Contract Manufacturing

Industry Description

This industry classification is designed for the company the will 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 posession of the product for inclusion in a final assembly or markets the product to the end user.

There is not a SIC code for this industry. Contract manufacturers are in almost every SIC code. The following are examples of a contract manufacturing company:

• Fabricator build a sub assembly for a machine manufacturer
• Packaging company mixes ingredants and packages them for a consumer goods company

Wikipedia defines the contract manufacturer as:

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, and cellular phones personal care products are all examples of products 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 value add 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 is 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 manufacture’s have a different business proceeess 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

Critical Requirements

Contract manufacturing companies should evaluate the following critical requirements:

ERP Vendors

Contract manufacturing companies should evaluate the following vendors: