Contract manufacturing

Contract manufacturing is yet another facet of outsourcing that is bursting out in all directions. Just think of all the products on the supermarket shelves around the world featuring the supermarket’s own label. In the early days of contract manufacturing the supermarket’s own branded products were probably manufactured by companies manufacturing and selling well-known competitive brands on nearby shelves. Now companies who do not have branded products of their own do much of this manufacturing.

Electronics is another area that has been transformed by the activities of the contract manufacturers. Many of Europe’s original computer manufacturers collapsed or moved into other areas of the computer business in the 1980s and early 1990s because they could not manufacture to the desired quality and price. Within a few years they were replaced by scores of new manufacturers such as Time Computers Ltd and Tiny Computers Ltd in the UK. The contract market for electronics had moved on to the stage where these new companies are effectively assemblers of parts made by other organizations around the world. This situation enables the Tiny Computers of this world to concentrate on their core activity of dealing with customers, safe in the knowledge that almost all new technology developments will be available to them on demand.

Therefore any entrepreneur with a good idea and access to capital can buy the manufacturing capacity and the non-core services such as distribution and finance that are necessary to run what appears to be a manufacturing business. In the electronics examples above it has been argued that Tiny Computers outsourced its core function and became a virtual company. In reality the company’s core business is dealing with customers through retail shops and direct mail, so they have not outsourced their core function and they are not a virtual company.

Contract manufacturing of electronic components is a very big business. Various US estimates suggest that on a global basis it is worth $70 billion annually and is growing at between 15 and 20 per cent a year.

Some contract manufacturers are relatively new companies, created because entrepreneurs saw an opportunity. Some began as small assembly shops operating as sub-contractors to larger companies, others were set up by existing giants in the marketplace. Boots Contract Manufacturing, or BCM, for example, was the brainchild of Boots the Chemist, the UK high street chain of chemists. BCM is now the largest contract manufacturer of pharmaceutical products in Europe.

In the same general market, other providers have become more specialized than general contract manufacturers. Oxford Asymmetry International, for example, provides outsourcing services for pharmaceutical and biotechnology companies but concentrates on early drug development and production for clinical trials.