What’s the difference between shelter, outsourced, and contract manufacturing?

What’s the difference between shelter, outsourced, and contract manufacturing?
Electronic Manufacruring

Shelter

Allows the hiring firm to fully control their own production and quality and benefit from the experience of a service provider that knows the local market. In essence, hiring firms opting to use this vehicle are “sheltered” from many of the risks and liabilities that normally affect firms that choose to incorporate directly. Under the typical shelter arrangement, manufacturers send raw materials and supervisory personnel to train and manage workers, while the service provider performs the tasks and functions that are not “core” to the manufacturing process. The client controls those areas that affect profitability and sustained growth (value chain). Shelter companies typically offer their shared services in some or all of the following areas: human resources, payroll and benefits administration, logistics, plant and park management, MRO purchasing, environmental and customs compliance, and real estate leasing.

The shelter provider bills the foreign company for the provided shared services without taking responsibility for production, quality, and delivery of the product.

Contract Manufacturing

In a contract manufacturing business model, the hiring firm approaches the contract manufacturer with a design or formula. The contract manufacturer will quote the parts based on processes, labor, tooling, and material costs. Typically a hiring firm will request quotes from multiple CMs. After the bidding process is complete, the hiring firm will select a source, and then, for the agreed-upon price, the CM acts as the hiring firm’s factory, producing and shipping units of the design on behalf of the hiring firm.

Job production is, in essence, manufacturing on a contract basis, and thus it forms a subset of the larger field of contract manufacturing. But the latter field also includes, in addition to jobbing, a higher level of outsourcing in which a product-line-owning company entrusts its entire production to a contractor, rather than just outsourcing parts of it.

The contract manufacturer typically bills the hiring firm on a per-product or per-piece basis.

Manufacturing Outsourcing

Manufacturing outsourcing is a hybrid of both the “shelter” system and traditional “contract manufacturing or subcontracting”. The outsourcing firm provides shared services and takes responsibility for production, quality, and delivery of the product.

The key difference between a manufacturing outsource situation and a contract manufacturing situation, is that in traditional contract manufacturing the service provider has the equipment, tooling, procedure, supply chain, and expertise in place and is currently manufacturing products that are very similar to the products that the foreign company needs. In contrast, a manufacturing outsource company utilizes the foreign company’s equipment, tooling, supply chain, and procedure combined with in-house expertise to manufacture the foreign company’s product in exactly the same way the foreign company makes it themselves.

The service provider typically bills the foreign company through mixed costing schemes that include direct costs, shared services, and overhead taking full responsibility for production, quality, and delivery of the product.