Contract manufacturing is defined as outsourcing or contract manufacturing services with third-party companies, business or third-party suppliers. Production services include manufacturing of products to the required specifications, engineering products and design and production of products.
The classical value chain of the production business consists of the following activities: input goods, production, goods unloading and marketing. Other activities such as human resources, finance and research and development are peripheral and support the underlying activities of the manufacturing company. Production would be the core and hidden business of the company, with third parties involved in raw materials and processed materials needed to convert the produced product. Contracted manufacturing services are limited to labor and other related services.
Contract manufacturing is suitable for business, because business has greater value for its products due to its excellence in production. This is also determined by macroeconomic factors such as globalization, increased co-operation in the supply chain environment and cost-effectiveness of dependence on others. Businesses have turned to third parties to gain cost benefits, close proximity to customers, and benefit from suppliers.
Contract manufacturing employs companies in the consumer and industrial products industry. Industries such as electronics, automobiles and pharmaceuticals use contract manufacturing in collaboration with suppliers. For example, soap makers are delivered to third-party vendors and pack soap with their names. Heavy engineering industries such as the aviation industry include third-party suppliers not only in manufacturing but also in component design.