Enumerate limitations of contract manufacturing.
Enumerate limitations of contract manufacturing.
The following are the major limitations of contract manufacturing.
(a) Difficulty in adhering to international quality standards: There are numerous reasons why local firms (which have received contracts for manufacturing goods) may find it difficult to follow the instructions of international companies. As a result, they might fail to produce goods strictly as per international quality and standards. If international companies pass on these inferior goods to their customers, this might hamper their goodwill and brand name.
(b) Lack of freedom over decision-making process: In contract manufacturing, local manufacturers lose their power to alter their production process according to their own decisions. This is because, in contract manufacturing, it becomes an obligation for the manufacturing company to follow the instructions given by the foreign company which is its client. This results in a lack of freedom for local manufacturers as they cannot take any decisions on their own.
(c) Possibility of incurring losses due to contracted prices: A contract signed between a local contract manufacturer and an international company is binding. Local manufacturers have to abide by the contract clauses and sell the output only to the foreign company at the predetermined prices. They cannot sell the output in the local market. This narrows the scope of local manufacturers for earning profits in case the domestic prices are higher than the prices in the contract with their international clients.
The following are the major limitations of contract manufacturing.
(a) Difficulty in adhering to international quality standards: There are numerous reasons why local firms (which have received contracts for manufacturing goods) may find it difficult to follow the instructions of international companies. As a result, they might fail to produce goods strictly as per international quality and standards. If international companies pass on these inferior goods to their customers, this might hamper their goodwill and brand name.
(b) Lack of freedom over decision-making process: In contract manufacturing, local manufacturers lose their power to alter their production process according to their own decisions. This is because, in contract manufacturing, it becomes an obligation for the manufacturing company to follow the instructions given by the foreign company which is its client. This results in a lack of freedom for local manufacturers as they cannot take any decisions on their own.
(c) Possibility of incurring losses due to contracted prices: A contract signed between a local contract manufacturer and an international company is binding. Local manufacturers have to abide by the contract clauses and sell the output only to the foreign company at the predetermined prices. They cannot sell the output in the local market. This narrows the scope of local manufacturers for earning profits in case the domestic prices are higher than the prices in the contract with their international clients.
