What is the advantage and disadvantage of contract manufacturing?

Answer 1

Advantage: Can be Cost-Effective

• The use of contract manufacturers means that the hiring firm does not need to purchase expensive manufacturing facilities, equipment, machinery, raw materials or hire specialized labor. This not only allows the hiring firm to focus solely on sales, advertising and marketing, it allows a firm that is comparatively more efficient at manufacturing to carry out the process. As a result, hiring firms often benefit from economies of scale and the purchasing power of large manufacturers. All of these factors lower production costs.

Advantage: Divides Risk

• Another benefit of contract manufacturing is it spreads the risk of developing a new product across multiple companies. Were a company to carry out all aspects of production single-handedly, it would be taking a huge gamble on the success of that product. As companies would essentially live or die on the success of a new product, risk-taking and innovation would be disincentivized.

Disadvantage: Binding Contracts

• Once a contract is signed with a manufacturer, the hiring firm essentially calls all the shots. This can lead to serious problems for the reputation of the manufacturer if the wrong firm is partnered with. Differences in quality standards can lead to disputes. Cost-cutting behavior on the part of the hiring firm (who cannot control labor costs) can result in the use of lower quality materials, which can compromise the overall quality of the product. Consequently, through no fault of their own a manufacturer can be linked to an inferior product, possibly damaging their future business prospects.

Disadvantage: Job Losses

• Contract manufacturing is essentially a form of outsourcing, much of which occurs overseas. The practice of global outsourcing is commonly criticized by both economic nationalists and domestic labor advocates. Critics accuse transnational firms of moving jobs overseas that would otherwise be filled by domestic workers. The shift in U.S. manufacturing from factories in the beltway to cheaper labor markets in Mexico, China and India has been sharply criticized as it has put many workers out of the job--many of which are too old to be retrained in new sectors.