Looking At Contract Manufacturing
With the liberalization of the Indian economy the concept of “ Contract Manufacturing “ has caught on the imagination of the corporate world. It is basically a contractual arrangement under which a manufacture undertakes to produce for other manufactures of the same goods over a period of time as provided in the contract. This arrangement work to the benefit of both in several ways. The former is freed from the vicissitudes of the market place and the latter gets a steady supply of the goods manufactured . A contract manufacturer is thus able to concentrate on its core competencies and leverage it to build a unique position.
There are situations when a company may have overestimated themselves potential of its products in the market and its investments are based on such erroneous estimates. These ventures betray lack of critical understanding of the factors responsible behind the dynamics of the market. Thus it might so happen that a company enjoying a particular phase of boom for its products may feel encouraged to go in for expansion and capacity building at a huge capital cost finally to discover to its great dismay that its calculation have gone awry. And the company is faced with the harsh reality that there is recession and whatever comes with it for its products.
Then it turns into a grim battle for survival. In a scenario like this the options before the company get restricted to either selling off the capacities built which have turned out to be unremunerative or go out of business. And no company worth its name would be willing to exercise any of these options. A sale in a desperate situation like this could hardly be expected to fetch the desired price for its new capacities. The contract manufacturing can be a boon in these situation. By agreeing to manufacture for a bigger and unequal competitor the returns on investments are guaranteed and it would be spared from the ballooning marketing expenditure and it can also explore some other avenues like providing after-sales services in which it enjoys the core competency.
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