We will clear your concepts here in simple words to explain that is all this is very simple to know.
The concept of contract manufacturing (or OEM manufacturing) may not be clear to you, but you may know the fact that an international brand-name garment you wear is produced by a domestically unknown clothing factory “made-to-order”, And an American brand computer that you use is produced by Lenovo Group ’s factory in Dongguan. Here, the original manufacturer uses a contract manufacturing method, purchasing finished products or some integrated components, and then using them for final assembly or direct sales.
Contract manufacturing is also a way of enterprise procurement. So, what is the difference between contract manufacturing and other forms of external procurement?
Here are some of the characteristics of a professional contract manufacturer ( OEM contract manufacturer)
In terms of technology, it has strong professionalism, unique equipment, and related equipment; or it has comprehensive technical equipment, and its production capacity has considerable scale advantages.
The processed products are designed by the main enterprise (OEM), and the part models, specifications and some suppliers are also designated by the main enterprise.
Its manufacturing system has high flexibility, and generally adopts lean production mode; it has extensive expandability and applicability, and can simultaneously process products or components of different customers. This feature is not only the result of efficient internal management but also reflects that the supplier’s dependence on a certain customer is significantly reduced and its independence is enhanced.
The content of the manufactured product is often a final product or a certain system integration, such as personal computer assembly, communication power supply unit, computer motherboard, and display, or automobile ABS braking system, chassis, etc.
Have strong technical and comprehensive service capabilities. As contract manufacturing continues to expand in scope and depth, this becomes increasingly apparent. Suppliers not only undertake processing functions but also increasingly provide logistics services such as after-sales technical support and direct delivery to end-users.
The gradual prevalence of contract manufacturing is an inevitable result of the development of social specialization. With the development of technology and the continuous extension of processing procedures, the degree of specialization has further increased, and the investment in various professional process facilities has become larger and larger. Adopting contract manufacturing can not only reduce wasteful competition, but also establish a large-scale professional division of labor system through this collaboration itself, and make operations more efficient by virtue of economies of scale.
In recent years, many multinational companies have sold their manufacturing, final assembly, and even test equipment to contract manufacturers. For example, world-famous telecommunications equipment manufacturers Ericsson, Nortel, and Nokia, etc., have largely divested their manufacturing facilities since 1998 and sold related facilities to professional contract manufacturers such as SCI and Solectron. Many emerging high-tech companies have adopted this production organization from the beginning. Contract manufacturing has gradually become an important model and trend of external procurement for many multinational companies.
As more and more manufacturing operations are completed by contract manufacturers, and the cooperative relationship between OEMs and suppliers is strengthened, some companies call the contract manufacturing method a “virtual manufacturing system.”
According to a survey and forecast by the American consulting agency “Technical Foresighters”, the global contract manufacturing output value reached 90 billion US dollars in 1998, and it has grown at an average annual rate of 25% and will reach 170 billion US dollars by 2001. Among them, purchases from personal computer manufacturers will rise slightly from the current 40% to 41%, still ranking first; the demand for telecommunications will rise from 19% to 21%.
Many multinational companies have taken contract manufacturing as an important part of their external procurement. While this has many advantages, it should also be seen that while adopting contract manufacturing, companies also have many management and strategic risks. Understanding and identifying these potential risks as early as possible, and adopting new management. Here are different methods to avoid that’s all and control it possible risks are another important, and real aspect of the contract manufacturing, management.
In one case, due to the uncertainty of the development trend of science and technology and the realization of industrialization, enterprises are judging and positioning their own “core capabilities” or expertise.
Contract manufacturing involves outsourcing part of the product manufacturing process to a third party. More specifically, leasing is the outsourcing of certain manufacturing activities previously handled by manufacturers to third parties. The company can outsource, the manufacture and of the certain component, of products different or outsources, the assembly of the products Today, outsourcing companies specialize in providing manufacturers with multiple services, including design, manufacturing, assembly, and distribution.
Advantages of contract manufacturing
Economies of scale
Contract manufacturing helps to minimize the company’s production costs. In this case, the company will not produce the product itself. Instead, outsource production activities to other manufacturers.
These manufacturers produce a large number of products for different customers. This helps them buy cheap materials in bulk and take advantage of economies of scale.
Focus more on sales activities
Contract manufacturing can help companies focus on functional areas. The sale of products is an important task for enterprises. In order to survive, it needs to face fierce market competition. By outsourcing production activities, companies can get more time to focus on these activities.
Manufactured under contract, the product is not manufactured by the company itself. The company basically outsources production activities to contract manufacturers. These manufacturers are highly skilled and experts in production activities.
They produce high-quality products at a lower cost. This helps the company provide customers with quality products.
Contract manufacturing can help companies save huge amounts of money needed to set up production processes. The company does not need to invest a lot of money in production plants and several other types of equipment.
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