Question

Enumerate limitations of contract manufacturing.

Answer 1

Following are the limitations of contract manufacturing

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

(ii) 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.

(iii) The profitability of local firm producing under contract manufacturing is low as it is not free to sell the contracted output as per its will. It has to sell the goods to the international at prices agreed upon under the contract which may be lower than the open market prices.