Page 3 - Microsoft Word - CH-7-HOME ASSIGNMENT 32 Types of Preference Shares & ESOP

The goods are produced or assembled by the local manufacturers as per the technology and
management guidance provided to them by the foreign company. The goods so manufactured
or assembled by the local producers are delivered to the international firm for use in its final
products or out rightly sold as finished products by the international firm under its brand
names in various countries including the home, host and other countries. All the major
international companies such as Nike, Reebok, Levis and Wrangler today get their products
or components produced in the developing countries under contract manufacturing.

Advantages

Contract manufacturing offers several advantages to both the international company and local
producers in the foreign countries.

• Contract manufacturing permits the international firms to get the goods produced on a large
scale without requiring investment in setting up production facilities. These firms make use
of the production facilities already existing in the foreign countries.

• Since there is no or little investment in the foreign countries, there is hardly any investment
risk involved in the foreign countries.

• Contract manufacturing also gives an advantage to the international company of getting
products manufactured or assembled at lower costs especially if the local producers happen to
be situated in countries which have lower material and labour costs.

• Local producers in foreign countries also gain from contract manufacturing. If they have
any idle production capacities, manufacturing jobs obtained on contract basis in a way
provide a ready market for their products and ensure greater utilisation of their production
capacities. This is how the Godrej group is benefitting from contract manufacturing in India.
It is manufacturing soaps under contract for many multinationals including Dettol soap for
Reckitt and Colman. This has considerably helped it in making use of its excess soap
manufacturing capacity.

• The local manufacturer also gets the opportunity to get involved with international business
and avail incentives, if any, available to the export firms in case the international firm desires
goods so produced be delivered to its home country or to some other foreign countries.

Limitations

The major disadvantages of contract manufacturing to international firm and local producer
in foreign countries are as follows:

• Local firms might not adhere to production design and quality standards, thus causing
serious product quality problems to the international firm.

• Local manufacturer in the foreign country loses his control over the manufacturing process
because goods are produced strictly as per the terms and specifications of the contract.