What Is Contract Manufacturing? What Advantages Can a Firm Expect

What is contract manufacturing? What advantages can a firm expect to gain from contract manufacturing? What are the downsides associated with this practice?
Contract manufacturing refers to outsourcing production to third-party firms. Firms that use contract manufacturers do not own the plants or directly employ the workers who produce the requested goods. Conventional wisdom suggests that leveraging cheap contract manufacturing in developing countries can keep the cost of goods low and allow firms to leverage specialized manufacturing expertise if production is not seen as core to competitive advantage. Firms can lower prices and sell more products or maintain higher profit margins.
Many firms have also experienced the ugly downside to this practice. Global competition among contract firms has led to race-to-the-bottom cost-cutting measures. Too often, this means that in order to have the low-cost bid, contract firms skimp on safety, ignore environmental concerns, employ child labor, and engage in other ghastly practices. Big firms are big targets and those that fail to adequately ensure their products are made under acceptable labor conditions risk a brand-damaging backlash that may turn off customers, repel new hires, and leave current staff feeling betrayed.