manufacturer, the component may be supplied to the outsourcing company in either in fully-finished or semi-finished condition. On some occasions the contract manufacturer may even ship the finished goods directly to the customers or the retail outlets.
Contract manufacturing is very common in the industrial world and some of the items that are general outsourced include computers and computer components, electronic devices, printers, copiers, telephones and other types of communication products, textiles, clothing, shoes and toys and recreational products. This method of outsourcing tasks to outside companies is also used in contract packaging where other companies are hired to package your products.
You need to make sure that the outside company builds all of your products to specifications and that all governmental standards are met. This can sometimes be difficult to achieve if you are outsourcing your work to companies that are located outside of your country. Contract manufacturing can often lead to a loss of jobs in some companies as the work is sometimes outsourced to other countries that utilize a much cheaper labor force. This is a common situation when work is contracted out to underdeveloped countries or slower developing nations.