This industry classification is designed for companies that manufacture a product based on the specifications of the buyer. The buyer has designed the product, will often buy the raw materials or components, and takes possession of the product for inclusion in a final assembly or markets the product to the end user.
There is not an SIC code for this industry. Contract manufacturers are in almost every SIC code. The following are examples of a contract manufacturing company:
- Fabricator builds a sub-assembly for a machine manufacturer
- Packaging company mixes ingredients and packages them for a consumer goods company
Common descriptions of the contract manufacturer include:
A contract manufacturer (“CM”) is a firm that manufactures components or products for another “hiring” firm. Many industries utilize this process, especially the aerospace, defense, computer, semiconductor, energy, medical, personal care, and automotive fields. Some types of contract manufacturing include CNC machining, complex assembly, aluminum die casting, grinding, broaching, gears, and forging.
In a contract manufacturing business model, the hiring firm – typically an OEM – approaches the contract manufacturer with a design or formula. The contract manufacturer will quote the parts based on processes, labor, tooling, and material costs. Typically an OEM will request quotes from multiple CMs. After the bidding process is complete, the hiring firm will select a source, and then, for the agreed-upon price, the CM acts as the hiring firm’s factory, producing and shipping units of the design on behalf of the hiring firm.
Many well-known companies use contract manufacturing as an alternative to operating and maintaining their own factories. Contract manufacturing can be used for anything from single components to a complete product. Printers, computers, cellular phones, and personal care products are all examples of items that are made using this method.
In an international context, establishing a foreign subsidiary as a contract manufacturer can have favorable tax benefits for the parent company, allowing them to reduce overall tax liabilities and increase profits, depending upon the activities of the contract manufacturer.
The major added value of the contract manufacture is the manufacturing capability. Depending on their customers, their functional make up will be different than a traditional manufacturer:
- Sales and customer service are organized by customer
- Engineering is mostly manufacturing enginering
- Purchasing has to deal with receipts of product from the customer
The arrangement with the customer may be “toll manufacturing” where the company charges the customer a “toll” to process the customer’s material.
Contract manufacturers have different business processes in the following areas:
- Receiving customer materials
- Processing a BOM with customer materials
- Estimating a job with customer materials
- Toll processing invoicing
Applicable SIC Codes
- Companies are spread across many industries
Contract manufacturing companies should evaluate the following critical requirements:
- Navigation and Personalization
- Business Intelligence
- Internet Portals
- Customer Relationship Management
- Quoting and Estimating
- Order Processing
- Product Configurator
- Product Data Management (PDM)
- Product Lifecycle Management (PLM)
- Document Management
- Engineering Change Management
- Forecasting and Demand Planning
- Multi Plant
- Materials Management
- Mixed Mode Manufacturing
- Engineer To Order
- Lean Manufacturing
- Supply Chain Management
- Advanced Manufacturing Planning
- Warehouse Management
- Plant Equipment
- Cost Accounting
- Fixed Assets
- Human Resources
Selected Contract Manufacturing Clients
Our team has solid experience in the contract manufacturing sector. Here’s a sampling of mid-market companies we’ve teamed with for ERP selection, evaluation, BPI and change management: EC Applications, Leggett & Platt, Milwaukee Electronics Corporation. See additional Ultra Consulting clients served by our independent team.