Contract manufacturing will add value, as long as the company outsourcing  the product , keeps a check on the vendor through continuous evaluation of facility, process, technology, skill and Quality. Since the company's name is associated with the product, company outsourcing the product ,must ensue the quality through various checks on vendors, right from raw material to final product . Now a days contract manufacturing is an acceptable practice. Even, the pharmaceutical products are also contract manufactured by some companies, where it is mandatory to ensure on the vendor  the compliance of CGMP ( current good manufacturing practices ) and other requirements as per relevant  pharmacopoeia , as per FDA ( food and drug authority ).

Contract manufacturing generally tends to reduce costs. That happens if the contract manufacturer already has the know-how and facilities to undertake such outsourced manufacturing. In such a case there will be reduced costs, obviously. But, if the contract manufacturer, does not have them, the "outsourcer" or customer will have to transfer know-how ( technology, process, etc.) (The firm for whom I previously worked transferred some of our technology to a firm in the Far East. The Far Eastern firm is flourishing and my former employer has disappeared from the corporate landscape. This is not to suggest this would befall all outsourcers.) The consequence is that the “outsourcee” manufacturer, if unscruplous, and many are in some countries, could manufacture the same product or similar product with variations and be able to compete with the first outsourcer who provided the know-how in the first place. Without naming them, I would say, please just look around and one can find legions of examples. Finally, if a firm outsources its manufacturing, it could also unconsciously be laying down the foundations for its eventual demise, unless it invests heavily in R&D for turning out new products. Many western firms have been doing that… resorting to contact manufacturing. These days many western firms are also outsourcing R&D to countries like India, China, for example.

As mentioned in the intro, quality will be the main concern.

In the long run, contract manufacturing tends to reduce quality . Though there is apparent saving in costs in the beginning, the rework, lost customer, eroded goodwill, insecurity of the regular employees etc., cost more. Of course, the type of industry and the nature of work may decide contract manufacturing. The major problems in contract manufacturing include:

1.Cost cutting at every opportunity

2. Corroded Employee Morale

3. Declining innovation

4. Leaking of technology and so on

Hello sadagopan. U hit the nail right on the head but the question is till when this so call contract manufacturing as related to SCM could be terminated with such erronous services in the long term? No doubt SCM as a tool justified its effective mechansm but the ones doing the works are the subcons. That means in practice there is nothing efficient by both parties in ensuring the production should be as good quality as being claimed to be. There are so many good brands by eell established MNCs but once they are into SCM and Subcon, thery failed to produce quality products that can sustain for long time

I own a pharma company India (MNC), and we do outsourcing to other company, which is far bigger than my own. Mine is a start-up. For a start-up, cost reduction is important. Many of the big pharma and MNCs in India do outsource their work for various reasons. They sell their manufacturing facilities and resort to contract manufacturing. This is not just because of cost cutting, but due to labor issues. Now-a-days, in the 24h society, industries run 24/7. This is cost effective and productive. For example, if I were to have a manufacturing facility for a particular antibiotics, once the batch is manufactured, I have to wait until most of the stocks are sold by the field force. Until such time, you cannot run new batches. This is the issue. This could result in labor union issues.

When you deal with a reputed manufacturer, you're almost covered of everything (including quality). They will provide all the certifications, tests, etc. You can always ask and they will be glad to provide it to you!

I totally disagree with Sadagopan!

I agree @ Jaharkanti Dattagupta, Asmat Ali & Sadagopan.

@ Kalpana, can you elaborate why you agree? I can see that you have agreed on people who have conflicting views! 

I am strongly agreed with the answer of Prof. Sadagopan Parthasarathy. And My own experience also in my BSNL Department "the contract manufacturing value is not added to the company production quality image"

@Pandi-Perumal

Certain points of yours like time saving, labour issues etc., seem to be convincing. But how many people off shore it to MNCs and other big companies? I have heard of big conglomerates allowing space and facilities for many start ups. But they take back these as soon as they need it. This again leaves many at the mercy of bigger organizations. Also, quality is something that need to be preserved, nourished and augmented at the parent  organization level for long term impact. My opinion is subject to correction. 

I am not denying or ignoring all and potential and legitimate concerns in outsourcing, such as quality parameters, potential legal issues (leakage of confidential information), and/or less control over situation, etc. But this is just one side of the issue. No one would ever argue quality is never a concern. If you have spend time to identify the right partner for outsourcing, would you do it or not?

Globally as well as locally (within India), the outsourcing strategy is growing. Perhaps, a simple google search would give all relevant statistics on the current scenario on contract manufacturing both within India and globally. Everyone knows, heard, and/or witnessed some case or other. But that should not limit arguing against the overall outsourcing industry.

Outsourcing manufacturing operations has several advantages. It is considered as a strategic imperative, which provides not only a cost effective (reduction in cost or reduction in expenditure) alternative, freeing up of existing facility, it allows to focus on our own (our organization's) core competencies, freeing up other resources (not to mention labor issues), improved efficiency, speed and flexibility, and therefore it facilitate a quicker market penetration, position, as well as expansion.

First of all, 'In the long run, contract manufacturing tends to reduce quality'. - you don't have to keep the same contractor. You're not obliged to, especially when he doesn't meet your quality requirements and standards. That's what I do, we change!

Secondly, cost cutting at every opportunity, corroded employee morale, declining innovation, and leaking of technology and so on - not necessarily restricted to contract manufactures. A big company (including government agencies) doesn't outsource could adapt these practices. 

As far as I know, the terms 'quality' and 'corruption' are not mutually exclusive. How can we be sure that the poor quality someone gets is due to 'corrupt practices' of the contract manufacturer or due to 'corruption' within the government department per se? 

Let's take the example of Ranbaxy:

http://gabionline.net/Generics/News/Ranbaxy-faces-lawsuit-in-India 

http://articles.economictimes.indiatimes.com/2012-01-27/news/30670358_1_daiichi-sankyo-drug-maker-japanese-drug

Things went out of control (when they exported) and they get caught. However, the same practices were happening within India. 

The point of my argument is, it not always true that outsourcing would result in poor quality. Poor quality can occur even if the company have their own plant with their own people working for them  (even if it was a government facility).

As Murphy's Law points out, "If anything can go wrong, it will!"

hello Pandi Perumal....quite interesting answers and almost to the positiveness of contract manufacturing or outsourcing effect....however, do u agree that for MNCs in applying such practice they are loosing the sense of quality products during their prime. There are many examples that we can take a look of it. Example between Samsung and Nokia handsets. No doubt the best of Samsung products come from the latest technology and savvy to the youngsters with the price cheaper than Nokia. Comparing to the durability and life cycle of the products, Nokia indeed have the edge over Samsung and Nokia is already a proven products. In this case, I think much of the reference by companies are the profit margin and I don't see value added to the quality image of those doing this contract manufacturing. In this case, the emphasize of output quantity undermine the quality itself. 

The original question was more or less whether contract manufacturing adds to quality image. While it is tempting to say “YES”or “NO”, I think it not wise to say just yes or no. Contract manufacturing (CMing, hereafter) can raise the quality in some instances, particularly if the contract manufacturer (hereafter CM) has lots of experience. But when we talk about quality then the question that needs to be posed and answered is “what quality are we referring to?” Are we talking about a firm A that designed a product and then chose to have that product manufactured by a CM or are we talking about a product that was designed by say firm B, which for, perhaps other reason, chose to outsource the manufacturer of the product after it has been in production.

If Firm AA has done a thorough assessment of the CM, and has put in place all manner of quality assurance procedures and continually monitors incoming products and provides feedback to the CM, then even if there are initial problems, the continuous monitoring should lead to an improvement in quality, with lower costs to follow. Of course Firm AA must have tight specifications about how it assesses quality and knows its own quality levels prior to the outsourcing of the manufacturing, as also on the components and sub-assembles it specifies – we cannot expect good manufacturing quality if components and processes used are not of the expected quality. On the other hand if Firm AA selects a CM which has been in CMing of similar products, and has turned out many products in large quantities at good quality levels for several manufacturers, then we can reasonably expect the quality will be approaching the “good” quality level, even if there are initial teething problems; if not, why select the CM? In my view selecting a CM which has little experience of CMing, can only be to reduce costs, with perhaps little concern for quality or its possible impact on Firm AA’s brand image.

Now, consider Firm BB, which has never manufactured the product but only designed the product. Then, of course a CM can take on the manufacture if it has its own experienced manufacturing and process engineers and have a record of delivering quality products. Alternatively, Firm BB must have manufacturing engineers and/or process engineers who can accurately, and comprehensively produce engineering, manufacturing, and quality specifications. If these are not made available, the CM should not take on the job, and if it still does, it can only be to keep its production workers in work and to keep flow of funds. These specifications have to be transferred to the CM and the CM must state if it can comply, with penalties to follow for non-compliance and severance of contracts at worse. Firm BB must have its own engineers, or at least external consultants to monitor, assess the production process at the CM’s plant and to effect changes quickly. Hence, this implies constant quality monitoring, which is a given if Firm BB has embraced quality assurance. Incidentally, it may be appropriate to mention here that a CM with ISO9000 certification is not guarantee of high quality. Lest readers forget, the notions of six-sigma, zero defects are objectives outsourcers such as, for instance, Firm AA or Firm BB should have on their radar screen. 

It is worth pointing out that Apple (of Cupertino, CA in the USA) designs products in the USA, but have them mostly manufactured by a Taiwanese firm Foxconn in Foxconn’s plants in China, using components and sub-assemblies delivered by a plethora of firms from around the world. I am in no position to comment on the quality Foxconn delivers as I do not as a matter of principle buy products that are contract manufactured by Foxconn and thus have no knowledge of Foxconn-manufactured products. Apple customers, and hopefully some readers, are better placed to comment on whether they got the quality they were expecting from the brand Apple when they chose Apple laptops, mobile phones, etc. You can find out more about Foxconn by entering Foxconn and Apple as search arguments in Google.

Now, the above is a long answer and I would submit, saying YES or NO to the initial question, without considering the many facets of the problem, is only trivializing a complex problem – there is no easy one-word answer, much as some would like to have such an answer

In Indian pharmaceutical company (DRL from its Hyderabad formulations plant at Bollaram) the cost control is carried on by Contract manufacturing for the following reasons.