1. In some cases, there will be a loss of potential profits from manufacturing. 2. Less control over the manufacturing process. 3. Contract manufacturing also carries the risk of developing potential competitors. 4. It would not be appropriate in cases of high-tech products and cases involving technical secrets, etc. 1.
The products are intended for the internal market. The goal is to reduce costs by outsourcing to factories located in countries where factor costs are lower. (2) The goods are destined for another foreign market. This should facilitate the conquest of new markets with lower price levels or high price competition by outsourcing to factories in third countries with lower production costs. 3. The goods are destined for the same foreign market in which they were produced. This is to circumvent the aforementioned obstacles to internationalization, while the cost-cutting aspect could perhaps – but not necessarily – be a subordinate objective. In contract manufacturing, the company`s product is manufactured in the foreign market by a local manufacturer on behalf of the company.
Since the contract only covers manufacturing, marketing is managed by a sales subsidiary of the company, which retains control of the market. Contract manufacturing has the following advantages: Management contracts have disadvantages under certain conditions. The deal makes no sense if the company can make better use of its scarce management talents or if larger profits can be made by running the entire company. The management contract may prevent a company from starting its own business activities for a certain period of time. The above-mentioned benefits of contract manufacturing are outweighed by a number of risks: [7] cf. Carbone (1999), www.manufacturing.net/magazine/purchasing/archives/1999/pur0617.99/062enews.htm This form of joint venture requires the company to enter a foreign market with a licensing agreement. The license involves fees and royalties paid for manufacturing processes, trademarks, patents, trade secrets or other values related to items manufactured by the Company. With this license, the company can lose control of the operation, create a competitor or give up part of its profits. The management contract can sometimes bring additional benefits to the management of a company. It may acquire the export or other sale activity of the proceeds of the managed company or provide the inputs required by the managed company. As you can see in the chart, risk, control, engagement, and profit potential also increase.
When entry opportunities move from left to right, they become more difficult and risky for businesses. On the one hand, the company can choose an export strategy, that is, the goods are produced in the domestic factory and then shipped abroad. On the other hand, it has the possibility to choose a foreign production strategy, with or without direct investment (see Figure 1 on p. 3). Some Indian companies Tata Tea, Harrisons Malayalam and AVT have contracts to manage a number of plantations in Sri Lanka. Tata Tea also has a joint venture in Sri Lanka, namely Estate Management Services Pvt Ltd. As a result, companies are launching more and more activities to conquer foreign markets, many of them moving to less developed countries. This apparent contradiction turns out to be a logical step towards expanding commercial activity, as many of these countries are on the verge of industrialization and therefore reveal a huge potential for unfulfilled claims that have remained unsupervised to this point.
As a result, small and medium-sized enterprises are also becoming “international” and are also looking for advantages in sales and procurement. These efforts and investments by companies to enter foreign markets face a high degree of uncertainty about the development of their activities abroad. Therefore, companies need to carefully select their new markets, examine them closely with market research tools and gather all available information before finally starting internationalization. On the other hand, OEMs can transfer complex processes such as PCBs to contract manufacturers (which are then mainly small specialist companies) while continuing to manufacture the enclosures and take over the assembly. (This is indeed very common among computer vendors like IBM and Apple.) On the other hand, only the assembly of the goods can be handed over to the foreign manufacturer, while the OEM retains the basic skills. The management contract allows a company to market the existing know-how built with significant investments, and often the impact of fluctuations in business volume can be reduced by the use of experienced staff who would otherwise have to be laid off. Contract manufacturing offers a number of advantages: Contract manufacturing – as a possible strategy – can be defined as “cooperation on a contractual basis between an original equipment manufacturer (OEM) and an independent manufacturer (subcontractor) to whom know-how is transferred to support certain stages or the entire production of goods”. Management contracts have clear benefits for customers. They can provide organizational skills that are not available in the field, expertise that is immediately available instead of being developed, and management support in the form of support services that would be difficult and expensive to replicate in the field.
1. The undertaking shall not have to allocate resources for the construction of production facilities 2. This frees the company from the risks of investing abroad. 3. If unused production capacity is available abroad, the marketer can start immediately. 4. In many cases, the cost of the contracted product is lower than that of an international company. For example, the cost of products in the small sector for many products is much lower than in the large sector due to lower wages, overhead and tax breaks.
In addition, if there is overcapacity with existing units, it may even be possible to deliver the product on the basis of marginal costs. 5. Contract manufacturing also has the advantage of being a less risky route in the first place. If the company does not attract enough, it is easy to abandon it; but if the country had set up its own production plant, the exit would be difficult. It may be interesting to note that the availability of overcapacity at some soap manufacturers has allowed several foreign companies to experiment with new brands of toilet soap in the Indian market. For example, Godrej made Dettol soap for Reckitt and Coleman; Clearton for Nichlas Laboratories; Johnson`s ™baby soap for Johnson and Johnson; and Ponds Dreamflower, Cold Cream and Sandalwood for ponds. It should be noted that some of these brands have not been successful in the market. The cost to the company of product failure is relatively low if it has not invested in production facilities. .