Contract Manufacturing Contract manufacturing, also commonly called outsourcing, is a common means of outsourcing cheaper labour overseas. It involves contracting for the production of finished goods or component parts. These goods or components are then imported to the home country, or to other countries, for assembly or sale. Alternatively, they may be sold in the host country.
Managers need to ensure the reliability and quality of the local contractor and work out adequate means of capital repatriation. This strategy is a good and desirable means of quick entry into a country with a low capital investment and none of the problems of local ownership. Firms such as shoe maker, Nike use contract manufacturing around the world. However, the Boston Consulting Group warned about assuming that this strategy would continue to deliver big cost reductions by itself and that it should be considered as just one part of a global sourcing strategy in 2011.
Offshoring When a company moves one or all of its factories from the “home” country to another country, then this is called Offshoring. This is the case with some of Nissan’s factories in the U.S. In fact, over 40 percent of cars built in the United States are made by Japanese and other foreign companies. Offshoring provides the company with access to foreign markets while avoiding trade barriers, as well as, frequently, an overall lower cost of production. According to the U.S. Commerce Department, approximately 90 percent of the output from U.S.-owned offshore factories is sold to foreign consumers.
However, some companies attribute their global success to their local connections for part or all of their manufacturing. An example is the BAG shoe company in Italy. Just over half the upper shoe parts are made in low-cost countries such as Serbia and Tunisia. The rest of the uppers and the soles are made locally. Having such a large part of its shoes made by local suppliers enables BAG to emphasise the “Made in Italy” label as a big marketing advantage.
And having suppliers close by means production problems are quickly solved. Splitting the assembly functions between BAG and many outside companies proves to be strength and not a weakness for them. This mix of production locations gives the company a vital source of flexibility and the capacity to make rapid changes in shoe style. One means of gaining increased efficiencies and therefore lower costs is through clustering used when contract manufacturing, offshoring, or service-sector outsourcing.
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