The role of Contract Manufacturing Service (CMS) Providers in the Term Paper

The role of Contract Manufacturing Service (CMS) Providers in the global manufacturing supply chain - Term Paper Example Broadly, there are two types of CMS, one involving supply with materials and the other involving only labor contract. The growth of CMS has been phenomenal in the recent years due to globalization. In order to preserve the core competency, the companies in the manufacturing sector setting up plants overseas to meet the consumer demand rely heavily on CMS, and the industry has evolved into a major economic force worldwide in the recent years. Factors influencing CMS The factors influencing the decision making process of an organization with reference to contract manufacturing service are multifarious of which, the opportunity cost of capital, marginal efficiency of the capital, benefits of mass production, cost-volume-price relationship, indigenization commitments required to be made in line with the economic policies of the host countries and cost structure in manufacturing versus CMS are the most important ones. The degree of the influence of each factor in the decision making varie s from product to product, industry to industry and the company to company based on the circumstances obtained in each case. These factors are considered very important since they are related to the growth of CMS industry and the competitiveness of the companies utilizing CMS, by tilting the balance towards CMS in manufacturing. A product primarily considered for in-house production might be switched over to CMS at a later stage due to the developments taken place in the intervening period. The CMS is on the growth path and Weber (2002) states â€Å"As OEMs slim down, electronic contract manufacturers have been bulking up. Indeed, these growing companies have become the new heavyweights of production in many industries†. Opportunity Cost â€Å"Cost of using something in a particular venture is the benefit foregone (or opportunity lost) by not using it in its best alternative use†. (Lipsey, R. G. p. 259) If the capital could be deployed in another economic activity inst ead of investment in machineries, buildings or facilities required for the manufacture of the product by offloading through CMS, the company takes the decision based on the opportunity cost of capital for increasing its competitive advantage. Marginal efficiency of the capital The returns expected on different capital investments are compared by the company, and if efficiency in the case of the alternative investment is higher compared to the investment that may be required to be made for manufacturing the product which could have otherwise been off-loaded under CMS, the decision in favor of CMS is taken by the companies. Mass production Economy of mass production is an important feature that many a times tilt the balance towards CMS. The auto manufacturers throughout the world prefer to procure standard components through CMS for cost advantage in view of the benefits of mass production enjoyed by the contractors. Janet (1992) states â€Å"The contract distribution operation has a nd will continue to play an increasingly important and rapidly developing role in the physical distribution scene†. Cost- Volume-Profit Analysis The benefit of volume in operations could be effectively achieved by the contractors and could be leveraged by the companies through CMS. Parasuraman (2000) says â€Å"If a linear relationship could be established among costs, volume and profits, it would help