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International contract manufacturing is a cross between licensing and investment. It is an arrangement whereby a firm "hires" the production facilities of a foreign company to produce a specific product for a specified period of time. There are many reasons why an international company might decide to use a foreign company's facilities to produce its product.
- The company's production facilities at home are overloaded, and thus the company cannot fulfill its obligation to supply foreign customers.
- Changes in a foreign government's procedures are making it very difficult to supply products to foreign customers via the usual exporting channels.
- The search for a local licensee or franchisee has proven unsuccessful.
- The local manufacturer has excess capacity and is willing to produce at cost plus a small service charge.
- The international firm wants to test the waters before jumping into an investment decision.
Contract manufacturing, also known as subcontracting, is widely used to supply products to world markets. For this reason, subcontracting will be dealt with in greater detail in PRODUCTION / SOURCING STRATEGY.
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